CMA Intermediate · Cost Accounting

Budget and Budgetary Control: formula sheet

Full chapter guide

Key formulas

Budget: Budget = planned targets (units or ₹) for a future period, approved in advance; Quote the idea of a plan prepared in advance and approved by management.
Budgetary control: Budgetary control = Budgeting + Recording actuals + Comparing + Corrective action; All four parts are needed. Without comparison and action it is only budgeting.
Variance: Variance = Actual − Budget; Label each variance Favourable or Adverse by its effect on profit. Higher cost than budget is adverse; higher revenue is favourable.
Principal budget factor: Budget preparation starts with the limiting factor (often sales); If the limiting factor is raw material or labour, start with that budget instead.
Forecast vs budget: Forecast = prediction; Budget = plan with commitment; Use this one-line contrast in the difference question.
Classification by function: Functional budgets (sales, production, purchase, cash, capital expenditure) → combined into the Master budget; The master budget is the summary of all functional budgets, not another functional budget.
Classification by time: Long-term (several years) | Short-term (up to about one year) | Current (very short period); Long-term budgets are usually in physical or broad terms; short-term ones are detailed in money.
Classification by flexibility: Fixed budget = one activity level | Flexible budget = several activity levels; A flexible budget separates fixed and variable costs. Variable cost moves with activity; fixed cost stays constant within the relevant range.
Flexed budget cost: Budget allowed = Fixed cost + (Variable cost per unit × Actual units); Use this to compare actual cost with the budget at actual activity.
Capacity basis: Budgets may assume normal, full or partial capacity; State the capacity assumed; it changes the fixed cost per unit.
Production budget (units): Production = Budgeted sales + Closing stock of finished goods − Opening stock of finished goods; Use units only. Adjust for work-in-progress if the question gives it.
Material usage budget: Material required = Production units × Material per unit; Include normal loss in the per-unit requirement if the question gives it.
Material purchase budget (units): Purchases = Material used + Closing stock of material − Opening stock of material; Multiply purchase quantity by price per unit to get the value.
Labour budget: Labour cost = Production units × Hours per unit × Rate per hour; If idle time is given, hours paid = productive hours ÷ (1 − idle %).
Capacity check: Maximum production = Available capacity (hours) ÷ Hours per unit; If this is less than the production required, capacity is the limiting factor.
Contribution per unit of scarce resource: Contribution per unit of scarce resource = Contribution per unit ÷ Units of scarce resource per unit of product; Rank products on this when one resource is limiting.
Closing cash balance: Closing cash = Opening cash + Receipts − Payments; Ignore depreciation and other non-cash items.
Closing cash balance: Closing cash = Opening cash + Total receipts − Total payments; Closing cash of one period is the opening cash of the next. A negative figure means an overdraft or a shortage to be financed.
Collections from debtors: Cash collected = Opening debtors + Credit sales − Closing debtors; Use this for annual statements. For monthly budgets, apply the stated collection pattern, such as 70% next month and 30% after two months.
Payments to creditors: Cash paid = Opening creditors + Credit purchases − Closing creditors; For monthly budgets, shift the purchases by the credit period given.
Purchases: Purchases = Materials consumed + Closing stock − Opening stock; Materials consumed comes from the production budget and material usage per unit.
Production: Units to produce = Sales units + Closing finished stock − Opening finished stock; This links the sales budget to the production budget.
Non-cash items: Cash expense = Total expense − Depreciation and other non-cash charges; Always remove depreciation from overheads before entering them in the cash budget.
Budgeted reserves: Closing reserves = Opening reserves + Budgeted profit − Dividends or appropriations; This carries the budgeted profit into the balance sheet.
Balance sheet check: Total assets = Capital + Reserves + Liabilities; Cash in the balance sheet must equal closing cash from the cash budget. If it does not tally, recheck working capital items.
Flexed variable cost: Budgeted variable cost per unit × Actual (or budgeted level) units; Variable cost per unit stays constant. Total changes with activity.
Fixed cost in a flexible budget: Total fixed cost = same at every level (within relevant range); Do not scale fixed cost with output. Fixed cost per unit will change.
Variable rate of a semi-variable cost: (Cost at higher level − Cost at lower level) ÷ (Units at higher level − Units at lower level); This is the high-low method. Use it when two cost levels are given.
Fixed part of a semi-variable cost: Total cost at any level − (Variable rate × Units at that level); Check by testing the other given level.
Flexed budget cost: Fixed cost + (Variable cost per unit × Units); Use this for every cost line, including semi-variable costs after splitting.
Units at a capacity level: Units = Capacity % × Units at 100% capacity; Convert percentages to units before applying per-unit rates.
Profit at an activity level: Profit = Sales − (Flexed variable costs + Fixed costs); Sales scale with units at the selling price per unit.
Incremental budget: Budget for new period = Last period's budget (or actual) ± expected change; The base is accepted without questioning. This is the contrast case for ZBB.
ZBB funding rule: Fund packages in rank order until the available budget is used up; The minimum-level package of each activity comes before higher-level packages of the same activity.
Cost-benefit ranking: Benefit ÷ Cost (or ranking score) for each package; Use it only when the question gives benefits in numbers. Otherwise rank by management judgement and state the reason.
Unit cost in performance budgeting: Cost per unit of work = Programme cost ÷ Units of output; Compare with the target unit cost to judge performance.
Rolling budget: At each review: drop the expired period, add a new period, revise the rest; The horizon stays fixed, for example always 12 months ahead.

Quick revision

A budget is a quantified plan; budgetary control compares actual with budget and acts on variances.
The limiting factor is the constraint that restricts activity; budgeting starts with it, often sales.
Production units = sales units + closing stock − opening stock.
Material to purchase = material needed for production + closing stock − opening stock of material.
A cash budget includes only cash items; leave out depreciation and other non-cash charges.
Record receipts and payments in the month cash actually moves, not when the sale or purchase occurs.
A master budget summarises the functional budgets as a budgeted profit and loss account and balance sheet.
A fixed budget does not change with activity; a flexible budget is recast for the actual level of activity.
Flexible budgets keep fixed cost constant in total and vary variable cost with activity; semi-variable costs must be split first.
ZBB justifies every activity from zero, using decision packages that are ranked by benefit.
Performance budgeting links budgets to programmes and measurable results rather than to line items.
Traditional budgeting usually builds on last year's figures; ZBB does not.

Common mistakes

Treating budget and forecast as the same thing Fix: Write that a forecast predicts what is likely, while a budget is a planned target management commits to. Add that the forecast feeds the budget.
Defining budgetary control as only preparing budgets Fix: Include the comparison of actuals with budget and corrective action. Without them there is no control.
Calling the master budget a functional budget. Fix: Remember that functional budgets are the parts and the master budget is the combined whole.
Comparing actual cost with a fixed budget at a different activity level. Fix: Flex the budget to actual activity before finding variances.
Adding opening stock and subtracting closing stock in the production budget Fix: Ask what must be made: sales plus what you want left over, minus what you already have. Closing is added, opening is deducted.
Including depreciation in the cash budget Fix: Depreciation is non-cash. Leave it out. Include only actual cash receipts and payments, such as loan instalments or capital purchases when given.
Including depreciation as a cash payment. Fix: Subtract depreciation and other non-cash charges from overheads before entering them in the cash budget. Depreciation only appears in the budgeted profit and loss account.
Showing sales and purchases in the month of the transaction instead of the month of cash movement. Fix: Apply the credit terms first. Show only the amount actually received or paid in each month.
Scaling fixed costs in proportion to activity. Fix: Mark each line F, V or SV first. Copy F lines across unchanged and apply the rate only to V lines.
Treating a semi-variable cost as fully variable or fully fixed. Fix: Always split it. With two levels, work out the rate using the high-low method and then find the fixed part.

Exam tips

For 'distinguish' questions, always use a two-column format and give at least four bases.
In objectives and limitations answers, number the points and give one explanatory line per point. Step marks follow the points.
Expect MCQs on definitions, such as who prepares the budget, the principal budget factor, and what a budget manual contains. There is no negative marking, so always attempt them.
Learn the one-line difference: budget manual is a document, budget committee is a group, budget officer is the coordinator.
Use Indian business examples in written answers to show application, but keep them short.
In MCQs, first spot the basis in the stem: one activity level, many levels, whole business, or time span.
For difference questions, write at least four points in two columns; step marks follow clear points.
Always flex before comparing in numericals, and mark each variance as favourable or adverse.