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Cost and Management Accounting

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Cost & Management Accounting (MGT-402)
VU
LESSON# 34 & 35
Production & Sales Budget
Budgets can be classified into different categories on the basis of Time, Function, or Flexibility.
The different budgets covered under each category are shown in the following chart:
Chart: clarification of Budgets
Time
Function
Flexibility
Long term
Sales
Fixed
Short term
Production
Flexible
Current
Cost of Production
Rolling
Purchase
Personnel
Research
Capital Expenditure
Cash
Master
Let us discuss some of the budgets covered in the above classification.
Rolling budget
Some organizations follow the practice of preparing a willing or progressive budget in such
organizations; budget for a year in advance will always be there. Immediately after a month, or a
quarter, passes, as-the case may be, a new budget is prepared for a twelve months. The figures for
the month/quarter, which has rolled down, are dropped and the figures for the next month /
quarter are added. For example, if a budget has been prepared for the year 19X7, after the expiry
of the first quarter ending 31st March 19X7, a new budget forth full year ending 31ft March, 19X8
will be prepared by dropping the figures for the quarter which has past (i.e. quarter ending 31st
March 19X7) and adding-the figures for the new quarter-ending 31st March 19X8. The figures for
the remaining three quarters ending 31st December 19X7 may also be revised, if necessary. This
process will continue whenever a quarter ends and a new quarter begins.
Sales budget
Sales Budget generally forms the fundamental basis on which all other budgets are built the budget
is based on projected sales to be achieved in a budget period. The Sales Manager is directly
responsible for the preparation and execution of this budget. Be usually taking into consideration
the following organizational and environmental factors while preparing the tales budget:
Availability of material or supplies
Internal
External
Past sales figures and trends
General trade prospects
Salesmen's estimates
Seasonal fluctuation
Plant capacity
Potential market
Orders on hand
Government  controls,  rule  and
regulator relating to the industry
Availability of material or supplies
Political situation and its impact on
Market
Cost of distribution of goods
Financial aspect
205
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Cost & Management Accounting (MGT-402)
VU
It is desirable to break up the entire sales budget on the basis of different products, time periods
and sales areas or territories.
Illustration 1
Shad on Ltd. has three sales divisions at A town, B town and C town. It sells two products ­ X and
Y. The budgeted sales for the month Jan at each place are given blow:-
A
Product X
[50,000 units @ Rs. 16 each
Product Y
[35,000 units @ Rs. 10 each
B
Product Y
[55,000 units @ Rs. 10 each
C
Product X
[75,000 units @ Rs. 16 each
The Budge sales during the Feb were:
Madras A
Product X
62,500 units @ Rs. 16 each
Product Y
37,500 units @ Rs. 10 each
Bangalore B
Product Y
62,500 units @ Rs. 10 each
Hyderabad C Product X
77,500 units @ Rs. 16 each
From the reports of the sales department it was estimated that the sales budget for the year ending.
31st March than 19x6 budget in the following respects:
Madras A
Product X
4,000 units
Product Y
2,500 units
Bangalore B
Product Y
6,500 units
Hyderabad C Product X
5,000 units
Intensive safes campaign in Bangalore and Hyderabad is likely to result in additional sales of
12,500 units of product I in Bangalore and 9,000 units of Product II in Hyderabad, Let us prepare
a sales budget for the period ending 31st December, 19X7.
206
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