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Budgeting

Q1. A Company is budgeting to manufacture and sell two products in coming year Product X product Y.
Sales are estimated to be 6,000 units of ALPHA and 10,000 units of BETA. Standard selling price of Alpha
is £20 per unit and Beta is £50 per unit.
ALPHA and BETA consists of following material
Product ALPHA Product BETA
Raw material 1 4 kg per unit 2 kg per unit
Raw material 2 250 grams 4 units per kg
Standard price of raw material 1 is £3 per kg, and raw material 2 is £4 per kg
Opening and closing stock of materials are as follows
Opening Closing
Raw material 1 1,500 kg 1,200kg
Raw material 1 2,100 kg 3,000
Product ALPHA 1,100 units 1,400 units
Product BETA 1,200 units 1,000
Detail about labour is as follows.
Wage rate Product ALPHA Product BETA
Labour – A £5 per hour 30 minutes 1.5 hours per unit
Labour –B £6 per hour 1 hour per unit 12 min per unit
Budgeted production overheads are expected to be £180,000
Required: -
Prepare
 Sales budget
 Production quantity budget
 Raw material consumption or usage budget.
 Material purchase budget
 Labour cost budget
 Production overhead absorption rate
 Manufacturing cost per unit.

Q2. A manufacturing company wishes to calculate an operating budget for the coming period. Information
regarding products, costs and sales level is as follows.
Product A Product B
Material required
X (kg) 3 2
Y (litre) 1 4
Labour hours required
Skilled (hours) 1 2
Semi skilled (hours) 2 3
Sales level 3,000 1,500
Opening stock 100 200
Closing stock of finished goods will be sufficient to meet 10% of demand and closing stock of raw
material will be 10% of consumption. Opening stocks of material X was 300 kg and for material Y was
1,000 litres. Material prices are £10 per kg for material X and £7 per litre for material Y. Labour costs are
£12 per hour for the skilled worker and £8 per for semi skilled worker.
Required:
Produce the following budgets
i. Production of A and B iii. Material purchase (kg, litre and in £)
ii. Material usage for both materials iv. Labour (hour and cost)

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Q3. XYZ Company manufactures two products STAR and BRIGHT. There are two manufacturing
departments in a company Dept 1 and Dept 2. All material has been added in dept 1.
The standard material and labour usage for each product is as follows:

Budgeted overheads of Department 1 Department 2


Rs. Rs.
Allocated overheads 100,000 150,000
Apportionment of overheads 200,000 330,000
Reapportioned overheads 50,000 20,000
Total overheads ? ?
Required: -
a. Sales budget
b. Production budget
c. Material usage budget
d. Purchase budget
e. Direct labor budget
f. departmental overhead absorption rate
g. cost per unit

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Q4. Treehorn produces a single product. The cost card for this product is as follows:
$ per unit
Direct materials 3kg per unit at $6 per kg 18
Direct labour 2 hrs per unit $10 per hour 20
Notes
1. Treehorn prepares budgets on a quarterly basis. Each quarter consists of 13 weeks, with five working
days per week.
2. Selling price is $56 per unit.
3. Treehorn incurs no costs other than those included in the cost card.
4. It is Treehorn’s policy to maintain an inventory of finished goods at the end of each quarter equal to five
days’ demand of the next quarter.
5. Because of its perishable nature it is not possible to hold raw material inventory.
6. Forecast sales units for the next five quarters are:
Quarter 1 1,950,000 units
Quarter 2 2,275,000 units
Quarter 3 3,250,000 units
Quarter 4 2,275,000 units
Quarter 5 1,950,000 units
Required:
(a) Produce the following budgets for EACH of the quarters 1, 2, 3 and 4:
(i) A sales budget showing sales volume in units and sales revenue in $;
(ii) A production budget in units, showing opening and closing inventories, sales and production;
(iii) A purchases budget showing purchases in kg and $.

Q5. Franklin Products Limited manufactures and distributes a number of products to retailers. One of
these products, SuperStick, requires four kilograms of material D236 in the manufacture of each unit. The
company is now planning raw materials needs for the third quarter—July, August, and September. Peak
sales of SuperStick occur in the third quarter of each year. To keep production and shipments moving
smoothly, the company has the following inventory requirements:
a. The finished goods inventory on hand at the end of each month must be equal to 8,000 units plus 20%
of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 22,000 units.
b. The raw materials inventory on hand at the end of each month must be equal to 40% of the following
month’s production needs for raw materials. The raw materials inventory on June 30 for material D236 is
budgeted to be 129,000 kilograms.
c. The company maintains no work in process inventories.
A sales budget for SuperStick for the last six months of the year follows:
Budgeted Sales in Units
July . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60,000
August . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
September . . . . . . . . . . . . . . . . . . . . . . . 105,000
October. . . . . . . . . . . . . . . . . . . . . . . . . .53,000
November. . . . . . . . . . . . . . . . . . . . . . . .30,000
December . . . . . . . . . . . . . . . . . . . . . . . 15,000
Required:
1. Prepare a production budget for SuperStick for July, August, September, and October.
2. Examine the production budget that you prepared. Why will the company produce more units than it
sells in July and August and fewer units than it sells in September and October?
3. Prepare a direct materials purchases budget showing the quantity of material D236 to be purchased for
July, August, and September and for the quarter in total.

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Q6. The production department of Taylor Company has submitted the following forecast of units to be
produced by quarter for the upcoming fiscal year:
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Units to be produced. . . . . . . . . . . . . 6,000 7,000 8,000 5,000
In addition, the beginning raw materials inventory for the first quarter is budgeted to be 3,600 kilograms
and the beginning accounts payable for the first quarter is budgeted to be $11,775.
Each unit requires three kilograms of raw material that costs $2.50 per kilogram. Management wants to
end each quarter with a raw materials inventory equal to 20% of the following quarter’s production needs.
The desired ending inventory for the fourth quarter is 3,700 kilograms. Management plans to pay for 70%
of raw material purchases in the quarter acquired and 30% in the following quarter. Each unit requires
0.50 direct labour-hours, and direct labour-hour workers are paid $12 per hour.
Required:
1. Prepare the company’s direct materials purchases budget and schedule of expected cash
disbursements for materials for the upcoming fiscal year.
2. Prepare the company’s direct labour budget for the upcoming fiscal year, assuming that the direct
labour workforce is adjusted each quarter to match the number of hours required to produce the
forecasted number of units produced.

Cash budget
Q1. Sales revenues of a trading company are expected to be as follows in 2017
April (Actual) £320,000
May (Actual) £170,000
June (budget) £200,000
July (budget) £300,000
August (budget) £150,000.
 30% sales are cash. 40% of the customers pay after one month of sales and 25% pay after 2
months. 5% sales are expected to result in bad debt
 Gross profit margin is 40%
 All purchases are made in the same month of sales and company pay 50% payments to its supplier
in same month and balance after one month.
 Operating expenses are expected to be £20,000 each month (including £2,000 of depreciation
expense) and will be paid during same month.
 Interest and tax payment in July are expected to be £35,000
 Opening cash balance on 1st June is £80,000.
Prepare cash budget from June to August

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Q2. Cool Ski Co is a skiwear retailer operating through its website shop. It is run by its three
directors/shareholders who started the business three years ago. Its busiest months of the year are
December, January, February and March, with sales for the rest of the year being relatively insignificant.
In December the company prepares a cash budget for January, February and March. The following
figures from its profit forecast for December 2007 through to March 2008 are currently available.
However, they may need to be revised and should be read together with the notes below.
Dec Jan Feb Mar
$’000 $’000 $’000 $000
Sales revenue (1) 450 650 750 350
Purchases See notes 2 and 3
Staff costs (4) 45 60 70 30
Packaging costs (5) 7 10 12 6
Distribution costs (6) 35 50 58 28
Other costs (7) 50 75 85 55
Notes:
1. The company does not provide any credit to customers. However, customers who join the company’s
members’ club are given a 5% discount on all of their purchases. Half of customers are club members.
The sales revenue forecasts above have been calculated before any discounts have been taken into
account.
2. Purchases represent 40% of gross sales revenue. Sales revenue in November was $95,000.
3. Suppliers allow two months’ credit.
4 All staff are paid at the beginning of the month for the previous month’s work.
5. Packaging costs are paid one month after they are incurred.
6. Distribution costs are paid in the month in which they are incurred.
7. Other costs include depreciation of $12,000 per month. They also include rental costs of $30,000 per
month, which are paid quarterly in December, March, June and September. The remainder of ‘other
costs’ are paid in the month in which they are incurred.
8. The bank charges interest of 0·5% per month for the overdraft, calculated on the closing bank balance
each month, and payable in the following month.
9. The overdraft on Cool Ski Co’s bank account at 31 December 2007 is expected to be $500,000.
Required:
Prepare a monthly cash budget for each of the three months to 31 March 2008, showing the cash
balance at the end of each month. (10 marks)

Q3. Tots Ltd specialises in the importation and sale of equipment for children’s indoor play centres. The
company was set up two years ago by its joint shareholders, Mr and Mrs Brute.
The business has been very successful, expanding rapidly over the last year, and the cash balance in the
company’s current account has exceeded £1 million on several occasions recently.
Mr and Mrs Brute have asked you, an accounting technician for Tots Ltd, to assist them in managing their
cash balances over the next six months.
You have been provided with the following information.
(i) The bank balance on 1 January 2005 is forecast at £1·2 million in credit.
(ii) Sales for November and December 2004 are £1·3 million per month. They are expected to rise to £1·5
million in January 2005, £1·7 million in February and £1·9 million in March. They will then fall to £1·4 million
for each of the following six months. This is due to a downturn in demand as the weather improves.
(iii) All sales are made on credit. 2% of debtors do not pay at all, 70% pay one month after sale and the
remaining 28% pay two months after sale.
(iv) Purchases are made one month prior to sales, and two months’ credit is taken from suppliers.
(v) The company’s gross profit margin is 50%.

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(vi) The cost of employing Tots Ltd’s permanent staff is £150,000 per month. Tots Ltd also employs
temporary staff during January, February and March at an additional cost equating to 3% of sales each
month.
(vii) Tots Ltd uses a courier to despatch the equipment to its customers. The cost of this service is 2% of
sales value in January to March, falling to 1% thereafter.
(viii) Administration costs are forecast at £30,000 for January. These costs are directly proportional to sales
each month.
(ix) Mr and Mrs Brute will be attending a conference abroad in July 2005 at a total cost of £5,000. They
must complete the booking form and send it off, along with a deposit of £2,000, by the end of January 2005.
The final balance is due in June.
(x) The company charges depreciation of £45,000 each month.
(xi) Tots Ltd also owns two indoor play centres that it rents out at the rate of £3,500 each per month from
January to April, falling to £3,000 per month thereafter. All rents are received one month in advance.
(xii) The company will invest in a new computer system later in the year. This will be paid for by two equal
instalments of £200,000, one in June and one in September.
Required:
Prepare a monthly cash budget for EACH of the THREE months to 30 March 2005, showing clearly
any necessary workings.
Unless told otherwise, assume that payments are made in the month in which the costs are incurred.

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Q5. Morello Landscapes is a small business established several years ago. The owner, Mr Morello, designs
and landscapes gardens for a range of clients using his team of five employees. The firm works on one job
at a time. Mr Morello has just signed a contract with a local building firm to landscape the gardens on a
development of thirty executive houses.
His designs have already been accepted and he has agreed to complete the work within a six-month period,
starting on 1 January 2007. Should he fail to complete the work on time, he will have to pay a penalty.
Should the work be completed early, workers can begin working on the next project.
Mr Morello understands the importance of careful cash budgeting and wants to prepare the cash budget
for the next six months, from January to June 2007.
The following information has been obtained:
(i) Opening debtors are forecast to be £2,400, all of which will be received in January.
(ii) A price of £400,000 has been agreed for the contract. The amount will be paid in instalments as follows:
January 5%
February 15%
March 10%
April 10%
May 10%
June 50%
(iii) Opening creditors, which will be paid in January, are forecast to be as follows:
Materials £6,600
Miscellaneous £2,570
(iv) Five diggers will be hired at the start of the job in January to level the land. They will be hired for the
whole month at a cost of £1,200 each. The fee is payable in full on the first day of hire. A deposit of £500
per digger is also payable at this point but this amount is refunded in full on the return of the vehicles on
the first day of February.
(v) Various materials are needed to complete the work and these will be purchased at different times over
the six months. Ace Ltd supplies all the soil and turf and Hardcastle Ltd supplies the sand, cement and
bricks/stones. Shrubs and ‘other materials’ are bought from several different companies. Materials have to
be kept on the driveways of the properties during the landscaping process. Since space is restricted, the
following schedule of purchases has been drawn up:
Materials Month Purchased Amount Credit terms
Soil January £12,600 None
Sand February £2,200 One month
Cement February £3,100 One month
Bricks/stones March £85,000 Two months
Turf May £48,000 One month
Shrubs May £16,700 None
Other materials Every month £2,000 per month None
The two key suppliers do charge delivery costs but these are already included in the above amounts. Both
key suppliers also give a 10% bulk order discount on any individual order that exceeds £40,000 in any given
month. Mr Morello has not taken any bulk discounts into account when calculating the above figures.
(vi) A waste disposal company has agreed to remove waste throughout the six months at a total cost of
£8,500. This must be paid in January.
(vii) Each of Mr Morello’s five employees is paid a salary of £21,600 per annum. They are all paid on the
last working day of each month for that month’s work. Mr Morello has also agreed to give each worker a
bonus of £1,500 in June for completion of the contract within the six-month period.
(viii) The firm uses three vans, which the five workers share. These are leased at an annual cost of £3,960
each, payable in equal monthly instalments on the first day of each month.
(ix) Mr Morello himself uses a business car that has already been fully paid for. He plans to sell the car in
April for £3,000 cash, giving rise to an anticipated profit on disposal of £600. His replacement car, to be
bought and paid for in the same month, is expected to cost £18,500. He charges depreciation of £300 each
month in his accounts for the existing car and will charge £385 per month for the new car. Depreciation is
charged in full in the month of acquisition but not at all in the month of disposal.
(x) Mr Morello’s business account is expected to be overdrawn by £14,200 at the beginning of January.

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(xi) The bank charges interest of 1% per month on an overdrawn balance, calculated on the closing bank
balance each month, and payable the following month. No interest is credited on positive balances.
Required:
Prepare a monthly cash budget for each of the six months to 30 June 2007, showing the cash
balance at the end of each month. Assume that the contract is completed on time.

Flexible and Flexed budgeting


Q1. Francis plc is a manufacturing company. It assesses managerial performance by comparing actual with
budgeted results. Due to staff shortages in the accounting department, figures for November 2004 budget
reports have been prepared by a trainee. A copy of the budget report for November 2004 for the appliances
division is given below.
Budgeted Actual Variance
Sales and production volumes (units) 5,000 5,500 500 F
£000 £000 £000
Sales revenue 1,000 1,078 78 F
Direct material (250) (286) 36 A
Direct labour (150) (176) 26 A
Other manufacturing costs (300) (308) 8A
Divisional fixed overhead (200) (190) 10 F
Profit 100 118 18 A
Note: F = favourable variance A = adverse variance.
The manager of the appliances division does not believe that the variances calculated give a fair
assessment of her division’s performance. She thinks that the budget figures are inappropriate and that a
flexed budget should be used to calculate the variances. To assist in preparing a flexed budget she provides
the following information:
1. Budgeted selling price is £200 per unit and actual selling price was £196 per unit.
2. Direct material is a variable cost.
3. Budgeted direct labour cost has a fixed element of £50,000 per month, the balance is variable.
4. Other manufacturing costs are semi-variable. Budgeted cost and output for the previous two months
have been as follows:
Month October 2004 September 2004
Budgeted Output (units) 4,000 3,000
Budgeted Cost (£000) 210 170
There is known to be ‘step up’ of £50,000 in the fixed element of this cost for volumes in excess of 4,500
units.
Required:
Prepare a flexed budget for the appliances division for November 2004 and recalculate the budget
variances. (9 marks)