 Namaste. In our last session, we had started discussion on budgeting and budgetary control. In general if you remember, budget is an estimated statement, but that is not all. It is prepared prior to the period for which it is prepared. It is a quantitative or financial statement and it is prepared to achieve some goal or a target. So a policy to achieve that target is prepared and that policy in quantitative terms is built up in the budget. We have also understood and discussed various types of budgets. So time wise one may categorize it as a long term, short term and current budget or one can also categorize it as per the functional versus master's budget. So in the functional budget, we prepare budgets for each function and all those budgets are consolidated and summarized in the form of a master budget. We have also seen a specialized type of budget known as zero base budget. Do you remember that? So zero base budget essentially is a budget which is prepared from scratch. Since the traditional budgeting system is heavily dependent on last periods budget and actual, this different system has been evolved. Basically a budget is based on last year's budget and last year's actual. We make a few changes as per the current scenario which gives us the current budget. But in case of zero base budget, it is called as budgeting from scratch. So we do not consider last year's budget as automatically authenticated. Every expenditure needs to justify itself and then only it can be added in the current budget. I hope you remember we have discussed all these basic concepts on budget. In the current session, we will mainly focus on the cases involving different types of functional budget. So do you remember what is a functional budget or what is a master budget for that matter? You know that master budget is in a form of a consolidated P&L or a balance sheet. It is a coordinated effort where the resources are coordinated and allocated to different functions and the end result is a master budget. And for each function, we make a separate budget that budget is called those budgets are called as functional budgets. So what are those budgets? What are the different functions? Can you tell me four or five functional budgets? On the screen you are able to see one budget I know that is material purchase budget. But it comes later on normally any business activities start with the demand. So one needs to do market research and prepare a sales budget as to how much we are likely to sell. Depending on the sale budget we need to manufacture. So from the sale we prepare purchase budget sorry from the sale we prepare production budget based on the production we need raw material. So we prepare a raw material consumption budget because we need to consume we need to buy. So we prepare raw material purchase budget. Getting it this is how one after another functional budgets are prepared. In the same way for the production we need manpower. So we need to prepare manpower budget. Now because we need manpower we need to recruit. So maybe we need to make a recruitment budget. We have to make fixed overheads budget, variable overheads budget, R and D budget and so on. All these are called as different types of masters budget. Now with this much of conceptual understanding let us go for cases for preparation of budgets. Now illustration one is already in front of you which is on material purchase. Some information is given about budgeted sales, raw material consumption needed and the opening stock. Based on this we will have to prepare raw material purchase budget fine. So go through it and if you have got a printout you can take it from the printout also and start preparing in your own notebook ok. Now based on this information are you able to prepare a budget? As I told you we will be starting with the sales. So we know that budgeted sales are 500. We also know the opening stock, little more information is given about stock that the opening stock of raw material is 5000 units and 3500 units respectively for A and B and we need to maintain closing stock of 1000. So we now know opening stock we also know closing stock of finished goods. So first of all let us make production budget ok. Let us try orally it is very simple we need to have 500 units for selling we already sorry 5000 units for sale we already have 500 and we need to have a closing stock of 1000 of finished goods right. So how many units we need to prepare or manufacture? So 5000 minus 500 because they are already ready plus 1000. So production requirement will be 5500 I hope you are getting I can show you the solution but try to do it mentally. Now based on this production requirement of 5500 units look at the consumption of A and B and based on that let us go for raw material requirement and then raw material purchase. I will show you the solution now. So budgeted sales are 5000 desired closing stock 1000 that means total requirement of finished goods is 6000 minus opening stock because that those 500 units are already there that means units to be produced or you can call it a production unit budget is 5500. Now based on this we have worked out the raw material consumption. Now it was given that raw material required of A and B is 12 and 10 respectively for one unit of finished goods. So for 5500 units into 12 and into 10. So A units of raw material are 66000 and B are 55000. There is already opening stock of 5000 and 3500 which we will reduce. We will add the closing stock which we need to maintain. So we get raw material purchase budget of 62500 and 52500 in terms of units. Are you getting me? Now this is a raw material purchase budget in units. If they give you prices of raw material we can multiply it and get it in terms of rupees as well but as of now only this much is given so this is our solution. I hope you are clear about it. Now let us go to the case which has been distributed to you. As usual please take a printout, sit with the printout and then we will try to solve the next case. Okay so you are ready with it? Fine. Please read it carefully, Gauri limited makes and sells high quality glare filters for micro computer monitors. Now John Craven the controller is responsible for preparing, this should be Gauri, Gauri is master budget and has assembled the following data for 2020 then they have given some data about labour costs and other things. Now this Gauri expects to have 1000 glare filters in the inventory at December 31st 2019 and has a policy of carrying 50% of following month's projected sales in inventory fine. So we know the opening stock and we also know the policy for maintaining the closing stock. Now they have given the data about the next one month's projected sales as well as sale prices, direct labour hours and so on fine. Based on these we need to prepare monthly budget for the quarter, first quarter 2020. So all these budgets are required, production units budget then direct labour budget, direct material cost budget and the sale budget fine. Further we are also to make some calculation about budgeted contribution margin for each of these months fine okay. Now how shall we proceed, think over a bit. As I have told you it is totally based on sales first of all. Based on sales and based on the estimation of stock we will have to calculate the production budget in terms of units. So based on the sale we go for production then based on production compute the because they have given the labour requirement and direct material requirement based on that compute the direct labour and direct material and in the end we will go for calculation of contribution margin fine. I hope you are able to do with me, now this is the structure firstly starting with the sales try to compute the production budget in terms of units first quarter. So we will be making only for Jan, Feb and March the data for April which is given over here is not as such required but it will be required for inventory purposes. Now to the sales you add the closing or the ending inventory. So you will come to know the total units required to that you need to reduce the opening inventory which will give you the units to be produced that is nothing but your production budget okay. Now compute the ending inventory for January it is 12,000 how did you get 12,000? We will go back a bit if you are not if you do not remember it here it was given that the policy is of carrying 50% of following months projected sales. So we know that the sales of February are 24,000 so 50% of that should be ready in the January got it because company does not want any disturbance in their delivery schedules. So half of the next month sales are produced in the current month and kept in the inventory. Now what will be the closing inventory for February half of 16,000 right. Now we will need the inventory of April I mean sale of April which is 18 based on that compute the inventory for March. So it is 9 are you getting me? So this is the closing inventory. Now what is the opening inventory? It was already given that they have 10,000 units of opening inventory got it. Now how much are the units to be produced they are 22,000. So 20 plus 12 means 32 minus 10 you get 22 are you getting? This is how production units budget is produced. In almost every problem it will start from sales then go to production and then we will go to each of the inputs like material, labour and so on. So now please prepare it for February also. How much budget you are getting for Feb? Now 12,000 is a opening inventory because last times closing will become opening and if you take 12 the units to be produced are 20. Same way for March the opening inventory is this that is 8,000 and based on 8,000 the units produced are 17,000. Now we have come closed it for the quarter, for the quarter the ending inventory is the March inventory that is 9,000 opening is a January inventory which is 10,000. That means during the quarter the total production is 59. You can cross check it both the sides 60 plus 9 minus 10 also you get that and if you take total of Jan, Feb and March also you will get 59. This is what is a production units budget. Are you getting it? Now based on this please go to labour cost now. Prepare direct labour budget firstly in hours and then in rupees. So if you go to case again they have given us the direct labour required per unit which is 4, 4 and 3.5 they have also given us direct labour hourly rate. Using this data let us prepare direct labour cost budget. Now compute the direct labour hours per unit. So they have given 22,000 are the units produced we have calculated 4 is given that is direct labour hour per unit based on this data 22 into 8 that means 88,000 are the total labour hour required for January fine. Same way what will be the figure for February it is simple you already know that we have to produce 20,000 units at 4 that means for the month of February the direct labour hours required are 80,000. How many for March it is 17 now the rate has changed 3.5 so 59,500 you can take the total for all the 3 months that is the quarter 59 and the total is 22,27,500 here the labour hour rate is taken as a weighted average which is 3.856 getting it 22,700 upon 59,000 you will get the weighted average rate for the quarter. Now same way try to prepare direct material cost budget. So again start with the production units take the unit cost you will get the direct material cost budget it is very simple 22 into 10 so you get 2,20,000 I hope you can take it now for other months 20 into 10 and 17 into 10 so 2,17,000 and then for the whole quarter 59,000 into 10 5,90,000 the cost per unit is same whereas in labour it had fallen hourly rate fine. Now what else you are required to calculate they have also asked us to calculate the sales budget we already are aware about sale units. So we have taken the sale units and take multiplied by the selling price they have given here the selling price which is 80, 80 and 75 so multiply by selling price you will get the total sales are you able to get it with me so 16,920,12,470,000. Now this is the total sale revenue projected which will be given in the sales budget fine. Now in the B part of the case we have been asked to compute the budgeted contribution margin. So we know all the data we know sales we know the variable cost like material and labour so compute the contribution. I hope you remember the structure take the labour cost material cost per unit sales and then based on that you will be able to compute the margin. How much is the sale price per unit? In the first quarter it is 80 minus labour cost which is 60. Now how will you get the 60 because it is 4 labour hours per unit and the rate per labour is 15. So just check the data for January direct labour hours per unit is 4, labour rate is 15. Now those labour rate was given here that direct labour hourly rate is 15. So 4 into 15 that means direct labour cost is 60 units sale units are already given which is 20,000 sale revenue or selling price per unit is 80, labour cost is 60 as per calculation material cost was already given rupees 10 are you getting it? So how much is a contribution margin now 80 minus 60 minus 10. So contribution margin is 10 per unit. Now also get the total margin so 20,000 units into 10 that means 2 lakhs is the total contribution generated since we are in the budgeting company would expect you to calculate total as well when we are solving a marginal costing or a CBP case or a problem we normally go by per unit here also you can go by per unit but then multiplied by total are you getting me? Now same way try to do it for Feb. How much is a direct labour hour rate? If we go here you can see that the hour rate is same labour direct labour hourly rate direct labour hour per unit is 4 and hourly rate is 15. So direct labour cost is same which is 20,000 and number of units to be produced are 20,000, 60 is a direct labour cost and sale units are 24,000 I am sorry do not take production this is a contribution so it is based on sales and sales are 24 so take 24. How much is a margin per unit actually all the data is same 80 minus 60 minus 10 so per unit is 10 24,000 into 10 so 2,40,000 is a contribution margin for Feb. Now for the month of March is there any change answer is yes there is a change you can see here the direct labour hours per unit have actually gone down to 3.5 now is it a good sign yes efficiency has improved earlier they were taking 4 hours for one unit now they are doing it bit faster that is 3.5 per unit multiplied by 16 because their rate has increased they are given 1 rupee extra to labour workers. So we will do this calculation here see 3.5 into 16 labour cost has actually gone down from 60 to 56 so workers are getting more pay but for the company the cost has gone down because of better efficiency sale units are actually less they are only 16,000 you can see here the contribution margin has also shrunk that is mainly because the price has gone down from 80 to 75 labour cost is slightly controlled in a better manner so it is 56 material cost is same so contribution margin is 9 16,000 into 9 that will be the total margin which is 144,000 are you getting it? So here we were asked to prepare 4 budgets and also compute the budgeted contribution margin so I think it will be clear to you all these things have been calculated and just add the heading here fine. So we will stop here in the next session we are going to solve a case on preparation of cash budget so I will request you to revise the cash budget because it is a little long ish case and we will try to solve it with this will stop namaste then never.