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Costing Cheat Sheet (DRAFT) by

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Budgeting and Budgetary Control

Budgeting: Basics

Core concept: Quanti­tative plan of future activities and objectives for a specified period.
Main focus: Planning, coordi­nation, resource allocation and perfor­mance targets.
Object­ives: Planning → Coordi­nation → Commun­ication → Resource allocation → Cost control → Perfor­mance evaluation → Corrective action.
Major advant­ages: Better planning, cost control, effici­ency, accoun­tab­ility and coordi­nation.
Major limita­tions: Estimates may be inaccu­rate; prepar­ation is time-c­ons­uming; rigidity and budgetary slack may arise.
Key distin­ction: Budgeting = prepar­ation of plans; Budgetary Control = compar­ison, variance analysis and corrective action.
Key distin­ction: Budget = planned target; Forecast = expected future outcome.

Budgetary Control Process

Core concept: System of contro­lling operations through budgets, actual­-pe­rfo­rmance comparison and corrective action.
Key process: Objectives → Budget Centres → Key Budget Factor → Budget Policies → Functional Budgets → Master Budget → Approval → Actual Results → Variance Analysis → Corrective Action.
Budget Centre: Organi­sat­ional unit for which a separate budget is prepared.
Key Budget Factor: Limiting factor governing activity; may be sales, material, labour or capacity.
Management by Exception: Focus on signif­icant deviat­ions.
Prereq­uis­ites: Management support, clear respon­sib­ili­ties, realistic budgets, reliable accoun­ting, coordi­nation and timely reporting.
Key distin­ction: Budgeting prepares the plan; budgetary control monitors and acts on perfor­mance.

Budget Committee and Budget Manual

Budget Committee: Group of senior executives respon­sible for overall coordi­nation, review and superv­ision of budgeting.
Compos­ition: CEO/MD, Finance Director, Budget Officer and depart­mental heads.
Main functions: Budget policies → Coordi­nation → Review → Conflict resolution → Monitoring → Revision.
Budget Officer: Admini­str­ative and technical coordi­nator who collects, checks and consol­idates budget estimates.
Budget Manual: Written document containing budgeting proced­ures, respon­sib­ili­ties, formats, timetables and reporting guidel­ines.
Major distin­ction: Committee = People who oversee budgeting; Manual = Document explaining how budgeting is conducted.

Fixed and Flexible Budgets

Fixed Budget: Prepared for one predet­ermined activity level; does not change with actual output.
Flexible Budget: Adjusted according to actual or expected activity levels.
Main focus: Unders­tanding how costs behave as activity changes.
Major strength of flexible budgeting: Meaningful cost control and perfor­mance evaluation at different activity levels.
Major weakness: Requires reliable cost classi­fic­ation and more prepar­ation.
Key distin­ction: Fixed = one activity level; Flexible = multiple activity levels.
Cost behaviour:
- Fixed → Total constant; per-unit cost decreases.
- Variable → Total changes propor­tio­nately; per-unit cost constant.
- Semi-v­ariable → Contains fixed and variable compon­ents.

Key formulas:
- Total variable cost = Variable cost per unit × Output.
- Total cost = Fixed cost + Variable cost.
- Semi-v­ariable cost = (a+bX).
- High-Low variable cost per unit = Change in cost ÷ Change in activity.

Functional Budgets

Core concept: Separate budgets prepared for individual organi­sat­ional functions and consol­idated into the Master Budget.
Key sequence: Sales → Production → Materials, Labour and Overheads → Master Budget.
Main purpose: Coordi­nation of depart­mental activi­ties, resource planning and cost control.
Key principle: Functional budgets are interd­epe­ndent; the output or estimates of one budget provide inputs for others.
Principal Budget Factor: The limiting factor governing operat­ions. Sales is commonly the starting point, but material availa­bility, labour or production capacity may be the constr­aint.
Key distin­ction: Functional Budgets = Individual depart­mental plans; Master Budget = Consol­idated organi­sat­ional plan.
Main types:
1. Sales Budget → Expected sales quantity and revenue.
2. Production Budget → Units to be manufa­ctured.
3. Material Budget → Materials required and purchases.
4. Labour Budget → Labour hours and labour cost.
5. Overhead Budget → Indirect production expenses.

Sales Budget

Core concept: Estimates expected sales quantity and revenue for a specified period.
Main focus: How much can the organi­sation sell, and at what price?
Formula: Sales Revenue = Budgeted Units × Selling Price per Unit.
Methods: Market research, sales force composite, trend analysis, statis­tical methods, expert opinion and test marketing.
Major strength: Provides the basis for production and other functional budgets.
Major limita­tion: Accuracy depends on demand forecasts and market condit­ions.

Production Budget

Core concept: Estimates units to be manufa­ctured to meet expected sales and desired inventory.
Main focus: How much should the organi­sation produce?
Formula: Production = Sales + Desired Closing Stock − Opening Stock.
Key inputs: Sales forecast, opening inventory, desired closing inventory and production capacity.
Major strength: Coordi­nates produc­tion, sales, inventory and resource requir­ements.
Major weakness: Depends on accurate sales forecasts and availa­bility of production resources.
Key distin­ction: Sales Budget = Units expected to be sold; Production Budget = Units required to be manufa­ctured.
Numerical trap: Higher closing stock increases produc­tion; higher opening stock reduces production.

Material Budget

Core concept: Estimates raw material quantity and cost required for production and the purchases needed to maintain desired inventory.
Types: Material Consum­ption Budget and Material Purchase Budget.
Main focus: How much material will be consumed, and how much must be purchased?
Key inputs: Produc­tion, material consum­ption per unit, opening stock, desired closing stock and purchase price.
Major strength: Ensures material availa­bility and supports purchase planning and cost control.
Major weakness: Depends on accurate production estimates, consum­ption standards and supply availa­bility.
Key distin­ction: Consum­ption = Material needed for produc­tion; Purchases = Consum­ption adjusted for inventory.
Numerical trap: If wastage is expressed as a percentage of input, Required Input = Good Output ÷ (1 − Wastage Rate).
Formulas:
- Material Required = Production Units × Material per Unit.
- Material Purchases = Material Required + Desired Closing Stock − Opening Stock.
- Purchase Cost = Purchase Quantity × Purchase Price.

Labour Budget

Core concept: Estimates labour hours, workforce requir­ements and labour cost for planned production.
Main focus: How many workers and labour hours are required, and what will they cost?
Key inputs: Produc­tion, labour time standards, wage rates, workforce availa­bility and produc­tivity.
Major strength: Helps plan workforce requir­ements and control labour costs.
Major weakness: Produc­tivity, absent­eeism, labour turnover and overtime can make estimates inaccu­rate.
Key distin­ction: Labour Hours Budget = Time required; Labour Cost Budget = Wages required.
Keyword associ­ations: Idle Time → Paid but unprod­uctive time; Overtime → Work beyond normal hours; Labour Turnover → Employees leaving and being replaced.
Formulas:
- Labour Hours = Production Units × Labour Hours per Unit.
- Labour Cost = Labour Hours × Wage Rate.
- Workers Required = Total Labour Hours ÷ Working Hours per Worker.
- Labour Produc­tivity = Output ÷ Labour Hours.

Overhead Budget

Core concept: Estimates indirect expenses expected to be incurred during a specified period.
Functional classi­fic­ation: Production / Factory → Admini­str­ation → Selling → Distri­bution.
Cost behaviour: Fixed → Variable → Semi-v­ari­able.
Key process: Identify overheads → Classify by function → Classify by behaviour → Estimate → Consol­idate → Monitor.
Formula: OAR = Budgeted Overheads ÷ Budgeted Activity.
Allocation: Charging an overhead directly to one cost centre.
Apport­ionment: Distri­buting common overhead among multiple cost centres.
Major strength: Helps control indirect costs and estimate total production expend­iture.
Major weakness: Estimation and allocation of indirect costs can involve judgement.
Keyword associ­ations:
- Factory rent → Production overhead.
- Advert­ising → Selling overhead.
- Delivery → Distri­bution overhead.
- Office rent → Admini­str­ation overhead.
- Machine hours → Common overhead absorption base.

Cash Budget

Core concept: Estimates future cash receipts and payments to determine cash surplus or deficit.
Main focus: When will cash actually come in and go out?
Formula: Closing Cash = Opening Cash + Cash Receipts − Cash Payments.
Methods: Receipts and Payments Method; Adjusted Profit and Loss Method; Balance Sheet Method.
Cash receipts: Cash sales, debtor collec­tions, loans received, sale of assets and other cash inflows.
Cash payments: Supplier payments, wages, overheads, taxes, capital expend­iture, loan repayments and interest.
Non-cash items: Deprec­iation, provisions and bad debts are excluded as cash movements.
Major strength: Helps manage liquidity and anticipate financing requir­ements.
Major weakness: Depends on accurate forecasts of receipts, payments and their timing.
Key distin­ction: Cash Budget = Future cash forecast; Cash Flow Statement = Actual historical cash flows.
Cash Budget Methods
- Receipts & Payments: Opening cash + cash receipts − cash payments.
- Adjusted P&L: Start with estimated profit; add non-cash expenses, adjust working capital changes and other cash items.
- Balance Sheet: Prepare estimated closing balance sheet; cash/bank is the balancing figure.
Closing Cash = Total Liabil­ities + Capital -Other Assets

Note:
- Profit does not necess­arily mean positive cash flow.

Receipts and Payments Method

Concept: Prepare a period­-wise statement of all expected cash receipts and cash payments.

1. Cash receipts — ADD (+)
Item Treatment
> Cash sales Add
> Collection from debtors Add
> Sale of fixed assets Add
> New loan received Add
> Issue of shares­/de­ben­tures Add
> Intere­st/­div­idend received Add
> Other cash income Add
> Opening cash/bank balance Add

2. Cash payments — SUBTRACT (−)
Item Treatment
> Cash purchases Subtract
> Payment to creditors Subtract
> Wages and salaries Subtract
> Rent and other expenses paid Subtract
> Purchase of fixed assets Subtract
> Loan principal repaid Subtract
> Interest paid Subtract
> Tax paid Subtract
> Dividend paid Subtract
> Other cash expenses Subtract

3. Important adjust­ments in numerical questions
A. Credit sales and debtor collec­tions

If sales are on credit, don't include the entire sales amount as cash received. Calculate collec­tions based on the given credit terms.

Example:
- January credit sales = ₹1,00,000
- 60% collected in January
- 40% collected in February
January receipt = ₹60,000; February receipt = ₹40,000.

B. Credit purchases and creditor payments

Similarly, purchases are not cash payments until suppliers are paid.

Example:
- January credit purchases = ₹80,000
- 70% paid in January
- 30% paid in February
January payment = ₹56,000; February payment = ₹24,000.

C. Outsta­nding and prepaid expenses
- Outsta­nding expense: Include when actually paid.
- Prepaid expense: Include when cash is paid, even if it relates to a future period.

D. Non-cash items

Exclude:
- Deprec­iation
- Amorti­sation
- Goodwill written off
- Provision for doubtful debts
- Credit purcha­ses­/sales not yet settled in cash

Adjusted Profit and Loss Method

The objective is to convert accounting profit into estimated cash.
Step 1. Start with Net Profit
Take the estimated net profit as given in the question.

Step 2. Adjust non-cash and non-op­erating items
Item Treatment Shortcut
> Deprec­iation: Add (+) Expense, but no cash paid
> Amorti­sation: Add (+) Non-cash expense
> Provision for doubtful debts: Add (+) No immediate cash outflow
> Goodwill written off: Add (+) Non-cash expense
> Loss on sale of fixed asset: Add (+) Accounting loss, not operating cash
> Profit on sale of fixed asset: Subtract (−) Accounting gain, not operating cash
> Interest income credited to P&L: Subtract (−) Remove if separately treated as cash inflow
> Dividend income credited to P&L: Subtract (−) Remove if separately treated as cash inflow

Shortcut: Non-cash expenses → ADD. Non-cash gains → SUBTRACT.

Step 3. Adjust working capital changes
This is where MCQs can test whether you understand the direction of adjust­ment.
Working capital item Increase Decrease
> Debtors / Receiv­ables − +
> Stock / Inventory − +
> Prepaid expenses − +
> Creditors / Payables + −
> Outsta­nding expenses + −
> Income received in advance + −
> Accrued income − +

Two powerful shortcuts:
- Current assets: Increase → subtract; decrease → add.
- Current liabil­ities: Increase → add; decrease → subtract.
Why? More current assets generally tie up cash; more current liabil­ities generally preserve cash by delaying payment.

Step 4. Account for other cash items separately
Once you have calculated cash generated from operat­ions, account for other cash flows.
Transa­ction Treatment Reason
> Purchase of machinery / building − Cash paid
> Sale of machinery / building + Cash received
> Purchase of invest­ments − Cash paid
> Sale of invest­ments + Cash received
> New loan raised + Cash received
> Loan principal repaid − Cash paid
>Issue of shares + Cash received
> Redemption / buyback of shares − Cash paid
> Interest paid − Cash outflow
> Tax paid − Cash outflow
> Dividend paid − Cash outflow
> Opening cash balance + Already available cash

Shortcut:
- Money coming IN → ADD.
- Money going OUT → SUBTRACT.
- Ignore non-cash transa­ctions.

Step 5. Calculate closing cash
Closing Cash=O­pening Cash+Net Cash Movement

Master Budget

Core concept: Consol­idated overall budget combining functional budgets.
Operating Budget: Sales, produc­tion, material, labour, overheads and budgeted P&L.
Financial Budget: Cash budget, capital expend­iture, financing and budgeted balance sheet.
Key process: Functional budgets → Operating and financial plans → Master Budget.
Major purpose: Coordi­nation, resource alloca­tion, planning and control.
Key distin­ction: Functional = individual depart­ment; Master = organi­sat­ion­-wide.
Keyword associ­ation: Master Budget = Integrated plan; Pro forma = Budgeted financial statements.

Budgeted Income Statement and Balance Sheet

Budgeted Income Statement: Forecasts revenue, expenses and profit.
Format: Sales − COGS = Gross Profit − Operating Expenses = EBIT − Interest − Tax = PAT.
COGS: Opening Stock + Purchases + Direct Expenses − Closing Stock.


Budgeted Balance Sheet: Forecasts assets, liabil­ities and equity.
Key calcul­ations: Debtors = Opening + Credit Sales − Collec­tions − Bad Debts; Creditors = Opening + Credit Purchases − Payments.
Fixed assets: Opening net assets + Purchases − Book Value Sold − Deprec­iation.
Key equation: Assets = Liabil­ities + Equity.
Connec­tion: PAT retained increases reserv­es/­ret­ained earnings.
Key distin­ction: Income Statement = perfor­mance over a period; Balance Sheet = financial position on a date.

A. Format of Budgeted Income Statement

Sales Revenue
Less: Cost of Goods Sold
Gross Profit
Less: Operating Expenses
Selling expenses
Admini­str­ative expenses
Operating Profit (EBIT)
Add: Non-op­erating income
Less: Finance cost / Interest
Profit Before Tax (PBT)
Less: Tax
Profit After Tax (PAT)

B. Format of Budgeted Balance Sheet
Liabil­ities and Equity
Share capital
Reserves and surplus
Long-term borrowings
Trade payables / Creditors
Outsta­nding expenses
Other liabil­ities
Total

Assets
Fixed assets
Less: Accumu­lated deprec­iation
Inventory / Closing stock
Trade receiv­ables / Debtors
Cash and bank
Prepaid expenses
Total

The fundam­ental accounting equation: Assets = Liabil­ities + Equity.

Types and Modern Approaches to Budgeting

Zero-based budgeting.

Associated with: Peter A. Pyhrr.
Origin of the modern approach: Developed and popula­rised at Texas Instru­ments.
Starting point: Zero base.
Core requir­ement: Fresh justif­ication of expend­iture.
Key termin­ology: Decision unit, decision package, ranking.
Resource alloca­tion: Based on evaluated priorities and available resources.
Applic­ation: Both existing and new activities can be evaluated.
Major weakness: Time-c­ons­uming and costly prepar­ation.
Major strength: Identi­fic­ation and elimin­ation of unnece­ssary expend­iture.
ZBB in six words/­steps
Zero → Identify → Justify → Evaluate → Rank → Allocate
Start afresh → identify activities → prepare packages → evaluate proposals → rank priorities → distribute funds.

- Decision unit = where expend­iture is examined.
- Decision package = why the activity deserves funding.
- Ranking = which package gets priority.

Perfor­mance Budgeting

Core concept: Links financial alloca­tions with physical perfor­mance and results.
Main focus: What was achieved with the money spent.
Key compon­ents: Inputs (resou­rces), Outputs (goods­/se­rvices delive­red), Outcomes (broader results).
Three Es: Economy (cost of resour­ces), Efficiency (input­-output relati­ons­hip), Effect­iveness (achie­vement of object­ives).
Major strength: Better accoun­tab­ility and result­-or­iented resource alloca­tion.
Major weakness: Difficult to measure outcomes; requires reliable data and monito­ring.
India: First ARC recomm­ended it in 1966; introduced in selected ministries in 1968–69.
Outcome Budget: Introduced in 2005–06; focuses on measurable outcomes and impact.
Perfor­mance Budgeting in six steps
Objectives → Activities → Targets → Resource allocation → Perfor­mance measur­ement → Review.

- Input = resources used.
- Output = direct goods/­ser­vices delivered.
- Outcome = broader result achieved.
- Perfor­mance vs Outcome Budget = work and perfor­mance vs results and impact.

Programme Budgeting

Core concept: Organises and allocates expend­iture around programmes and organi­sat­ional object­ives.
Main focus: What programmes should be undertaken to achieve desired object­ives.
Key structure: Programme → Sub-pr­ogramme → Activity.
Resource alloca­tion: Based on programme object­ives, priorities and requir­ements.
Major strength: Better coordi­nation, planning and object­ive­-or­iented alloca­tion.
Major weakness: Complex classi­fic­ation, overla­pping activities and coordi­nation diffic­ulties.
PPBS → Planni­ng–­Pro­gra­mmi­ng–­Bud­geting System. Connec­tion: Programme Budgeting is one important element within the broader PPBS approach. Robert McNamara → Associated with the introd­uct­ion­/po­pul­ari­sation of PPBS in the US Department of Defense in the 1960s.
Programme Budgeting in six steps
Objectives → Programmes → Sub-pr­ogr­ammes → Activities → Resource allocation → Review.

- Programme = broad object­ive­-or­iented grouping of activi­ties.
- Sub-pr­ogramme = component of a programme.
- Activity = specific task undert­aken.

Increm­ental Budgeting

Core concept: Uses the previous period's budget as the base and adjusts it for expected changes.
Main focus: What changes are required to the existing budget?
Key process: Previous Budget → Adjust­ments (+/−) → Revised Budget → Approval → Control
Formula: New Budget = Previous Budget + Net Adjust­ments.
Adjust­ments: May include both increases and reductions.
Major strength: Simple, econom­ical, less time-c­ons­uming and predic­table.
Major weakness: Perpet­uates historical ineffi­cie­ncies; limited scrutiny of existing expend­iture.
Budgetary slack: Deliberate overes­tim­ation of costs or undere­sti­mation of revenues.
Numerical trap: Consec­utive percentage increases are compounded.
Suitab­ility: Relatively stable operating enviro­nments.
Keyword associ­ation: Use-it­-or­-lo­se-it → Increm­ental Budgeting.

Rolling / Continuous Budgeting

Core concept: A budget that is contin­uously updated by adding a new future period as the current period ends.
Main focus: Mainta­ining a contin­uously updated, fixed future planning horizon.
Key process: Set Planning Horizon → Prepare Budget → Monitor Actuals → Revise Estimates → Drop Completed Period → Add New Period.
Example: A 12-month budget is contin­uously rolled forward by dropping the completed month and adding a new month.
Frequency: Monthly, quarterly or other periodic intervals.
Major strength: Continuous planning, adapta­bility and improved foreca­sting.
Major weakness: Time-c­ons­uming, costly and admini­str­atively demanding.
Suitab­ility: Dynamic and uncertain business enviro­nments.
Key distin­ction: Rolling Budget = Updates the time horizon; Flexible Budget = Adjusts for activity levels.
Keyword associ­ation: Fixed planning horizon + continuous updating → Rolling Budgeting.

Activi­ty-­Based Budgeting (ABB)

Core concept: Estimates budget requir­ements based on expected activities and the resources needed to perform them.
Main focus: What activities are required, in what quantity, and what resources will they consume?
Key process: Forecast Demand → Identify Activities → Estimate Activity Quantities → Identify Cost Drivers → Estimate Resources → Prepare Budget → Monitor.
Cost driver: Factor that causes or influences the cost of an activity.
Activity cost pool: Collection of costs associated with a particular activity.
Major strength: Better cost estima­tion, resource allocation and identi­fic­ation of ineffi­cient activi­ties.
Major weakness: Complex, time-c­ons­uming, costly and data-i­nte­nsive.
Suitab­ility: Organi­sations with diverse activities and signif­icant overhead costs.
Key distin­ction: ABC calculates produc­t/s­ervice costs using activi­ties; ABB estimates future resource requir­ements using expected activi­ties.
Keyword associ­ation: Cost drivers + Expected activities → Activi­ty-­Based Budgeting

Partic­ipative Budgeting

Core concept: Budget prepared with the involv­ement of managers and employees at different organi­sat­ional levels.
Main focus: Who partic­ipates in budget prepar­ation?
Altern­ative name: Bottom-Up Budgeting.
Key process: Top Management Guidelines → Depart­mental Estimates → Discussion & Negoti­ation → Consol­idation → Approval → Implem­ent­ation.
Major strength: Better estimates, motiva­tion, ownership, commitment and coordi­nation.
Major weakness: Time-c­ons­uming; risk of budgetary slack and depart­mental conflicts.
Budgetary slack: Deliberate overes­tim­ation of costs or undere­sti­mation of revenues.
Key distin­ction: Partic­ipative budgeting focuses on involv­ement in prepar­ation; Respon­sib­ility Budgeting focuses on accoun­tab­ility.
Keyword associ­ation: Bottom-up approach → Partic­ipative Budgeting.

Respon­sib­ility Budgeting

Core concept: Budgets are prepared for different respon­sib­ility centres, and managers are held accoun­table for their respective perfor­mance.
Main focus: Who is respon­sible for costs, revenue, profit and invest­ment?
Key structure: Cost Centre → Revenue Centre → Profit Centre → Investment Centre.
Perfor­mance measures: Cost Centre → Cost control. Revenue Centre → Revenue genera­tion. Profit Centre → Profit (Revenue and costs). Investment Centre → ROI / Residual Income (Revenue, costs and assets­/in­ves­tment).
Key principle: Contro­lla­bility Principle — managers should be evaluated primarily on factors within their control.
Major strength: Clear accoun­tab­ility, cost control, perfor­mance evaluation and decent­ral­isa­tion.
Major weakness: Depart­mental conflicts, uncont­rol­lable factors and difficulty allocating common costs.
Key distin­ction: Respon­sib­ility Budgeting focuses on accoun­tab­ility; Partic­ipative Budgeting focuses on employee involv­ement in budget prepar­ation.
Keyword associ­ation: Respon­sib­ility Centres → Respon­sib­ility Budgeting.