Management Accounting Solved Papers 2021, Dibrugarh University B.Com 5th Sem (CBCS Pattern)

 [Management Accounting Solved Question Paper 2021 (CBCS Pattern), Management Accounting Solved Question Papers, Dibrugarh University Solved Question Papers, 2021, B.Com 5th Sem]
 (Held in January/February, 2022)
Paper: DSE-501 (Group-I)
(Accounting and Finance)
Full Marks: 80
Pass Marks: 32
Time: 3 hours.
The figures in the margin indicate full marks for the questions

1. (a) Write True or False:                            1x4=4

(1) Management accounting is concerned with accounting information that is useful to the management. True

(2) Cash flow statement is useful for short-term financial analysis.              True

(3) Managerial Cost = Total Cost – Variable Cost.                False

(4) Budgetary control is a system of controlling cost.        True

(b) Fill in the blanks:                                       1x4=4

(1) Intuitive decisions limit the usefulness of management accounting.

(2) Income tax refund is an inflow of cash.

(3) Fixed cost per unit decreases when volume of production increases.

(4) Flexible budget is a capacity budget.

2. Write short notes on any four of the following:                            4x4=16

(a) Limitations of management accounting.

Ans: Limitations of Management Accounting

Management accounting, being comparatively a new discipline, suffers from certain limitations, which limit its effectiveness. These limitations are as follows:

1. Limitations of basic records: Management accounting derives its information from financial accounting, cost accounting and other records. The strength and weakness of the management accounting, therefore, depends upon the strength and weakness of these basic records. In other words, their limitations are also the limitations of management accounting.

2. Persistent efforts. The conclusions draw by the management accountant are not executed automatically. He has to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas.

3. Management accounting is only a tool: Management accounting cannot replace the management. Management accountant is only an adviser to the management. The decision regarding implementing his advice is to be taken by the management. There is always a temptation to take an easy course of arriving at decision by intuition rather than going by the advice of the management accountant.

4. Wide scope: Management accounting has a very wide scope incorporating many disciplines. It considers both monetary as well as non-monetary factors. This all brings inexactness and subjectivity in the conclusions obtained through it.

(b) Funds from operation.

Ans: Funds from Operations or Trading Profits: Trading profits or the profits from operations of the business are the most important and major source of funds. Sales are the main source of inflow of funds into the business as they increase current assets (cash, debtors or bills receivable) but at the same time funds flow out of business for expenses and cost of goods sold. Thus, the net effect of operations will be a source of funds if inflow from sales exceeds the outflow for expenses and cost of goods sold and vice-versa. But it must be remembered that funds from operations do not necessarily mean the profit as shown by the profit and loss account of a firm, because there are many non-fund or non-operating items which may have been either debited or credited to profit and loss account. The examples of such items on the debit side of a profit and loss account are: Amortization of fictitious and intangible assets such as goodwill, Preliminary expenses and Discount on issue of shares and debentures written off; Appropriation of Retained Earnings, such as Transfers to Reserves, etc., Depreciation and depletion; Loss on sale of fixed assets; Payment of dividend, etc. The non-fund items are those which may be operational expenses but they do not affect funds of the business, e.g. for depreciation charged to profit and loss account, funds really do not move out of business. Non-operating items are those which although may result in the outflow of funds but are not related to the trading operations of the business, such as loss on sale of machinery or payment of dividends.

(c) Profit-volume ratio.

Ans: Profit/Volume Ratio: Profit-Volume Ratio expresses the relationship between contribution and sales. It indicates the relative profitability of diff products, processes and departments. Higher the P/V ratio, more will be the profit and lower the P/V ratio lesser will be the profit. Hence, it should be the aim of every concern to improve the P/V ratio which can be done by increasing selling price, reducing variable cost etc.

It can be calculated as follows:

P/V ratio = (S – VC)/ S  X 100

= Contribution / Sales X 100

= Change in profit or loss / Change in sales

Uses of P/V Ratio:

1. To compute the variable costs for any volume of sales.

2. To measure the efficiency or to choose a most profitable line. The overall profitability of the firm can be improved by increasing the sales/output of a product giving a higher PV ratio.

3. To determine break-even point and the level of output required to earn a desired profit.

4. To decide more profitable sales-mix.

(d) Differential cost.

Ans: Differential costing is concerned with the effect on costs and revenues if a certain course of action is undertaken. An accountant uses the term differential cost to describe the same costs that an economist calls incremental cost. Differential costs may be defined as the increases or decreases in total cost, or the change in specific elements of costs, that result from a variation in operations. Incremental costs have been defined as the additional costs of a change in the level or nature of activity. Any cost that changes as a result of a contemplated decision is a differential cost or incremental cost relating to that decision. Differential costing eliminates the residual costs which are the same under each alternative, and therefore irrelevant to the analysis.

(e) Zero-based budgeting.

Ans: ZBB is defined as ‘a method of budgeting which requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time. Without approval, the budget allowance is zero’.

Zero – base budgeting is so called because it requires each budget to be prepared and justified from zero, instead of simple using last year’s budget as a base. In Zero Based budgeting no reference is made to previous level expenditure. Zero based budgeting is completely indifferent to whether total budget is increasing or decreasing. 

‘Zero base budgeting’ was originally developed by Peter A. Pyher at Texas Instruments. Peter A. Pyher has defined ZBB as “an operating, planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why we should spend any money at all”.

CIMA has defined it “as a method of budgeting whereby all activities are revaluated each time a budget is set."

Management Accounting

Chapter Wise Notes

Chapter Wise MCQs

1. Introduction to Management Accounting

2. Funds Flow Statement

3. Cash Flow Statement

4. Marginal Costing

5. Budget and Budgetary Control

Also Read:

6. Standard Costing and Variance analysis

7. Ratio Analysis

Management Accounting MCQs

Marginal and Absorption Costing

Budget and Budgetary Control

Standard Costing

Ratio Analysis

Cash Flow Statement

Funds Flow Statement

Financial Statement and Financial Statements Analysis

Management Accounting Important Questions for Upcoming Exams (Dibrugarh University)

Management Accounting Solved Papers: 2013  2014 2015  2016 2017 2018 2019

Management Accounting Question Papers: 2013 2014 2015 2016 2017 2018 2019

3. (a) “Management accounting is nothing more than the use of financial information for management purposes.” Explain this statement and clearly distinguish between Financial Accounting and Management Accounting. 6+8=14

Ans: The accounting system concerned only with the financial state of affairs and financial results of operations is known as Financial Accounting. It is the original form of accounting. It is mainly concerned with the preparation of financial statements for the use of outsiders like creditors, debenture holders, investors and financial institutions. The financial statements i.e., the profit and loss account and the balance sheet, show them the manner in which operations of the business have been conducted during a specified period.

The term management accounting refers to accounting for the management. Management accounting provides necessary information to assist the management in the creation of policy and in the day-to-day operations. It enables the management to discharge all its functions i.e. planning, organization, staffing, direction and control efficiently with the help of accounting information.

In the words of R.N. Anthony “Management accounting is concerned with accounting information that is useful to management”.

Anglo American Council of Productivity defines management accounting as “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking”.

According to T.G. Rose “Management accounting is the adaptation and analysis of accounting information, and its diagnosis and explanation in such a way as to assist management”.

Characteristics or Nature of management accounting

The task of management accounting involves furnishing of accounting data to the management for basing its decisions on it. It also helps, in improving efficiency and achieving organisational goals. The following are the main characteristics of management accounting:

1.          Providing Accounting Information. Management accounting is based on accounting information. The collection and classification of data is the primary function of accounting department. The information so collected is used by the management for taking policy decisions. Management accounting involves the presentation of information in a way it suits managerial needs.

2.          Cause and Effect Analysis. Financial accounting is limited to the preparation of profit and loss account and finding out the ultimate result, i.e., profit or loss Management accounting goes a step further. The cause and effect’ relationship is discussed in management accounting. If there is a loss, the reasons for the loss are probed. If there is a profit, the factors directly influencing the profitability are also studies. So the study of cause and effect relationship is possible in management accounting.

3.          Taking Important Decisions. Management accounting helps in taking various important decisions. It supplies necessary information to the management which may base its decisions on it. The historical date is studies to see its possible impact on future decisions. The implications of various alternative decisions are also taken into account while taking important decisions.

4.          Achieving of Objectives. In management accounting, the accounting information is used in such a way that it helps in achieving organisational objectives. Historical date is used for formulating plans and setting up objectives. The recording of actual performance and comparing it with targeted figures will give an idea to the management about the performance of various departments. In case there are deviations between the standards set and actual performance of various departments corrective measures can be taken at once. All this is possible with the help of budgetary control and standard costing. 

From the above explanations, Management Accounting is nothing more than the use of financial information for management purposes.

Difference between Financial Accounting and Management Accounting


Financial accounting

Management accounting

a)       Objectives

The main objective of financial accounting is to supply information in the form of profit and loss account and balance sheet to outside parties like shareholders, creditors, government etc.

The main objective of management accounting is to provide information for the internal use of management.


b)      Performance

Financial accounting is concerned with the overall performance of the business.

Management accounting is concerned with the departments or divisions. It reports about the performance and profitability of each of them.


c)       Data

Financial accounting is mainly concerned with the recording of past events.

Management accounting is concerned with future plans and policies.

d)      Nature

Financial accounting is based on measurement.

Management accounting is based on judgment.

e)      Accuracy

Accuracy is an important factor in financial accounting.

Approximations are widely used in management accounting.

f)        Legal Compulsion

Financial accounting is compulsory for all joint stock companies.

Management accounting is optional.


g)       Monetary transactions

Financial accounting records only those transactions which can be expressed in terms of money.

Management accounting records not only monetary transactions but also non- monetary events.


(b) Discuss, in detail, the functions of management accounting.                14

Ans: Functions of Management Accounting: Main objective of management accounting is to help the management in performing its functions efficiently. The major functions of management are planning, organizing, directing and controlling. Management accounting helps the management in performing these functions effectively. Management accounting helps the management is two ways:

I. Providing necessary accounting information to management

II. Helps in various activities and tasks performed by the management.

I. Providing necessary accounting information to management:

(a) Measuring: For helping the management in measuring the work efficiency in different areas it is done on the past and present incidents with context to the future. In standard costing and budgetary any control, standard and actual performance is compared to find out efficiency.

(b) Recording: In management accounting both the quantitative and qualitative types of data are included and this accounting is done on the basis of assumptions and even those items which cannot be expressed financially are included in management accounting.

(c) Analysis: The work of management accounting is to collect and analyze the fact related to the managerial problems and then present them in clear and simple way.

(d) Reporting: For the use of management various reports are prepared. Generally, two types of reports are prepared:

a. Regular Reports

b. Special Reports.

II. Helping in Managerial works and Activities:

The main functions of management are planning, organizing, staffing, directing and controlling. Management accounting provides information to the various levels of managers to fulfill the above mentioned responsibilities properly and effectively. It is helpful in various management functions as under:

(a) Planning: Through management accounting forecasts regarding the sales, purchases, production etc. can be obtained, which helps in making justifiable plans. The tools of management accounting like standard costing, cost -volume-profit analysis etc. are of great managerial costing, help in planning.

(b) Organizing: In management accounting whole organization is divided into various departments, on the basis of work or production, and then detailed information is prepared to simplify the thing. The budgetary control and establishing cost centre techniques of management accounting helps which result in efficient management.

(c) Staffing: Merit rating and job evaluation are two important functions to be performed for staffing. Generally, only those employs are useful for the organization, whose value of work done by them is more than the value paid to them. Thus by doing cost-benefit analysis management accounting is useful in staffing functions.

(d) Directing: For proper directing, the essentials are co-ordination, leadership, communications and motivation. In all these tasks management accounting is of great help. By analyzing the financial and non-financial motivational factors, management accounting can be an asset to find out the best motivational factor.

(e) Co-ordination: The targets of different departments are communicated to them and their performance is reported to the management from time to time. This continual reporting helps the management in coordinating various activities to improve the overall performance.

4. (a) From the following Balance Sheets of X Ltd. Co. for the years 2019-20 and 2020-21, make out:

(1) schedule of changes in the working capital;

(2) statement of sources and application of fund:             7+7=14

Capital and Liabilities

31-03-2020 (Rs.)

31-03-2021 (Rs.)

Equity Share Capital

8% Redeemable Preference Share

Capital Reserve

General Reserve

Profit and Loss A/c

Proposed Dividends

Sundry Creditors

Bills Payable

Expenses Due

Provision for Taxation

























31-03-2020 (Rs.)

31-03-2021 (Rs.)





Sundry Debtors


Bills Receivable

Cash in Hand

Cash at Bank

Preliminary Expenses
























Additional Information:

(1) A machine has been sold for Rs. 10,000. The written-down value of the machine was Rs. 12,000. Depreciation of Rs. 10,000 is charged on plant in 2020-21.

(2) A piece of land has been sold out in 2020-21 and profit on sale has been credited to capital reserve.

(3) The investment in trade investment Rs. 3,000 is received by way of dividends including Rs. 1,000 from pre-acquisition which have been credited to Investment A/c.

(4) An interim dividend of Rs. 20,000 has been paid in 2020-21.

Ans: Solution of this question will be available on our Youtube channel very soon


(b) What is cash flow statement? How is it prepared? Distinguish between a Cash Flow Statement and a Cashbook. 3+7+4=14

Ans: Cash Flow Statement:

A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only sources and applications of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored.

A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash.

Simply, Cash Flow is a statement which analyses the reasons for changes in balance of cash in hand and at bank between two accounting period. It shows the inflows and outflows of cash.

Preparation of Cash flow statement/Various activities under cash flow statement (AS-3)

Cash flow statement is a statement which shows the movement of cash and cash equivalents over a particular period of time. It comprised of three sections: Operating activities, investing activities and financing activities. There are two methods of preparing cash flow statement: the direct method preferred by FASB and indirect method preferred by most businesses because of its simplicity. The difference between the two methods lies in the operating section only. Investing and financing activities calculation are same under both the methods.

A) Section one: Cash flow from operating activities: Operating activities are the principal revenue generating activities of the business. These are cash flows from regular course of operations such as manufacturing, trading etc. All activities that are not investing or financing activities are included under operating activities.

Examples of Operating Activities:

Ø  Cash receipts from the sale of goods and rendering of services. (Source)

Ø  Cash payments to suppliers of goods and services. (application)

Ø  Cash receipts from royalties, fees, commission and other revenue. (Source)

Ø  Cash payments to and on behalf of employees for wages, etc. (application)

Ø  Cash payments and refunds of income taxes. (application)

Under indirect method cash flow from operating activities is calculated with the help of net profit before tax and extraordinary items. Non-cash and non-operating expenses and losses are added and non-cash and non-operating incomes are deducted from net profit before tax and extraordinary items to find net cash flow from operating activities before working capital change. After this changes in working capital is adjusted and payment of taxes during the year is deducted to find cash flow from operating activities.

B) Section two: Cash from investing activities: The investing activities of a business include all cash flow arises due to acquisition and disposal of long term assets (whether tangible and intangible) and investments. Acquisition or disposal of companies also comes under investing activities. These are separately disclosed in cash flow statement.

Examples of Investing Activities:

Ø  Cash payments to acquire long term fixed assets (tangible and intangible) and investments. (application)

Ø  Cash receipts from the disposal of long term fixed assets (including intangibles) and investments. (Source)

Ø  Cash payments for purchase or of shares, warrants, or debt instruments of other enterprises and interest in joint ventures. (application)

Ø  Cash receipts from sale of shares, warrants, debt instruments of other enterprises and interest in joint ventures. (source)

Ø  Cash receipts from repayments of advances and loans made to third parties. (source)

All the sources of cash from investing activities are added and all the applications of cash in investing activities are deducted to find net cash flow from investing activities.

C) Section three: Cash flows from financing activities: Financing activities are the activities which results in changes in the size and composition of the owner’s capital and borrowings of the enterprises from other sources. The financing activities of a firm include issuing or redemption of share capital, issue and redemption of debentures, raising and repayment of long term loans etc. Dividends and Interest paid are also come under financing activities. 2

Examples of Financing Activities: (Sources and applications of cash flow)

Ø  Cash proceeds from the issue of shares or other similar instruments. (source)

Ø  Cash proceeds from the issue of debentures, loans, bonds and other short term borrowings. (source)

Ø  Buy-back of equity shares. (application)

Ø  Cash repayments of the amounts borrowed including redemption of debentures. (application)

Ø  Payments of dividends and interest on borrowings. (application)

All the sources of cash from financing activities are added and all the applications of cash in financing activities are deducted to find net cash flow from financing activities.

Last section – Bottom line: All the cash flows from three sections are added to find net cash flow during the year. Thereafter opening balance of cash and cash equivalent s are added with this amount and the resulting amount will be the closing balance of cash and cash equivalents. Here cash and cash equivalents means:

Cash: Cash comprises cash on hand and demand deposits with banks.

Cash Equivalents: Cash Equivalents are short-term, highly liquid investments that are readily convertible cash. Examples of cash equivalents are: (a) treasury bills, (b) commercial paper, (c) money market funds and (d) Investments in preference shares and redeemable within three months.         (2018)

Format of Cash Flow Statement under Indirect Method



A.      Cash Flow from operating activities:

Net Surplus before tax and extraordinary items

Add: Non-operating/non-cash expenses

Less: Non-operating/non-cash income





Net cash flow from operating activities before change in W.C

Effect of change in working capital:

Increase in current assets

Decrease in current assets

Increase in Current Liabilities 

Decrease in current liabilities








Less: Payment of taxes net of tax refund



1. Cash Flow from operating activities

B.      Cash Flow from Investing activities:

Sources of cash                                       

Applications of cash                               





2. Cash flow from investing activities

C.      Cash Flow from Financing activities:

Sources of cash                                       

Applications of cash                           





3. Cash flow from Financing activities


D.      Cash Flow during the year (1 + 2 + 3)

Add: Opening balance of cash & cash equivalent



Closing balance of cash & cash equivalent


Difference between Cash flow statement and Cash Book:


Cash Flow Statement

Cash Book


It means inflows and outflows of cash and cash equivalents.

It is a book of prime or original entry where every transaction is recorded first.


It is prepared to explain to management the sources of cash and its uses during a particular period of time.

It is prepared to record the receipts and payments for the accounting year.


It summarises effect of specific cash transactions into three categories operating, investing and financing activities of an enterprise during a period in prescribed format.

Each and every transaction is recorded in cash book in chronological order.

Technique of analysis

It is a technique of past analysis.

It is a technique of future financial forecasting.


It is prepared at the end of the accounting year.

It is prepared during the accounting year.


It is a statement.

It is a journal.

5. (a) From the following data, calculate:   3+3+4+4=14

(1) profit-volume ratio;

(2) fixed cost;

(3) sales at break-even point;

(4) sales required to earn a profit of Rs. 20,000:               


Sales (Rs.)

Profit (Rs.)

Period – I

Period – II





Ans: Solution of this question will be available on our Youtube channel very soon


(b) What do you mean by marginal costing? Discuss its usefulness and limitations.        2+7+5=14

Ans: Marginal Costing: It is the technique of costing in which only marginal costs or variable are charged to output or production. The cost of the output includes only variable costs. Fixed costs are not charged to output. These are regarded as ‘Period Costs’. These are incurred for a period. Therefore, these fixed costs are directly transferred to Costing Profit and Loss Account.

According to CIMA, marginal costing is “the ascertainment, by differentiating between fixed and variable costs, of marginal costs and of the effect on profit of changes in volume or type of output. Under marginal costing, it is assumed that all costs can be classified into fixed and variable costs. Fixed costs remain constant irrespective of the volume of output. Variable costs change in direct proportion with the volume of output. The variable or marginal cost per unit remains constant at all levels of output.”

Thus, Marginal costing is defined as the ascertainment of marginal cost and of the ‘effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs. Marginal costing is mainly concerned with providing information to management to assist in decision making and to exercise control. Marginal costing is also known as ‘variable costing’ or ‘out of pocket costing’.

Advantages of Marginal Costing

a)       Simple and Easy: It is very simple to understand and easy to operate.

b)      Helpful in Cost control: Marginal costing divides total cost into fixed and variable cost. Marginal costing by concentrating all efforts on the variable costs can control total cost.

c)       Profit Planning: It helps in short-term profit planning by making a study of relationship between cost, volume and Profits, both in terms of quantity and graphs.

d)      Evaluation of Performance: The different products and divisions have different profit earning potentialities. Marginal cost analysis is very useful for evaluating the performance of each sector.

e)      Helpful in Decision Making: It is a technique of analysis and presentation of costs which help management in taking many managerial decisions such as make or buy decision, selling price decisions, Key or limiting factor, Selection of suitable Product mix etc.

f)        Production Planning: It helps the management in Production planning. The effect of alternative production policy can be readily available and decision can be taken that would yield the maximum return to Business.

g)       It removes the complexities of under-absorption of overheads.

h)      The distinction between product cost and period cost helps easy understanding of marginal cost statements.

Disadvantages of Marginal Costing

a)       It is based on an unrealistic assumption that all costs can be segregated into fixed and variable costs. In the long term sales price, fixed cost and variable cost per unit may vary.

b)      All costs are not divisible into fixed and variable. There are certain costs which are semi-variable in nature. The separation of costs into fixed and variable is difficult and sometimes gives misleading results.

c)       Under marginal costing, stocks and work in progress are understated. The exclusion of fixed costs from Stock Valuation affects profit, and true and fair view of financial affairs of an organization.

d)      Marginal cost data becomes unrealistic in case of highly fluctuating levels of production, e.g., in case of seasonal factories.

e)      It can correctly assess the profitability on a short-term basis only, but for long term it is not effective.

f)        It does not provide any effective yardstick for evaluation of performance.

g)       Contribution of marginal costing is not a foolproof indicator of profitability.

h)      Marginal cost, if confused with total cost while fixing selling price may lead to a disaster.

6. (a) A manufacturing company manufactures two Products X and Y. An estimate of the number of units expected to be sold in the first seven months of 2020 is given below:


Product – X (Units)

Product – Y (Units)






















It is anticipated that:

(1) There will be no work-in-progress at the end of month.

(2) Finished units equal to half of the anticipated sales for the next month will be in stock at the end of each month (including December 2019).

The budgeted production and production cost for the year ending 31st December, 2020 are as follows:


Product – X

Product – Y


Direct Material

Direct Wages

Other Manufacturing Expenses (apportion able to each type of product)

11,000 units

Rs. 12 per unit

Rs. 5 per unit


Rs. 33,000

12,000 units

Rs. 19 per unit

Rs. 7 per unit


Rs. 48,000

You are required to prepare:

(1) a product budget showing number of unit to be manufactured each month;

(2) a summarized production cost budget for six months’ period from January to June 2020.  8+6=14

Ans: Asked in 2017 Exam. Available on Our YouTube Channel


(b) Define the term ‘budget’ and ‘budgetary control’. Explain in detail the classification of budgets according to:

(1) time;

(2) functions;

(3) flexibility.                    2½+2½+9=14

Ans: Meaning and Definition of Budget and Budgetary Control:

Budget: A budget is the monetary and / or quantitative expression of business plans and policies to be pursued in the future period of time. Budgeting is preparing budgets and other procedures for planning, coordination and control or business enterprises.

I.C.M.A. defines a budget as “A financial and / or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective”.

Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures for arriving at deviations if any, which are to be eliminated in future. Thus budget is a means and budgetary control is the end result. Budgetary control is a continuous process which helps in planning and coordination. It also provides a method of control.

According to Brown and Howard “Budgetary control is a system of coordinating costs which includes the preparation of budgets, coordinating the work of departments and establishing responsibilities, comparing the actual performance with the budgeted and acting upon results to achieve maximum profitability”.

Wheldon characterizes budgetary control as planning in advance of the various functions of a business so that the business as a whole is controlled.

I.C.M.A. define budgetary control as “the establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual actions the objectives of that policy or to provide a basis for its revision”.

Types of Budgets

As budgets serve different purposes, different types of budgets have been developed. The following are the different classification of budgets developed on the basis of time, functions, and flexibility or capacity.

(A) Classification on the basis of Time:

1. Long-term budgets

2. Short-term budgets

3. Current budgets

(B) Classification according to functions:

1. Functional or subsidiary budgets

2. Master budgets

(C) Classification on the basis of flexibility:

1. Fixed budgets.

2. Flexible budgets

(A) Classification on the basis of time

1. Long-term budgets: Long-term budgets are prepared for a longer period varies between five to ten years. It is usually developed by the top level management. These budgets summarise the general plan of operations and its expected consequences. Long-term budgets are prepared for important activities like composition of its capital expenditure, new product development and research, long-term finance etc.

2. Short-term budgets: These budgets are usually prepared for a period of one year. Sometimes they may be prepared for shorter period as for quarterly or half yearly. The scope of budgeting activity may vary considerably among different organization.

3. Current budgets: Current budgets are prepared for the current operations of the business. The planning period of a budget generally in months or weeks. As per ICMA London, “Current budget is a budget which is established for use over a short period of time and related to current conditions.”

(b) Classification on the basis of function

1. Functional budget: The functional budget is one which relates to any of the functions of an organization. The number of functional budgets depends upon the size and nature of business. The following are the commonly used:

(i) Sales budget

(ii) Purchase budget

(iii) Production budget

(iv) Selling and distribution cost budget

(v) Labour cost budget

(vi) Cash budget

(vii) Capital expenditure budget

Sales Budget

Sales budget is one of the important functional budgets. Sales estimate is the commencement of budgeting may be both made in quantitative or in value terms. Sales budget is primarily concerned with forecasting of what products will be sold in what quantities and at what prices during the budget period. Sales budget is prepared by the sales executives taking into account number of relevant and influencing factors such as: Analysis of past sales, key factors, market conditions, production capacity, government restrictions, competitor’s strength and weakness, advertisement, publicity and sales promotion, pricing policy, consumer behaviour, nature of business, types of product, company objectives, salesmen’s report, marketing research’s reports, and product life cycle.

Production Budget

Production budget is usually prepared on the basis of sales budget. But it also takes into account the stock levels desired to be maintained. The estimated output of business firm during a budget period will be forecast in production budget. The production budget determines the level of activity of the produce business and facilities planning of production so as to maximum efficiency. The production budget is prepared by the chief executives of the production department. While preparing the production budget, the factors like estimated sales, availability of raw materials, plant capacity, availability of labour, budgeted stock requirements etc. are carefully considered.

Cost of production Budget

After preparation of production budget, this budget is prepared. Production cost budgets show the cost of the production determined in the production budget. Cost of production budget is grouped in to material cost budget, labour cost budget and overhead cost budget. Because it breaks up the cost of each product into three main elements material, labour and overheads. Overheads may be further subdivided in to fixed, variable and semi-fixed overheads. Therefore, separate budgets required for each item.

2. Master Budget

When the functional budgets have been completed, the budget committee will prepare a master budget for the target of the concern. Accordingly, a budget which is prepared incorporating the summaries of all functional budgets. It comprises of budgeted profit and loss account, budgeted balance sheet, budgeted production, sales and costs. The ICMA England defines a Master Budget as ‘the summary budget incorporating its functional budgets, which is finally approved, adopted and employed’. The master budget represents the activities of a business during a profit plan. This budget is also helpful in coordinating activities of various functional departments.

(C) Classification on the basis of flexibility

1. Fixed budget: A fixed budget, on the other hand is a budget which is designed to remain unchanged irrespective of the level of activity actually attained. In a fixed budgetary control, budgets are prepared for one level of activity whereas in a flexibility budgetary control system, a series of budgets are prepared one for each level of alternative production levels or volumes. According to ICWA London ‘Fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained.”

Fixed budget is usually prepared before the beginning of the financial year. This type of budget is not going to highlight the cost variance due to the difference in the levels of activity. Fixed budgets are suitable under static conditions.

2. Flexible budget: Flexible Budget: A flexible budget is defined as “a budget which, by recognizing the difference between fixed, semi-variable and variable cost is designed to change in relation to the level of activity attained”. Flexible budgets represent the amount of expense that is reasonably necessary to achieve each level of output specified. In other words, the allowances given under flexibility budgetary control system serve as standards of what costs should be at each level of output.


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