from the following ratios and details, prepare trading profit and loss account of arjuna company...

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.50,000Material Purchases = Rs.3,20,000Opening Stock of material = Rs. 40,000Closing Stock of material = Rs. 60,000

Administrative Expenses: Sales Expenses = 3:2Wages : Administrative Expenses = 5:3Factory Expenses : Wages = 1:2Non-business expenses were 5% of the non-manufacturing operating expenses.

Preparation of Income Statement

Solution to the ProblemComputation of Cost of Sales : -Opening stock = 40,000+ Purchases = 3,20,000 - Closing stock = (60,000)Cost of Sales = 3,00,000Gross 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 = 3:2)

Therefore Admn. Exp.= 12% of Sales -(3) Therefore Selling Exp.= 8% of Sales –(4)Therefore Wages = (5/3) x 12% (Wages: Admin = 5:3)

= 20% of Sales – (5)Therefore Factory Expenses = (1/2) x 20%

= 10% of Sales –(6) (Factory Exp:Wages = 1: 2)

Unit in Rs.

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 STherefore 0.3 Sales = 3,00,000Therefore Sales = 10,00,000Wages = 2,00,000Factory Exp. = 1,00,000Gross Profit = 4,00,000Admn. 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)ThereforeNet Profit = 2,40,000 ( 1 + 2 – 3 )

Unit in Rs.

Product Price Budgeting DecisionsFollowing 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

The Co. produces 3 products A, B & C.

Following are some important estimations for 200X – 200X1 :

1) Co. will sell 2,000, 4,000 & 8,000 units of A, B & C respectively.

2) P/V ratio of A, B, & C will be 50 % , 40 % & 60 % respectively.

3) Co. will have to maintain the ratio of “Sale Price Per Unit” of A,B & C as 5:3:2.

4) Co. expects 10 % increase in reserves. It would like to give 10 % dividend on share capital.

5) Co’s. tax rate is 50 %. Fixed Assets are depreciated at 10 % p.a.

6) Other Operating Fixed Costs will remain at Rs. 1 Lac.

7) 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.

Solution:- Income StatementWorkings are required to start from the bottom line in this case.

(i) 10% increase in Reserves means Retained Earnings are 10% of last

years’ reserves. i.e. Rs.15 Lacs.

(ii) Dividend is declared at 10% on Share Capital i.e. Rs.5Lacs. Therefore,

PAT = Retained Earnings + Dividend = Rs. 20 Lacs.

(iii) Co’s Tax rate is 50%. therefore,Tax = Rs.20 Lacs and PBT = Rs. 40

Lacs.

(iv) Interest paid on 14% Debentures of Rs.100 Lacs is Rs.14 Lacs

Therefore PBIT = Rs.54 Lacs.

(v) 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.

(vi) Therefore, Contribution = PBIT + Operating Fixed Costs = Rs. 75 Lacs.

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)

Particulars A B C

Suppose Sales Price Per Unit (Rs.)

5x 3x 2x

Sales Units (no.) 2000 4000 8000

Sales (Rs.) 10000x 12000x 16000x

P/V Ratio 50% 40% 60%

Therefore, Contribution 5000x 4800x 9600x

Therefore, Total Contribution (Rs.) 19,400 x = 75,00,000

Therefore, x = 386.6

Thus, Sales Price Per Unit 1932.99 1159.8 773.2

Therefore, Sales (Rs.) 38,65,980 46,39,200 61,85,600

Therefore, Total Sales = Rs. 1,46,90,780 = Rs. 146.91 LacsTherefore, Variable Cost = Rs. (146.91 –75) = Rs.71.91 Lacs

Computation of Sales Price

Preparation of Balance Sheet

(i) New Reserves : 150 (old) + 15 (addition) = 165

(ii) New Fixed Assets : 200 (old) – 20 (Depreciation) = 180

(iii) 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

Rs. Lacs

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

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(1) Activity Level Achieved was same for Sales and Production.

(i.e. No opening or Closing Stocks).(2) Break-up of Variable Cost for these Divisions was -

Budgeting for Divisional Performance

(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.

Particulars Division ‘A’ Division ‘B’ Division ‘C’

Material 50% 40% 60%

Packaging & Processing 40% 30% 30%

Sundry 10% 30% 10%

SolutionPARTICULARS 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(S*PVR) 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

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

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

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

Therefore, @ 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

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

The other constraints are :

(i) Total Machine Hour Capacity available is 50,000.

(ii) Fixed Overheads are Rs. 50,000/-

(iii) 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

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 2=2,000][2,000x3=6,000][3,000x4=12,000]Minimum quantity Total 20,000 machine hours.

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= 15,000+1,000 (minimum no.) = 16,000 < 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.

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

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 costs=BE sales x PV ratio=

10,000 Rs. 10,000 Rs. c

(D) 0.5 = 1,10,000 – 90,000 S – 2,00,0000.5S = 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 ratiotherefore PV ratio = 0.75

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

BUDGETING FOR RAW MATERIAL

Following are some estimations for the year 200X – X1 :-

(1) Maximum available Material will be 10,000 Kgms.

(2) Price per Kg. of Material will be Rs.2.

(3) Wage Rate per Labour Hour will be Re.1.

(4) Variable Overheads will be 100% of Wages.

(5) Fixed Cost for 200X – X1 will be Rs.5,000.

(6) 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.

Solution

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 unitLabour cost = Re. 1 per hour

Unit in Kgs.

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.

•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

Optimal Product mix

PRODUCT UNIT CONTRIBUTIONPer Unit in Rs.

Rs.

X 300 10 3000

Y 400 16 6400

Z 680 20 13600

TOTAL 23000

SALES VARIANCE ANALYSIS – The Value Method

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

BUDGET 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

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 = -26000 Favourable

Quantities in Kgs., and Prices and Variances are in Rs.

Sales Volume Variance =

Budgeted Sales Price (Budgeted Quantity–Actual 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 = 500000 Adverse


Sales Value Variance =

Budgeted Sales Price x Budgeted Quantity–Actual 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 = 474000 Adverse


SALES VARIANCE ANALYSIS – The Profit MethodThe Budget & actual Sales of Households Products

Ltd. As of March 200X are as follows :

BUDGET 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.

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


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 = -4800 Favourable


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 = - 250 Favourable

Sales Value Variance= Sales Price Variance + Sales Qty. Variance

= - 4800 + - 250

Total: Rs. 5050 Favourable Variance


A Case Study onResponsibility Accounting for Performance Evaluation using

Variance Analysis Technique

Phase 1 Preparing a Budget StatementThe Chempro India Pvt. Ltd. prepared its annual sales budget for the year

2000 as shows below:

Rs.

Total 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.

Phase 2 Recording the Actual Performance during the

YearRs.

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

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 = AdverseThe 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

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.

E.g. The true causes of the variance in the Chempro India Pvt. Ltd. Were

found 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 government’s 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

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 C=UC=10,000

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.

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.

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 Jan’95-Dec’2002 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

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 :

1) To Decide the Penalty / Reward Quantum

2) The revision to be made to frame the Individual Sales Budget

for the coming year.

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

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 2000

Rs.

Actual Performance of

year 2000Rs.

Budget of year 2001

Rs.

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 1,30,000+1,000 (F) C-1,000 (A) UC

Continued …

Continued …

Territory C 1,60,000 2,70,000 1,60,000 OB+ 60,000 (F) C+ 20,000 (F) C&UC+ 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.

The Territorial Sales Managers shall be given the following Rewards / Penalties for their respective Variances of 2000

Manger Variance Penalty / Reward

A10,000 (F) C&R 5,000 (F) UC&R 5,000 (F) UC&R

High RewardSome Reward Some Reward

B 1,000 (A) C&NR 2,000(A) UC&NR 1,000 (F) C&R

Some PenaltyNo PenaltyHigh Reward

C

1,000 (A) UC&R60,000 (F) C&R10,000 (F) UC&R10,000 (F) C&R10,000 (F) UC&NR20,000 (F) UC&R

No PenaltyHigh RewardSome RewardHigh RewardLittle RewardSome Reward

D 9,000 (A) UC&R11,000 (A) UC&NR

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.

from the following ratios and details, prepare trading profit and loss account of arjuna company...

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