1. What are the limitations of Ratio Analysis?

1. Historical Data – Ratios are based on past financial statements and may not reflect
the current or future financial position.
2. Different Accounting Policies – Companies may follow different accounting
methods (e.g., depreciation methods, inventory valuation), making comparisons
difficult.
3. Ignores Qualitative Factors – Ratio analysis does not consider qualitative aspects
like management efficiency, market conditions, and brand value.
4. Lack of Standard Benchmarks – There is no universal standard for ideal ratios,
making interpretation subjective.
5. Window Dressing – Companies can manipulate financial statements to present a
better financial position (e.g., delaying expenses or inflating revenue).
6. Inflation Effects – Financial statements may not be adjusted for inflation, leading to
misleading ratios.
7. Industry Differences – Ratios vary significantly across industries, making cross-
industry comparisons irrelevant.
8. Static Nature – Ratio analysis provides a snapshot at a specific time and may not
indicate long-term trends.
9. Over-Reliance on Ratios – Ratios alone do not provide complete insights; they must
be used with other analytical tools for better decision-making.

2. Define Budget. What are the characteristics of Budget?

Definition of Budget

A budget is a financial plan that outlines an organization's expected income and expenditures
over a specific period. It serves as a roadmap for managing financial resources, controlling
costs, and achieving financial goals efficiently. Budgets can be prepared for individuals,
businesses, and governments to ensure financial discipline and planning.

Characteristics of a Budget

1. Pre-determined Plan – A budget is prepared in advance to guide financial decisions

and resource allocation.
2. Quantitative Expression – It is expressed in numerical terms, typically in monetary
values, though non-monetary aspects (like labor hours) may also be included.
3. Time-bound – Budgets are prepared for a specific period (e.g., monthly, quarterly,
annually).
4. Objective-Oriented – It is aligned with organizational goals, such as cost control,
revenue maximization, or expansion.
5. Flexibility – While a budget provides a financial framework, it should be adaptable to
changing conditions.
6. Coordination Tool – A budget integrates various departments and functions,
ensuring alignment in financial planning.
7. Control Mechanism – It serves as a benchmark for measuring actual performance
and identifying variances.
8. Based on Forecasting – Budgets rely on historical data, market trends, and future
expectations to make realistic financial projections.
 9. Decision-Making Aid – It helps management make informed financial decisions by
evaluating available resources and potential constraints.
10. Legal or Regulatory Compliance – Some budgets, especially in government and
large corporations, must comply with financial regulations and reporting standards.

3. What are the techniques of Budgetary Control?

1. Fixed Budgeting

 A budget prepared for a specific level of activity or output.

 Does not change with variations in business activity.
 Suitable for stable environments but ineffective for dynamic conditions.

2. Flexible Budgeting

 Adjusts based on changes in activity levels.

 Helps in analyzing cost behavior at different levels of operations.
 Useful for businesses with fluctuating demand.

3. Zero-Based Budgeting (ZBB)

 Every expense must be justified from scratch, rather than basing it on past budgets.
 Helps in cost reduction by eliminating unnecessary expenditures.
 Suitable for organizations looking to optimize spending.

4. Rolling Budget (Continuous Budgeting)

 A budget that is continuously updated by adding a new period as the old one expires.
 Ensures better responsiveness to changing conditions.
 Commonly used in rapidly evolving industries.

5. Performance Budgeting

 Links expenditures to outcomes or performance objectives.

 Used in government and nonprofit organizations to evaluate efficiency.
 Focuses on results rather than just allocations.

6. Activity-Based Budgeting (ABB)

 Budgeting based on the cost of activities necessary to produce goods or services.

 More precise as it focuses on cost drivers rather than traditional cost allocation.
 Useful for cost control and resource optimization.

7. Responsibility Accounting

 Assigns budgets and financial responsibility to different departments or managers.

 Encourages accountability and efficient resource utilization.
 Helps in tracking deviations and taking corrective actions.
8. Cash Budgeting

 Focuses on cash inflows and outflows over a period.

 Helps in maintaining liquidity and avoiding cash shortages.
 Essential for short-term financial planning.

9. Capital Budgeting

 Used for evaluating long-term investment decisions.

 Involves techniques like Net Present Value (NPV), Internal Rate of Return (IRR), and
Payback Period.
 Helps in making strategic investment choices.

10. Master Budget

 A comprehensive budget that consolidates all functional budgets (sales, production,

finance, etc.).
 Provides an overall financial plan for the organization.
 Helps in ensuring coordination across departments.

4. What are the advantages of Budgetary Control?

1. Planning and Forecasting

 Encourages systematic planning of income, expenses, and resources.

 Helps in forecasting future financial needs and resource allocation.

2. Cost Control and Reduction

 Identifies cost overruns and inefficiencies, allowing corrective actions.

 Helps in eliminating unnecessary expenditures and optimizing resource utilization.

3. Performance Evaluation

 Provides a benchmark to compare actual performance against budgeted targets.

 Helps in identifying deviations and taking necessary corrective measures.

4. Better Coordination

 Ensures alignment between different departments (e.g., sales, production, finance).

 Promotes teamwork and reduces conflicts by setting clear financial expectations.

5. Enhanced Decision-Making

 Provides financial insights that support managerial decisions.

 Helps in setting priorities and making strategic choices based on financial feasibility.

6. Improved Resource Utilization

 Ensures optimal use of available financial, human, and material resources.

  Prevents over- or under-utilization of assets.

7. Motivates Employees

 Clear financial targets encourage employees to work efficiently.

 Responsibility accounting promotes accountability and ownership among department
heads.

8. Helps in Financial Stability

 Ensures liquidity management through effective cash flow planning.

 Reduces financial uncertainty by preparing for contingencies.

9. Facilitates Corrective Actions

 Identifies variances between actual and budgeted figures.

 Enables timely corrective measures to avoid financial losses.

10. Legal and Regulatory Compliance

 Helps in adhering to financial regulations and tax obligations.

 Ensures proper financial reporting and transparency.

5. What are the various types of Functional Budgets?

1. Sales Budget

 Forecasts expected sales revenue for a given period.

 Based on market analysis, demand trends, and past sales data.
 Helps in setting production and marketing targets.

2. Production Budget

 Estimates the quantity of goods to be produced.

 Ensures alignment between sales demand and production capacity.
 Includes raw material and labor requirements.

3. Purchase Budget

 Plans the quantity and cost of raw materials or goods to be purchased.

 Ensures a balance between stock levels and production needs.
 Helps in cost control and supplier negotiations.

4. Direct Labor Budget

 Estimates the labor cost and workforce required for production.

 Helps in scheduling workforce and wage planning.
 Ensures efficient labor utilization.
5. Overheads Budget

 Estimates costs related to factory, administration, and selling & distribution

overheads.
 Helps in cost control and resource optimization.
 Categorized into fixed, variable, and semi-variable overheads.

6. Research and Development (R&D) Budget

 Allocates funds for innovation, product development, and process improvements.

 Helps businesses stay competitive in the market.

7. Marketing and Advertising Budget

 Plans expenses related to promotional activities, market research, and brand building.
 Ensures proper allocation of funds for customer acquisition and retention.

8. Cash Budget

 Forecasts cash inflows and outflows over a specific period.

 Helps in liquidity management and avoiding cash shortages.
 Ensures smooth day-to-day operations.

9. Capital Expenditure Budget

 Estimates long-term investments in assets like machinery, buildings, and technology.

 Helps in strategic decision-making for business expansion.
 Evaluated using capital budgeting techniques like NPV and IRR.

10. Administrative Budget

 Covers expenses related to office operations, salaries, and other administrative costs.
 Helps in managing general and overhead expenses effectively.

11. Master Budget

 A comprehensive budget combining all functional budgets.

 Provides an overall financial plan for the organization.
 Serves as a control tool for top management.

6. Solution: Return on Investment (ROI) for Modi Steel Ltd

𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕
Formula for ROI: 𝑹𝑶𝑰 = 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕 × 𝟏𝟎𝟎

Given Data:

 Net Profit = Rs. 1,20,000

 Total Assets = Rs. 8,50,000
 120000
𝑅𝑂𝐼 = × 100 = 14.12%
850000

Thus, the Return on Investment (ROI) = 14.12%.

7. What is Programme Budgeting? Explain the objectives of Programme budgeting.

Programme Budgeting

Programme Budgeting is a budgeting approach that allocates financial resources based on

specific programs or activities rather than traditional departmental or line-item budgeting. It
focuses on achieving predefined objectives by linking expenditures to expected outcomes.
This method is widely used in government, public sector organizations, and large
corporations to ensure effective resource allocation and performance measurement.

Objectives of Programme Budgeting

1. Goal-Oriented Resource Allocation

o Ensures that funds are allocated to programs that align with organizational or
national objectives.
o Helps in prioritizing projects based on their impact.
2. Efficient Use of Resources
o Avoids wastage by directing funds to the most beneficial programs.
o Encourages cost-effectiveness in budget planning.
3. Improved Decision-Making
o Helps policymakers and managers evaluate the effectiveness of different
programs.
o Aids in making informed financial and operational decisions.
4. Performance Measurement
o Enables tracking of outcomes against financial allocations.
o Helps in assessing program efficiency through key performance indicators
(KPIs).
5. Flexibility in Budgeting
o Allows modifications based on changing needs and priorities.
o Ensures adaptability to economic and policy changes.
6. Accountability and Transparency
o Encourages responsible spending by linking budgets to program objectives.
o Enhances transparency in public and corporate financial management.
7. Encourages Long-Term Planning
o Focuses on multi-year planning rather than just annual financial cycles.
o Supports sustainable development and strategic growth.
8. Facilitates Cost-Benefit Analysis
o Assists in evaluating whether the financial investment in a program yields the
desired social or economic benefits.
o Helps in discontinuing ineffective programs and reallocating funds to better
alternatives.
8. What is Performance Budgeting? Explain its limitations.

Performance Budgeting

Performance Budgeting is a budgeting approach that links financial allocations to the

outcomes or results achieved by different programs or departments. Instead of simply
allocating funds based on past expenditures, it focuses on efficiency, effectiveness, and
achieving predefined goals. It is widely used in government agencies, public institutions, and
large organizations to ensure accountability and optimal resource utilization.

Limitations of Performance Budgeting

1. Difficulty in Measuring Performance

 Many government and social programs have qualitative objectives (e.g., improving
public health), making it hard to measure performance in financial terms.
 Setting clear and measurable performance indicators is often challenging.

2. Time-Consuming and Complex

 Requires extensive data collection, analysis, and reporting, which can be time-
consuming.
 Needs continuous monitoring and evaluation, increasing administrative workload.

3. Dependence on Reliable Data

 The effectiveness of performance budgeting depends on accurate and reliable data.

 Poor data quality or lack of proper tracking systems can lead to misleading budget
decisions.

4. Resistance to Change

 Employees and departments accustomed to traditional budgeting methods may resist

performance-based budgeting.
 Requires training and a shift in organizational culture, which can take time.

5. Subjectivity in Performance Evaluation

 Some performance criteria may be influenced by external factors beyond the control
of the organization (e.g., economic downturns affecting tax revenues).
 Performance assessment may involve subjective judgments, leading to biases.

6. High Implementation Costs

 Requires investments in technology, training, and monitoring systems.

 Small organizations or governments with limited resources may struggle to implement
it effectively.
7. Short-Term Focus

 May encourage managers to prioritize short-term targets rather than long-term

strategic goals.
 Some essential long-term projects may receive less funding if their immediate impact
is not visible.

8. Difficulty in Comparing Different Programs

 Different programs may have varying objectives and methods, making it hard to
compare their efficiency and justify budget allocations.

9. Solution: Common Size Balance Sheet for XYZ Ltd

 Formula for Common Size Balance Sheet (% of Total Assets):

𝐈𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐈𝐭𝐞𝐦 𝐕𝐚𝐥𝐮𝐞
𝐂𝐨𝐦𝐦𝐨𝐧 − 𝐬𝐢𝐳𝐞 𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 = × 𝟏𝟎𝟎
𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬

Let's compute the percentage for each item based on the total assets for 2020-21 and 2021-22.

Particulars 2020-21 (Rs.) % of Total Assets 2021-22 (Rs.) % of Total Assets

Equity Share Capital 10,00,000 29.3% 15,00,000 30%
Preference Share Capital 5,00,000 14.7% 5,00,000 10%
Reserves & Surplus 4,00,000 11.7% 6,00,000 12%
Non-Current Liabilities 10,50,000 30.8% 15,50,000 31%
Current Liabilities 4,60,000 13.5% 8,50,000 17%
Total Liabilities 34,10,000 100% 50,00,000 100%
Non-Current Assets 20,00,000 58.6% 30,00,000 60%
Investments 10,00,000 29.3% 12,00,000 24%
Current Assets 4,10,000 12.1% 8,00,000 16%
Total Assets 34,10,000 100% 50,00,000 100%

10. Solution: Production Budget and Raw Material Purchase Budget

Step 1: Production Budget Calculation

Production for a Month=Sales for the Month+Closing Stock−Opening Stock

Given:

 Finished Goods Closing Stock = 50% of Next Month’s Sales

 Opening Stock = Previous Month’s Closing Stock
 Sales Closing Stock (50% of Opening
Month Production Required
(Units) Next Month's Sales) Stock
April 12,000 13,000/2=6,500 6,000 12,000+6,500−6,000=12,500
May 13,000 9,000/2=4,500 6,500 13,000+4,500−6,500=11,000
June 9,000 8,000/2=4,000 4,500 9,000+4,000−4,500=8,500
July 8,000 10,000/2=5,000 4,000 8,000+5,000−4,000=9,000
August 10,000 12,000/2=6,000 5,000 10,000+6,000−5,000=11,000
September 12,000 14,000/2=7,000 6,000 12,000+7,000−6,000=13,000

Step 2: Raw Material Purchase Budget Calculation

Raw Material Required=Production Units×2 kg per unit

Closing Raw Material Stock=Next Month’s Requirement
Raw
Closing
Production Material Opening Raw Material to be Cost@
Month Stock
(Units) Required Stock (Kg) Purchased (Kg) Rs.5/Kg
(Kg)
(Kg)
11,000×2 25,000+22,000−24,000=
April 12,500 25,000 24,000 Rs. 1,15,000
=22,000 23,000
8,500×2= 22,000+17,000−22,000=
May 11,000 22,000 22,000 Rs. 85,000
17,000 17,000
9,000×2= 17,000+18,000−17,000=
June 8,500 17,000 17,000 Rs. 90,000
18,000 18,000
11,000×2 18,000+22,000−18,000=
July 9,000 18,000 18,000 Rs. 1,10,000
=22,000 22,000
13,000×2 22,000+26,000−22,000=
August 11,000 22,000 22,000 Rs. 1,30,000
=26,000 26,000
14,000×2 26,000+28,000−26,000=
September 13,000 26,000 26,000 Rs. 1,40,000
=28,000 28,000