NUMERICAL PROBLEMS

1
Preparation of Income Statement
From the following ratios and details, prepare
Trading Profit and Loss Account of Arjuna Company
Ltd for the year ended on 31st
December,200X- Net Operating Profitability
20 Gross Profitability 40 Net
non-business income Rs.50,000 Material
Purchases Rs.3,20,000 Opening
Stock of material Rs. 40,000 Closing Stock of
material Rs. 60,000 Administrative
Expenses Sales Expenses 32 Wages
Administrative Expenses 53 Factory Expenses
Wages 12 Non-business expenses were 5 of the
non-manufacturing operating expenses.
2
Solution to the Problem
Unit in Rs.
Computation of Cost of Sales - Opening stock
40,000 Purchases 3,20,000 -
Closing stock (60,000) Cost of Sales
3,00,000 Gross Profit 40 of Sales
(1) Net operating Profit 20 of Sales
(2) (Gross Profit - Net operating
Exp) Therefore Net Operating Exp 20 of
Sales (Admin. Selling Exp.Ope.
Exp.) Therefore (Admn. Selling)Exp. 20 of
Sales (Admn. Selling Exp 32) Therefore
Admn. Exp. 12 of Sales -(3) Therefore Selling
Exp. 8 of Sales (4) Therefore Wages
(5/3) x 12 (Wages Admin 53)
20 of Sales (5) Therefore Factory
Expenses (1/2) x 20 10 of
Sales (6) (Factory ExpWages 1 2)
3
Trading Profit and Loss A/c. for the Period 31st
December,200X Sales Gross Profit Cost of
Sales Wages Factory expenses S 0.40 x
S 3,00,000 0.2 x S 0.1 x
S Therefore 0.3 Sales 3,00,000 Therefore
Sales 10,00,000 Wages
2,00,000 Factory Exp.
1,00,000 Gross Profit
4,00,000 Admn. Exp.
1,20,000 Non Manufacturing Selling Exp.
80,000 Operating Exp.2,00,000. Net
operating Profit 2,00,000 - (1) Net Non
Business Inc. 50,000 (2) Non Business Exp.
0.05 x 2,00,000 10,000 (3) (5 of Non
Manufacturing Operating Expenses) Therefore Net
Profit 2,40,000 ( 1 2
3 )
Unit in Rs.
4
Product Price Budgeting Decisions Following is
the B/S of Bombay Co.Ltd. As on 31st March 200X
Investment (Assets)
Rs.Lacs Fixed
Assets 200 Add W. C.
100 300 Sources used (Liabilities)
Equity Share Capital 50
Reserves 150 14
Debentures 100
300
5

• The Co. produces 3 products A, B C.
• Following are some important estimations for 200X
  200X1
• Co. will sell 2,000, 4,000 8,000 units of A, B
  C respectively.
• P/V ratio of A, B, C will be 50 , 40 60
  respectively.
• Co. will have to maintain the ratio of Sale
  Price Per Unit of A,B C as 532.
• Co. expects 10 increase in reserves. It would
  like to give 10 dividend on share capital.
• Cos. tax rate is 50 . Fixed Assets are
  depreciated at 10 p.a.
• Other Operating Fixed Costs will remain at Rs. 1
  Lac.
• Required 1 Fixation of per unit sale price of
  A, B C.
• 2. Estimated Income Statement of
  200X 200X1 .
• 3. Estimated Balance
  Sheet as on 31st March 200X1.

6
Solution- Income Statement

• Workings are required to start from the bottom
  line in this case.
• 10 increase in Reserves means Retained Earnings
  are 10 of last years reserves. i.e. Rs.15 Lacs.
• Dividend is declared at 10 on Share Capital i.e.
  Rs.5Lacs. Therefore, PAT Retained Earnings
  Dividend Rs. 20 Lacs.
• Cos Tax rate is 50. therefore,Tax Rs.20 Lacs
  and PBT Rs. 40 Lacs.
• Interest paid on 14 Debentures of Rs.100 Lacs is
  Rs.14 Lacs Therefore PBIT Rs.54 Lacs.
• Fixed Assets are depreciated at 10 p.a. i.e.
  Depreciation is Rs. 20 Lacs when added to other
  Operating Fixed Costs of Rs.1 Lac results into
  Total Operating Fixed Costs of Rs.21 Lacs.
• Therefore, Contribution PBIT Operating Fixed
  Costs Rs. 75 Lacs.

7
Particulars Rs.Lacs.
Contribution 75
Less Operating fixed cost
Depreciation 20
Other operating fixed cost 1 21
PBIT 54
Less Interest 14
PBT 40
Less Tax 20
PAT 20
Less Dividend 5
Retained Earnings 15
(increase in Reserves)
8
Computation of Sales Price
Particulars Particulars A B C
Suppose Sales Price Per Unit (Rs.) Suppose Sales Price Per Unit (Rs.) 5x 3x 2x
Sales Units (no.) Sales Units (no.) 2000 4000 8000
Sales (Rs.) Sales (Rs.) 10000x 12000x 16000x
P/V Ratio P/V Ratio 50 40 60
Therefore, Contribution Therefore, Contribution 5000x 4800x 9600x
Therefore, Total Contribution (Rs.) 19,400 x 75,00,000 Therefore, x 386.6 Therefore, Total Contribution (Rs.) 19,400 x 75,00,000 Therefore, x 386.6 Therefore, Total Contribution (Rs.) 19,400 x 75,00,000 Therefore, x 386.6 Therefore, Total Contribution (Rs.) 19,400 x 75,00,000 Therefore, x 386.6 Therefore, Total Contribution (Rs.) 19,400 x 75,00,000 Therefore, x 386.6
Thus, Sales Price Per Unit 1932.99 1932.99 1159.8 773.2
Therefore, Sales (Rs.) 38,65,980 38,65,980 46,39,200 61,85,600
Therefore, Total Sales Rs. 1,46,90,780
Rs.
146.91 Lacs Therefore, Variable Cost Rs.
(146.91 75) Rs.71.91 Lacs
9
Preparation of Balance Sheet
Rs. Lacs

• New Reserves 150 (old) 15 (addition)
  165
• New Fixed Assets 200 (old) 20 (Depreciation)
  180
• New Working Capital Own Funds Borrowing
  Fixed Assets
  (215
  100 180)
  
  Rs. 135 Lacs.
  
• Therefore, Change in W.C. Rs.135 Lacs Rs.100
  Lacs Rs.35 Lacs.
• This Increase is on A/c of Depreciation
  Rs.20 Lacs
  
  Add Retained Earnings Rs.15 Lacs
  
  
  Rs.35 Lacs

10
Estimated Balance Sheet as on 31/3/200X1
Sources Used Rs.Lacs Investment Rs.Lacs
Equity Share Capital 50 Fixed Assets 200
Add Reserves Less Depreciation 20 180
Old 150 Add W.C. 135
New 15 165
Add 14 Debentures 100
315 315
11
Budgeting for Divisional Performance
Following are the Performance Details of the
Divisions of Modern Co. Ltd., of the year ended
on 30-09-200X -
Particulars Division A Division B Division C
Sales (Rs.) 8,00,000 6,00,000 9,00,000
Margin of Safety (Rs.) 4,00,000 4,00,000 6,00,000
Divisional Fixed Cost (Rs.) 2,00,000 1,00,000 1,00,000
Activity Level Achieved 80 60 50

• Additional information about the year ended on
  30-09-200X
• Activity Level Achieved was same for Sales and
  Production. (i.e. No opening or Closing Stocks).
• Break-up of Variable Cost for these Divisions was
  -

12
Particulars Division A Division B Division C
Material 50 40 60
Packaging Processing 40 30 30
Sundry 10 30 10

• (3) Head Office Fixed Cost Rs. 40,000.
• Estimations for the year to end on 30-09-200X1.
• All Divisions will achieve 90 Activity Level of
  Sales and Production. (i.e. No opening or
  Closing Stocks).
• Head Office Fixed Cost will Increase by 10.
• Selling Price of Division A and B will be
  Increased by 5.
• Material Prices will Increase by 5 for all the
  Divisions.
• You are required to Prepare Estimated
  Performance Statement for 200X X1 , with
  Maximum Details.

13
Solution
PARTICULARS A B C
Sales 800000 600000 900000
Margin of safety 400000 400000 600000
Break-even sales 400000 200000 300000
Fixed costs 200000 100000 100000
BES FC/PVR () 50 50 33.33
Contribution(SPVR) 400000 300000 300000
Material 200000 120000 360000
Pkg. Processing 160000 90000 60000
Sundry Expenses 40000 90000 60000
Profit 200000 200000 200000
Activity level () 80 60 50
14
For Division A

• Sales 800000 90/80 105/100 945000
• Material 200000 90/80 105/100 236250
• Sundry 40000 90/80 45000
• Pkg. processing 160000 90/80 180000

15
For Division B

• Sales 600000 90/60 105/100 945000
• Material 120000 90/60 105/100 189000
• Pkg. processing 90000 90/60 135000
• Sundry 90000 90/60 135000

16
For Division C

• Sales 900000 90/50 1620000
• Material 360000 90/50 105/100 680400
• Pkg. processing 180000 90/50 324000
• Sundry 60000 90/50 108000

17
Therefore, _at_ 90
PARTICULARS A B C TOTAL
Sales (-) VC 945000 945000 1620000 3510000
Material 236250 189000 680400 1105650
Pkg. 180000 135000 324000 639000
Sundry 45000 135000 108000 288000
Contribution 483750 486000 507600 1477350
(-) Fixed costs 200000 100000 100000 400000
Profit 283750 386000 407600 1077350
(-) Head off. FC (44000)
Profit 1033350
18
PROBLEMS ON BUDGETING PRODUCT MIX
DECISIONS Wizard Ltd. Manufactures 3 Products
A,B C. The relevant data for which are as
follows
A B C
Rs Rs
Rs Sales Price Per Unit 30
28 32 Cost Data Per Unit
24 23 25 Raw Material
11 12 9 Direct
Labour 4 6
7 Variable Overheads 9
5 9 Machine Hrs. required
/Unit 2 3 4
19

• The other constraints are
• Total Machine Hour Capacity available is 50,000.
• Fixed Overheads are Rs. 50,000/-
• Following are the Minimum and Maximum Quantities
  of each of the Products that need to be
  Manufactured and Sold
• Minimum Quantity 1,000 2,000
  3,000
• Maximum Quantity 20,000 15,000
  11,000
• Compute the Maximum Profit that can be achieved
  under the circumstances

20
BUDGETING FOR PRODUCT MIX DECISIONS
Solution Computation of Contribution per
machine hour
A Rs. B Rs. C Rs.
Selling Price/unit 30 28 32
Total Variable Cost/unit 24 23 25
Contribution / unit 6 5 7
Machine hrs. required/unit 2 3 4
Contribution/machine hour 3 5/3 7/4
Therefore Ranking for manufacturing basis
contribution A,C and B Machine hrs. Required
for 1,000 x 22,0002,000x36,0003,000x412,00
0 Minimum quantity Total 20,000
machine hours.
21
Thus remaining machine hours (30,000) are
available for maximistion of contribution. If all
the 30,000 machine hours are used for producing
the product A (having highest contribution) then
no. of units of A produced 30,000 / 2
15,000. Thus total no. of units of A produced
and sold 15,0001,000 (minimum no.) 16,000 lt
20,000 less than the maximum quantity of A is
allowed. (a) Therefore ideal product mix and
maximum contribution-
Product Production Sales (units) Contribution (Rs.)
A 16,000 96,000
B 2,000 10,000
C 3,000 21,000
1,27,000
(b) Maximum Profit Contribution Fixed
Overheads (1,27,000 50,000)
77,000 Rs.
22
Dec.200X (4)
Particulars 200X 200X
Sales 1,00,000 2,00,000 1
Profit 40,000 90,000 2
Margin of Safety 80,000 1,80,000 3
Break-Even Sales (1 3) 20,000 20,000 a
P/V Ratio - Change in Profit/corresponding change in sales P/V Ratio - Change in Profit/corresponding change in sales P/V Ratio - Change in Profit/corresponding change in sales P/V Ratio - Change in Profit/corresponding change in sales
Total (Variable Fixed) Costs (1 2) 60,000 1,10,000
Therefore PV ratio 40,000 0 1,00,000-20,000 90,000 0 2,00,000-20,000
PV ratio 0.5 0.5 b
Total fixed costsBE sales x PV ratio 10,000 Rs. 10,000 Rs. c
23
(D) 0.5 1,10,000 90,000
S 2,00,000 0.5S 20,000
1,00,000 therefore S 1,20,000 / 0.5
2,40,000 Rs. (E) Increase in fixed costs 50
i.e. 15,000 Rs. therefore 15,000 20,000 x
PV ratio therefore PV ratio 0.75
24
BUDGETING FOR RAW MATERIAL
Modern India Co. Ltd. Produces and Sells three
Products X,Y and Z. All these Products Consume
common Raw Material. As a strategy, the company
Produces and Sells at least 50,100 and 50 units
of X,Y and Z every year, irrespective of their
Profitability. Following are further Details
Available -
Particulars X Y Z
Material Content Per Unit (Kgms.) 3 4 8
Labour Hours Per Unit 6 7 10
Normal Material Loss ( on input) 25 20 20
Selling Price Per Unit (Rs.) 30 40 60
25

• Following are some estimations for the year 200X
  X1 -
• Maximum available Material will be 10,000 Kgms.
• Price per Kg. of Material will be Rs.2.
• Wage Rate per Labour Hour will be Re.1.
• Variable Overheads will be 100 of Wages.
• Fixed Cost for 200X X1 will be Rs.5,000.
• Maximum Demand for X and Y will be 300 and 400
  Units respectively.
• You are required to decide the Optional Product
  Mix for 200X X1, to maximise the overall Profit
  of the Company and also prepare the Performance
  Statement for 200X X1 with maximum possible
  details.

26
Solution
Unit in Kgs.
PARTICULARS X Y Z
Material content per unit 3 4 8
() Process loss 1 1 2
Total material per unit 4 5 10
Material cost Rs. 2 per unit Labour cost Re.
1 per hour
27
PARTICULARS Per Unit X Y Z
Selling Price (Rs.) 30 40 60
(-) Material Cost (Rs.) (8) (10) (20)
Labour Cost (Rs.) (6) (7) (10)
Material O/H (Rs.) (6) (7) (10)
Contribution (Rs.) 10 16 20
Contribution per kg. (Rs.) 2.5 3.2 2
Material available 10000 kg.
28

• Maximum units of X that can be produced 300
  units
• Material used 300 4 1200 kg.
• Maximum units of Y that can be produced 400
  units
• Material used 400 5 2000 kg.
• Material left 10000 (2000 1200) 6800 kg.
• Maximum units of Z that can be produced 6800/10
  680 units

29
Optimal Product mix
PRODUCT UNIT CONTRIBUTIONPer Unit in Rs. Rs.
X 300 10 3000
Y 400 16 6400
Z 680 20 13600
TOTAL 23000
30
SALES VARIANCE ANALYSIS The Value Method

• The Budgeted actual sales of DCP Ltd.
  For the year 200X are as follows

BUDGET BUDGET BUDGET ACTUAL ACTUAL ACTUAL
PRODUCT Qty. (Kg.) Price (Rs./Kg.) Amt. (Rs.) Qty. (Kg.) Price. (Rs./Kg.) Amt. (Rs.)
D 1,000 1,000 10,00,000 1,200 980 11,76,000
C 600 5,000 30,00,000 500 5,100 25,50,000
P 1,250 800 10,00,000 1,000 800 8,00,000
Total 2,850 50,00,000 2,700 45,26,000
Required Detailed analysis of Sales Variances
31
Problem on Sales Variance Analysis (Value Method)
Sales Price Variance Actual Quantity ( Budgeted
Sales Price Actual Sales Price)
Product Actl Qty Bud S.P. Act S.P. SPV Variance
D 1200 1000 980 24000 Adverse
C 500 5000 5100 -50000 Favourable
P 1000 800 800 0
Total Price Variance Total Price Variance Total Price Variance Total Price Variance -26000 Favourable
Quantities in Kgs., and Prices and Variances are
in Rs.
32
Sales Volume Variance Budgeted Sales Price
(Budgeted QuantityActual Quantity)
Product Bud S.P. Bud S.P. Actl Qty SVV Variance
D 1000 1000 1200 -200000 Favourable
C 5000 600 500 500000 Adverse
P 800 1250 1000 200000 Adverse
Total Volume Variance Total Volume Variance Total Volume Variance Total Volume Variance 500000 Adverse
Quantities in Kgs., and Prices and Variances are
in Rs.
33
Sales Value Variance Budgeted Sales Price x
Budgeted QuantityActual Sales Price x Actual
Quantity
Product Bud S.P. Bud Qty Actl. S.P. Actl. Qty SVV Variance
D 1000 1000 980 1200 -176000 Favourable
C 5000 600 5100 500 450000 Adverse
P 800 1250 800 1000 200000 Adverse
Total Value Variance Total Value Variance Total Value Variance Total Value Variance 474000 Adverse
Quantities in Kgs., and Prices and Variances are
in Rs.
34
SALES VARIANCE ANALYSIS The Profit Method

• The Budget actual Sales of Households Products
  Ltd. As of March 200X are as follows

BUDGET BUDGET ACTUAL ACTUAL
Product Qty.(units) Price (Rs./units) Qty. (Units) Price (Rs./Units)
A 900 50 1,000 55
B 650 100 700 95
C 1,200 75 1,100 78
The Marginal Cost of Sales Per Unit of A,B C was
Rs. 45, Rs. 85 Rs. 65 respectively. Required
Different Variances to explain the difference
between the Budgeted and Actual Profit.
35
Problem on Sales Variance Analysis (Profit Method)
Product Budgeted Quantity Price Actual Quantity Price Standard Price Budgeted Margin Actual Margin
A 900 50 1000 55 45 5 10
B 650 100 700 95 85 15 10
C 1200 75 1100 78 65 10 13
Quantities in Kgs., and Prices and Variances are
in Rs.
36
Sales Price Variance Actual Quantity ( Budgeted
Margin Actual Margin )
Product Actual Quantity Budgeted Margin Actual Margin SMV Variance
A 1000 5 10 -5000 Favourable
B 700 15 10 3500 Adverse
C 1100 10 13 -3300 Fovourable
Sales Price Variance Sales Price Variance Sales Price Variance Sales Price Variance -4800 Favourable
Quantities in Kgs., and Prices and Variances are
in Rs.
37
Sales Volume Variance Budgeted Margin (
Budgeted Quantity- Actual Quantity )
Product Budgeted Margin Budgeted Quantity Actual Quantity SMV Variance
A 5 900 1000 -500 Favorable
B 15 650 700 -750 Favourable
C 10 1200 1100 1000 Adverse
Sales Volume Variance Sales Volume Variance Sales Volume Variance Sales Volume Variance - 250 Favourable
Quantities in Kgs., and Prices and Variances are
in Rs.
Sales Value Variance Sales Price Variance
Sales Qty. Variance
- 4800 - 250 Total Rs. 5050
Favourable Variance
38
A Case Study on Responsibility Accounting for
Performance Evaluation using Variance Analysis
Technique
Phase 1 Preparing a Budget Statement The Chempro
India Pvt. Ltd. prepared its annual sales budget
for the year 2000 as shows below Rs. Tot
al Sales 5,00,000 Budget
performance (sales) from each territorial
manager Manager --- Territory A
1,20,000 Manager --- Territory B
1,30,000 Manager --- Territory C
1,60,000 Manager --- Territory D
90,000 5,00,000 The Sales
General Manager is responsible for the Overall
Sales Performance of the company and the
territorial managers are accountable to him.
39
Phase 2 Recording the Actual Performance during
the Year Rs. Total Sales
6,00,000 Actual Sales Performance from each
Territorial Manager Manager --- Territory
A 1,40,000 Manager --- Territory
B 1,20,000 Manager --- Territory
C 2,70,000 Manager --- Territory
D 70,000
6,00,000
40
Phase 3 Calculating the Favourable and
Unfavourable Variances
Responsible Individual Budgeted Sales Actual Sales Variance
Sales General Manager 5,00,000 6,00,000 1,00,000 (F)
Territory A Manager 1,20,000 1,40,000 20,000 (F)
Territory B Manager 1,30,000 1,20,000 10,000 (A)
Territory C Manager 1,60,000 2,70,000 1,10,000 (F)
Territory D Manager 90,000 70,000 20,000 (A)
Note F Favourable A Adverse
The Sales General Manager submitted his
Divisional Performance Report with the above
variances to the Managing Director of the
Company. The Territorial Sales Managers gave the
causes for the Various Variances as follows A
Extra Efforts B Delayed Supplies from Factory C
Extra Efforts and New Marketing Strategies D
Delayed Supplies from Factory
41
Phase 4 Finding out the true causes of the
Variances.
Generally, there is a tendency that the people
responsible for bad performance blame it on
someone else. Therefore there is no specific way
to find out the cause of a good/poor variance.
As long as the variance is good the person is
rewarded , due to which he may try and grab the
reward for the TOTAL good performance which may
not be only due to him. Therefore the true cause
of variance need to be Known so as to give a
suitable reward/penalty. One person alone should
not gain/lose everything if he could alone not
control the good/bad variance. Such causes also
decided the extent to which the standards should
be revised, i.e. the same standards of
performance cannot be expected under different
operational / economical circumstances. The
cause given for the good/bad performance may be
true or false as the general manager (sales) may
not clearly state the reasons for his
subordinates performance as ultimately he is
responsible for it. Hence the managing director
should assign such work to the managing
accountant who shall in return find out the true
causes.
42
E.g. The true causes of the variance in the
Chempro India Pvt. Ltd. Werefound as follows by
the Managing Accountant
Territory Sales Manager Sales Causes for the Variance
A Total Rs. 20,000 (F)10,000 (F)5,000 (F)5,000 (F) 1. Increased Selling Price 2. Government Order 3. Reduced Selling Price as Production Cost was reduced
B Total Rs. 10,000 (A) 8,000 (A)2,000 (A)1,000 (F)1,000 (A) 4. Inadequate Efforts5. Delayed Supplies from Factory6. Increased Selling Price7. Unexpected increase in Sales Tax, so undue increase on Selling Price
C Total Rs. 1,10,000 (F) 60,000 (F)20,000 (F)10,000 (F)20,000 (F) 8. New Marketing Strategy 9. Government Order10. Subsidiary prices as per governments instruction11. Reduced Selling Price as production cost was reduced
D Total Rs. 20,000 (A)11,000 (A)9,000 (A) 12. Inadequate distribution facilities13. Delayed Supplies from Factory
43
Territory Sales Manager Variance Controllable (C) / Uncontrollable (UC) causes
A Total Rs. 20,000 (F)10,000 (F) 5,000 (F) 5,000 (F)Therefore CUC10,000 1. C(Recurring) 2. UC (Recurring) 3. UC (Recurring)
B Total Rs. 10,000 (A) 8,000 (A) 2,000 (A) 1,000 (F) 1,000 (A) 4. C (Non-Recurring) 5. UC (Non-Recurring) 6. C (Recurring)7. UC (Recurring)
C Total Rs. 1,10,000 (F) 60,000 (F) 20,000 (F) 10,000 (F) 20,000 (F) 8. C (Recurring) 9. UC C (10,000 10,000) (Recurring)10. UC (Non-Recurring)11. UC (Recurring)
D Total Rs. 20,000 (A) 9,000 (A)11,000 (A) 12. UC (Non-Recurring) 13. UC (Non-Recurring)
Note It is difficult and to an extent subjective
to decide the degree of controllability for a
particular cause, i.e. whether the variance is C
or UC e.g. a responsible person argues the cause
of an adverse variance is UC and his superior may
say it to be C e.g. in item 9. Since the
favourable variance is a result of the govt.
Order the response of manager C is also important
as he might have grabbed the govt. order with his
awareness.
44
Phase 6 Deciding the quantum of Reward / Penalty
The person should be penalized/rewarded for
only the controllable portion of his
Favourable/Unfavourable variance. In the
illustration the sales manager of territory D
will not be penalized because his advise variance
was due to UC factors. Similarly manager C will
be rewarded only 70,000 as out of his whole
favourable variance, only that much was
controllable. Manager B has a variance of 11,000
(A) and a 1000 (F). He will be proportionately
penalized and rewarded. Manager A will be
rewarded only 50 of his favourable variance as
only that much is in his control.
45
Phase 7 Revising the standards of performance
Due to fast changing operational/ financial
environments / methods/ techniques/ expectations
requirements, standards of performance have to be
timely revised. The causes for the variances
have to be studied carefully and the degree of
controllability has to be analysed with trend
technique. The following illustration will
explain this aspect further. Annual Sales Budget
from Jan95-Dec2002 Rs. 1,60,000 Avg. Actual
Annual Sales achieved in above period Rs.
1,70,000 Yearly sales variance (F) Rs.
10,000 Frequent cause for yearly Variance Govt.
order not estimated each year
46

• Therefore the Additional Sales of Rs. 10,000
  should be added regularly for 6 years to the
  budget of 2001 and it should increase to
  1,70,000. This revision made is a result of the
  frequent additional sales and is expected to flow
  in the coming years as well.
• If there is a favourable trend in a particular
  territory in the Variance, the Sales Budget of
  the coming year may be more Optimistic and this
  may also be introduced to the Other Budgets along
  with the techniques to show the results of the
  same.
• Penalty / Reward for Individual Sales
  Performances and revisions in the Budgets for the
  coming year
• The Variances Analysis Techniques is used to
• To Decide the Penalty / Reward Quantum
• The revision to be made to frame the
  Individual Sales Budget for the coming
  year.

47
The following table shall explain this
Variance Penalty / Reward To be considered for revision
A FAVOURABLE C R C NR UC R UC NR High rewardSome rewardSome rewardLittle reward Yes (Upward)NoYes (Upward)No
B UNFAVOURABLE C R C NR UC R UC NR High PenaltySome penaltyNo penaltyNo penalty NoNoYes (downward)No
C Controllable R Recurring NR Non
Recurring UC Uncontrollable
48
Therefore with the above technique we can make an
approximate budget of the Chempro India Pvt. Ltd.
for the year 2001 and figure out the treatment
that shall be rendered to the 4 Territorial
Managers for their performance in the financial
year.
Manager Original Budget of year 2000Rs. Actual Performance of year 2000Rs. Budget of year 2001Rs.
Territory A 1,20,000 1,40,000 1,20,000 OB 10,000 (F) C 5,000 (F) UC 5,000 (F) UC---------------------- 1,40,000-----------------------
Territory B 1,30,000 1,20,000 1,30,0001,000 (F) C-1,000 (A) UC
Continued
49
Continued
Territory C 1,60,000 2,70,000 1,60,000 OB 60,000 (F) C 20,000 (F) CUC 20,000 (F) UC---------------------- 2,60,000-----------------------
Territory D 90,000 70,000 90,000 OB
TOTAL 5,00,000 6,00,000 6,20,000
OB Original Budget Only Recurring Variances
are considered for revision in the budget of
2001. Therefore the budget of 2001 will Increase
or Decrease due to the estimation for 2001 about
other Variables/ Constraints.
50
The Territorial Sales Managers shall be given the
following Rewards / Penalties for their
respective Variances of 2000
Manger Variance Penalty / Reward
A 10,000 (F) CR 5,000 (F) UCR 5,000 (F) UCR High RewardSome Reward Some Reward
B 1,000 (A) CNR 2,000(A) UCNR 1,000 (F) CR Some PenaltyNo PenaltyHigh Reward
C 1,000 (A) UCR60,000 (F) CR10,000 (F) UCR10,000 (F) CR10,000 (F) UCNR20,000 (F) UCR No PenaltyHigh RewardSome RewardHigh RewardLittle RewardSome Reward
D 9,000 (A) UCR11,000 (A) UCNR No PenaltyNo penalty
General Sales ManagerSome of the UC, i.e. F and
A variances of the Territory Manger can be
controlled by the General Sales Manager. Hence
all the above Variances will have to be
reanalysed with the aspect of controllability to
determine the Penalty/ Reward for the General
Sales Manager.