Suneeta Laboratories Ltd. Indore (Madhya Pradesh) India

Branch: Cost and Management Accounting

Tool: Budgeting, Budgetary Control and Variance Analysis

Abstract

Budgeting is a significant function in organizations which operate with a policy of planning activities and attempt to achieve targets as set in the budget through those activities. While planning such activities, every person responsible to deliver results is involved in the process and is enabled to own the targets set by the organization for his/her function for the specified period. This is achieved by facilitating the generation of budget proposals at the lowest level and taken to the top in hierarchy through bottom-up approach. This process helps instill a sense of ownership in the minds of functional people working at different levels and they sincerely contribute in keeping their performance in line with the budget prepared and willingly agreed upon by them.

Budgetary control operates as an effective tool of monitoring and control in routine and specific functions throughout the organization. With the help of this, top management is assured of achieving organizational goals and measuring performance of functions objectively.

The present case highlights the importance of budget which incorporates in it every aspect of organization with the understanding that it has a definite bearing upon the performance of people. It also highlights the role a static and flexible budget play through budgetary control. When an effective budgetary control is in place, top management banks upon targets set.

Learning objectives

Objectives of this case are to help students:

1.To learn about significance of a budget in an organisation.

2.To learn using budget figures for effective management planning and control.

3.To learn about budgetary control and Variance Analysis process.

4.To learn about utility of static and flexible budget.

5.To learn about responsibility accounting for taking corrective actions.

A Case Study on

Suneeta Laboratories Ltd. Indore (Madhya Pradesh) India

Branch: Cost and Management Accounting

Tool: Budgeting and Budgetary Control

"Dr. Nimgaonkar, you would perhaps recollect, actual performance of our organisation for the year 2012-13 was not very encouraging and therefore we all had decided to look into various aspects of operations which sounded to be responsible for drop in profitability for the period. You would also remember, we had chalked out a plan for improvement in workers efficiency by which our plant utilisation could have been increased and we could offer more volume to customers by retaining same sale price at least for one year, although, I know, the trend for such product is on downward side and retaining the price with increasing volume would not be that easy."

Suneeta Laboratories Ltd. Indore was engaged in manufacturing anti-malarial drugs and was contributing to the National Malaria Eradication Programme (NMEP) undertaken by the Government of India and also sold a part of its production volume in open market to various hospitals and druggists. Dr. Subhash Bhaskar, the Managing Director of the organisation wanted to bring in improvements in all-round operations and better performance in the next year.

"Process improvement was another target we had set for bringing in savings in input consumption; along with it, we had also agreed for a stronger vendor development drive which seemed to be an immediate necessity for a better purchase management. Keeping in view all these considerations made by us, you told me that the profitability which was budgeted for the year recently completed on 31^st March, 2014, was up at least by 1.15% points over the actual performance of the year 2012-13. Now actual profitability for the year 2013-14, as shown by Mr. Rajpurohit, which works out somewhere around 10%, is shocking indeed. You would appreciate, I had made a declaration in last Board meeting, "we will earn what we had budgeted". Do you think, functional people are not concerned about seriousness of budget or there are other reasons leading to such a lackluster? If so, we need to analyse in details, why it is not happening what is expected? I hope you as the Plant Head would be equally concerned about all this as I am".

Dr. Bhaskar was worried about actual performance of the organisation and was sharing his concerns with Dr. Nimgaonkar, Chief Executive Officer of the Company.

The CEO, after discussing with Finance Controller, Mr. Rajpurohit, met Dr. Bhaskar in the afternoon next day and briefed him about forecast points which were included in budget for the year 2013-14. He wanted to convince MD that:

(1)A plan for training the workers was chalked out to be implemented in the month of February, 2013 and also a schedule was prepared for improving erratic working conditions at work places in the same month which would have a combined effect of increase in efficiency of workers by 5% in the year 2013-14. In addition, it was also decided to run the plant 10 days more to increase utilisation of capacity for a larger volume and revenue by selling the product AMQ BASE. Plant was operated for 350 days in the year 2012-13 for 24 hours. The CEO was optimistic to sell increased volume by retaining same price in the year 2013-14 which prevailed in previous year.

(2)A systematic process improvement plan was chalked out and was ready to be undertaken since 1st February, 2013 till 15^th March, 2013, which would result in a 5% saving of material

NEOFARM consumption during the year 2013-14 over actual consumption of previous year. However, the Purchase Manager apprehended for a rise in price of the material by 4% during the year.

(3)As the supply of another input DEOFARM could not be stabilized due to uneven quality, it was estimated that the consumption may rise by around 3% while on account of a systematic and persistent vendor development programme which was undertaken in the last quarter of 2012-13, a saving in rate was confirmed in 2013-14 at 6% over average rate of previous year for the material.

(4)Although, no change in packing material consumption pattern was admitted, an increase in the rate of packing box was found inevitable by 2% over average price of the year 2012-13.

(5)The efforts for improvement in workers' efficiency were quantified to be a gain by 5% while the periodic agreement (becoming due after every three years) became due in the year 2013- 14 as a result of which an increase in labour cost was estimated by 8%.

(6)Direct expenses were estimated to be costlier by 10% in the year 2013-14 over previous year expenses while other variable overheads were thought to be controllable and was decided to keep them within an increase of maximum 6% over previous years cost. Dr. Bhaskar was of the view that all processing chemicals which have a little value compared to other raw material cost should be clubbed in direct expenses.

(7)Although, the company is known to be a good pay-master and declares a minimum 12% rise in salary every year, managers and other staff people were convinced to manage with a maximum rise in salary by 6% this year with a hope that something better would be offered in the year 2014-15 if the performance of the organisation improves in the year 2013-14.

(8)It was unanimously decided by all functional heads to keep all other fixed overheads exactly same at the level of the year 2012-13.

When Dr. Nimgaonkar discussed above points with Dr. Bhaskar at length, the latter developed a hope that the profitability would surely show an improvement which was a fact as the it showed an increase of above 1%age point over previous period; this was not a significant figure, however, it was an indication of an improvement which was a smoothening factor.

When this discussion was going on, Mr. Rajpurohit also joined the discussion who had come with actual performance data for the completed year 2013-14 which showed a profitability of 9.98% as against budget of 13.07% for the same period. Although, Mr. Rajpurohit had shown variances between budget data and actual performance data to both Dr. Bhaskar and Dr. Nimgaonkar, they could not reach any conclusion in respect of exact variance as compared to the budget and also in respect of weaknesses in specific areas where improvements could be brought in future.

On being asked by the MD, the Finance Controller submitted to him a paper which consisted of data of actual performance of the year 2012-13 which Dr. Bhaskar always referred to as the base document for casting the budget for the year 2013-14 as a tool for management control. To support his conclusions,Mr. Rajpurohit also furnished data on actual performance for the year 2013-14 asshown in Exhibit: 1.

Finally, when Mr. Rajpurohit analysed the data as given in Exhibit:1, MD and CEO had a clear clue about specific areas where the improvements were highly warranted, although, a further gap analysis into minutest reasons was entrusted to Mr. Rajpurohit for discussion in a special meeting which was convened three days later.

Assignment:

(1)How could you help Mr. Rajpurohit to analyse data for the scheduled meeting; also indicate remedial steps for next budget year.

(2)Whether, according to you, a flexible budget has added value to management of Suneeta Laboratories Limited?

Akshay F_Flexible budget case no. 4.docx - Word (Product Activation Failed) Microsoft account FILE HOME INSERT DESIGN PAGE LAYOUT REFERENCES MAILINGS REVIEW VIEW Find * 16 Cut Times New Ro * 8.5 - A A Aa - AaBbCcI AaBbCcD( AaBbCcI AaBbCc[ AaBbCcl AaBbC AaBbC( AaBbCc] ac Replace BB Copy Paste BI U - abe x X' A . ZZ . A . = = = 1. .B 1 Normal 1 Body Text 1 List Para... 1 No Spac... 1 Table Pa... 1 Heading 1 1 Heading 2 1 Heading 3 = Select Format Painter Styles Editing Clipboard G Font Paragraph Quantity in Kg: Rate Exhibit:l. and Value in Indian Rupees Actual Performance Actual Performance 2012-13 2013-14 Otu per Ory per unit of Avg- unit of Avg- Value Particulars sale qiyi Otv Rate Value sale of: Otuz Rate Sale of the product (AMO 50,400 140.00 70 56 000 137.00 68 50 000 BASE-kg) 50,000 Cost 0.7500 85.00 0.7100 90.00 Input-NEOFARM 35,500 30 53.000 0.3000 37,800 65.48 32.13.000 0.3200 62.00 Input-DEOFARM 15,120 16,000 9 02 000 1.0000 5.90 0.11 Total input cost 42 03 058 1.0000 40.45.000 44.00 Packing material 0.1667 50,400 40.00 50,000 3.01.806 0.1800 3.05.490 8,400 9,000 1.00 3.06 000 Direct wages- 50,400 3.36 000 1.40 50,000 1.40 15,000 Hours Direct 50.400 50,400 50,000 70,000 Expenses 70,560 Other variable overheads 9.05 020 10.54.700 Fixed overheads 90,000 Salary 65,000 65,000 Travel expenses 95,000 95,000 Administration overheads Selling and distribution 6216014 61 56 190 overheads 8.39.086 6.83.810 Cost of Sales Profi + 100% PAGE 5 OF 5 1673 WORDS [X ENGLISH (UNITED STATES) 18:05 Type here to search 27-11-2020