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Cost and Management Accounting

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Cost & Management Accounting (MGT-402)
VU
LESSON# 39
Complex Cash Budget & Flexible Budget
The cash budget is a summary of the firm's expected cash inflows and outflows over a particular
period of time. In other words, cash budget involves a projection of future cash receipts and
cash disbursements over various time intervals.
A cash budget helps the management in:
 Determining the future cash needs of the firm
 Planning for financing of those needs
 Exercising control over cash and liquidity of the firm.
The overall objective of a cash budget is to enable the firm to meet all its commitments in time
and at the same time prevent accumulation at any lime of unnecessary large cash balances with
it:
Practice Question---Complex Cash Budget
Data relating to the months of February to June is available
Prepare the cash budget for the month of April to June
Months
Sales
Purchases
Wages
February
18,000
12,480
1,200
March
19,200
14,400
1,400
April
10,800
24,300
1,100
May
17,400
24,600
1,000
June
12,500
26,800
1,500
Particulars
April
May
June
Opening
2,500
2,480
0
Balance
Add
15,480
15,960
13,460
Receipts
Sales
Total (1)
17,980
18,440
13,460
Less
14,400
24,300
24,600
Payments
Purchases
1,100
1,000
1,500
Wages
Total (2)
-15,500
-25,300
-26,100
Closing
2,480
-6,680
-12,640
Balance (1-
2)
Bank O/D
0
6,860
12,640
Total Bank O/D = 6,860 + 12,640 = 19,500
216
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Cost & Management Accounting (MGT-402)
VU
Flexible budget:
The Flexible Budget is designed to change in accordance with the level of activity attained. Thus,
when a budget is prepared in such a manner that the budgeted cost for any level of activity is
available, it is termed as flexible budget. Such a budget is prepared after considering the fixed and
variable elements of cost and the changes that may be expected for each item at various levels of
operations. Flexible budgeting is desirable in the following cases:
Where, because of the nature of business, sales are unpredictable, e.g. in luxury or semi-luxury
trades.
Where the venture is a new and, therefore, it is difficult to foresee the demand e.g., novelties
and fashion products.
Where business is subject to the vagaries of nature, such as soft drinks,
Where progress depends on adequate supply of labor and the business is in an area which
suffering forms shortage of labor.
Normal capacity level 2,000 units
Original budget
Fixed cost
10,000
Variable cost
40,000
50,000
Actual capacity attained 1,500 units
Flexed budget
Fixed cost
10,000
Variable cost
30,000
40,000
Cost actually incurred
Flexed budget
Fixed cost
11,000
Variable cost
33,000
44,000
Comparing actual with original budget
Actual
Budget
Variance
Fixed cost
11,000
10,000
(1,000) UF
Variable cost
33,000
40,000
7,000  F
44,000
50,000
6,000  F
Comparing actual with flexed budget
Flexed Actual
Variance
Fixed cost
10,000
11,000
(1,000) UF
Variable cost
30,000
33,000
(3,000) F
40,000
44,000
4,000 UF
Production cost at normal capacity:
Direct cost
Direct material
Rs. 30,000
Direct labor
20,000
Indirect cost
Indirect material (Variable)
800
Other variable production OH cost
4,200
217
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Cost & Management Accounting (MGT-402)
VU
Deprecation (Fixed)
10,000
Other fixed OH cost
5,000
Total budgeted cost
70,000
Normal capacity at 20,000 units
Direct material
Rs. 26,900
Direct labor
19,540
Indirect material (Variable)
1,000
Other variable production OH cost 3,660
Deprecation (Fixed)
10,000
Other fixed OH cost
5,400
Total budgeted cost
66,500
Capacity attained 17,600 units
Prepare Flex budget at 16,000, 20,000 and 24,000 units
218
Table of Contents:
  1. COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION:COST CLASSIFICATION,
  2. IMPORTANT TERMINOLOGIES:Cost Center, Profit Centre, Differential Cost or Incremental cost
  3. FINANCIAL STATEMENTS:Inventory, Direct Material Consumed, Total Factory Cost
  4. FINANCIAL STATEMENTS:Adjustment in the Entire Production, Adjustment in the Income Statement
  5. PROBLEMS IN PREPARATION OF FINANCIAL STATEMENTS:Gross Profit Margin Rate, Net Profit Ratio
  6. MORE ABOUT PREPARATION OF FINANCIAL STATEMENTS:Conversion Cost
  7. MATERIAL:Inventory, Perpetual Inventory System, Weighted Average Method (W.Avg)
  8. CONTROL OVER MATERIAL:Order Level, Maximum Stock Level, Danger Level
  9. ECONOMIC ORDERING QUANTITY:EOQ Graph, PROBLEMS
  10. ACCOUNTING FOR LOSSES:Spoiled output, Accounting treatment, Inventory Turnover Ratio
  11. LABOR:Direct Labor Cost, Mechanical Methods, MAKING PAYMENTS TO EMPLOYEES
  12. PAYROLL AND INCENTIVES:Systems of Wages, Premium Plans
  13. PIECE RATE BASE PREMIUM PLANS:Suitability of Piece Rate System, GROUP BONUS SYSTEMS
  14. LABOR TURNOVER AND LABOR EFFICIENCY RATIOS & FACTORY OVERHEAD COST
  15. ALLOCATION AND APPORTIONMENT OF FOH COST
  16. FACTORY OVERHEAD COST:Marketing, Research and development
  17. FACTORY OVERHEAD COST:Spending Variance, Capacity/Volume Variance
  18. JOB ORDER COSTING SYSTEM:Direct Materials, Direct Labor, Factory Overhead
  19. PROCESS COSTING SYSTEM:Data Collection, Cost of Completed Output
  20. PROCESS COSTING SYSTEM:Cost of Production Report, Quantity Schedule
  21. PROCESS COSTING SYSTEM:Normal Loss at the End of Process
  22. PROCESS COSTING SYSTEM:PRACTICE QUESTION
  23. PROCESS COSTING SYSTEM:Partially-processed units, Equivalent units
  24. PROCESS COSTING SYSTEM:Weighted average method, Cost of Production Report
  25. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Accounting for joint products
  26. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Problems of common costs
  27. MARGINAL AND ABSORPTION COSTING:Contribution Margin, Marginal cost per unit
  28. MARGINAL AND ABSORPTION COSTING:Contribution and profit
  29. COST VOLUME PROFIT ANALYSIS:Contribution Margin Approach & CVP Analysis
  30. COST VOLUME PROFIT ANALYSIS:Target Contribution Margin
  31. BREAK EVEN ANALYSIS MARGIN OF SAFETY:Margin of Safety (MOS), Using Budget profit
  32. BREAKEVEN ANALYSIS CHARTS AND GRAPHS:Usefulness of charts
  33. WHAT IS A BUDGET?:Budgetary control, Making a Forecast, Preparing budgets
  34. Production & Sales Budget:Rolling budget, Sales budget
  35. Production & Sales Budget:Illustration 1, Production budget
  36. FLEXIBLE BUDGET:Capacity and volume, Theoretical Capacity
  37. FLEXIBLE BUDGET:ANALYSIS OF COST BEHAVIOR, Fixed Expenses
  38. TYPES OF BUDGET:Format of Cash Budget,
  39. Complex Cash Budget & Flexible Budget:Comparing actual with original budget
  40. FLEXIBLE & ZERO BASE BUDGETING:Efficiency Ratio, Performance budgeting
  41. DECISION MAKING IN MANAGEMENT ACCOUNTING:Spare capacity costs, Sunk cost
  42. DECISION MAKING:Size of fund, Income statement
  43. DECISION MAKING:Avoidable Costs, Non-Relevant Variable Costs, Absorbed Overhead
  44. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS
  45. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS:MAKE OR BUY DECISIONS