Page 157 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes 9. ........................ Budget is one of the important sub functional budgets, prepared by the sales
manager.
10. Cost control contains two different processes one is the ........................ of the budget and
another one is the ........................ of the prepared budget.

11. ........................ overhead is the expense incurred for the promotion of the sales.

8.4 Classification of the Budget in accordance with the Flexibility

8.4.1 Fixed Budget

It is a budget known as constant budget, never registers the changes in the preparation of a
budget, being prepared for irrespective level of output or production. This budget is mainly

meant for the fixed overheads of the firm which are constant in volume irrespective level of

production. The ultimate utility of the budget is to control the cost as a cost controlling measure,
but the fixed budget is meaningless in having comparison with the actual performance.

8.4.2 Flexible Budget

Flexible budget is prepared for any level of production as an estimate of statement of all expenses

i.e. the expenses are classified into three categories viz. variable, semi-variable and fi xed expenses.
The structure of the budget for any output is only to the tune of the actual performance achieved.
This is the budget facilitates not only to have comparison in between various levels of production
but also to identify the level of lowest production cost.

Note Utilities of the fl exible budget:
1. This budget is most useful tool of analysis in studying the sales at when the
circumstances are not warranting to predict.
2. It is mostly suited to the seasonal business, where the sales volume is getting differed
from one period to another due to changes taken place in the taste and preferences of
the buyers.
3. The production is being done on the basis of demand of the products in the market.
The demand of the products is studied only through demand forecasting. The fl exible
budget is more applicable in the case of products, which are greatly fi nding diffi cult
to forecast the demand.

4. The budget is prepared only during the time of acute shortage of resources of
production viz. Men, Material and so on.

Example: Draft a flexible budget for overhead expenses on the basis of following
information and determine the overhead rates at 70%, 80% and 90% plant capacity.
Particulars 70% capacity 80% capacity (`) 90% capacity
Variable Overheads
Indirect Labour ----------------- 24,000 -----------------
Stores including spares ----------------- 8,000 ----------------
Semi-variable overheads
Power 30% fixed ,70% variable 40,000 -----------------

Contd...

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