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Friday, December 24, 2010

Model Test – Final - BUDGETARY CONTROL

Model Test – Final

BUDGETARY CONTROL

SUGGESTED ANSWER

 
The budgeted and actual cost data of M Ltd. For 6 months from April to September, 2008 are as under:

                                                                   Budget                            Actual

Production units                                         16,000                            14,000

Material cost                                          Rs.25,60,000               Rs.41,60,000

                                                     (1,600 MT @ Rs.1, 600)        (at Rs. 1,650)

Labour cost                                            Rs.16,00,000               Rs.15,99,840

                                                     (at Rs.40 per hour)             (@Rs.44 per hour)

Variable overhead                                  Rs.3,00,000                 Rs.2,76,000

Fixed overhead                                       Rs.4,60,000                 Rs.5,80,000           

 

In the first half of the financial year 2009-10, production is budgeted for 30,000 units, material cost per tonne will increase from last year's actual by Rs.150, but it is proposed to maintain the consumption efficiency of 2008 as budgeted. Labour efficiency will be lower by 1% and labour rate will be Rs.44 per hour. Variable and fixed overhead will go up by 20% over 2008 actuals. Prepare the production cost budget for the period April-September, 2009 giving all workings.

 

Solution:

Production Cost Budget

                                  (for 6 months ending 30th September, 2009)

                                                                                      

    30,000 Units

                                                                                      Cost per unit                Total

                                                                                              Rs.                           Rs.

Material cost                                                                      180                   54,00,000

Labour cost                                                                        115.21              34,56,420

Variable overhead                                                                23.65               7,09,500            

Fixed overhead                                                                     23.20               6,96,000

 

342.06                            1,02,61,920

 


Assumption:

Here, difference in actual and standard time is also considered for calculating the lower efficiency i.e 3.74% + 1% = 4.74%.

 

Working Notes:

I . Material cost:

Material consumption per unit = 1,600 MT = 0.10 MT

                                                     16,000

Consumption for 30,000 units = 3,000 MT.

Cost of 3,000 MT @ Rs.1,800 per MT = Rs.54,00,000.

 

II. Labour cost can be calculated as follows:

 

Time required for 30,000 units                                                       = 75,000 hours

Add: *(3.74%+1%) = 4.74% for lower efficiency                         =    3,555 hours

                                                                                                        = 78,555 hours

 

* 3.74% = Difference in actual and standard hours

                               Actual hours

 

              = 1,360 hours

                 36,360 hours   

 

Labour cost = 78,555 hours x 44 per hour

                    = 34,56,420

 

III. Variable overhead:

 

Actual rate = Rs.2,76,000          =  19.71 per unit

                         14,000    

Add: 20                                      =    3.94  

 

New rate                                         23.65

 

Total variable overhead = 30,000 x 23.65 = Rs.7,09,500

 

IV. Fixed overhead:

 

      Actual                                  = Rs.5, 80,000

Add: 20%                                  = Rs.1, 16,000

                                                      Rs.6, 96,000

According to the above production cost budget will be as follows:

 

Alternative:

Production Cost Budget

                                     ( for 6 months ending 30th September, 2009)

 

                                                                                    30,000 units

                                                                                   Cost per unit        Total

                                                                                         Rs.                    Rs.

Material cost                                                                  180               54, 00,000

Labour cost                                                                    111.1            33, 33,000

Variable overhead                                                           23.65             7, 09,500

Fixed overhead                                                                23.20             6,96,000  

 

                                                                                      337.95         1,01,38,500      

 

Working Notes:    

 

1. Material cost

 

    Material consumption per unit = 1,600 MT                             = 0.10 MT

                                                          16,000

Consumption for 30,000 units = 3,000 MT

Cost of 3,000 MT @ Rs.1,800 per MT = Rs.54,00,000.

 

2. Labour cost:

 

2008- Total Budgeted Hour = 16,00,000                                     = 40,000 hours

                                                      40

 

Labour hour budget for each unit = 40,000                                 =     2.5

                                                         16,000     

 

Actual time paid = 15,99,840                                                      =  36,360 hours

                                    44         

Less: standard labour hours for 14,000 units (i.e 14,000 x 2.5)  = 35,000 hours

                                               

Difference in actual and standard hours                                     =    1,360

 

Time required for 30,000 units ( 30,000 x 2.5)                          = 75,000 hours

Add: 1% for lower efficiency                                                     =      750 hours

                                                                                                    = 75,750 hours

Labour cost = 75,750 hours x 44 per hour

                   = 33,33,000

 

3. Variable overhead

Actual rate = Rs.2,76,000                                                           =           19.71 per unit

                      14,000 units   

Add: 20                                                                                       =             3.94  

New rate                                                                                                   23.65 

Total variable overhead = 30,000 x 23.65 = Rs.7,09,500

 

4. Fixed overhead

    Actual                                                                                   = Rs.5,80,000

Add: 20%                                                                                 = Rs.1,16,000

                                                                                                  = Rs.6,96,000

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