# 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
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
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
·
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
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