ASSURANCE PROFESSIONAL SCHOOL

MANAGEMENT ACCOUNTING: BUDGET AND BUDGETARY CONTROL

Budget
A budget may be defined as a plan quantified in monetary terms prepared and approved
prior to a defined period of time usually showing planned income to be generated and/or
expenditure to be incurred during that period and the capital to be employed to attain a
given objective.

Budgets have two main roles:

a) They act as authorities to spend i.e. they give authority to budget managers to incur
expenditure in their part of the organisation.
b) They act as comparators for current performance by providing a yardstick against which
current activities can be monitored.

The purposes of preparing budgets:

 To obtain more economical use of capital.
 To facilitate various department to operate efficiently and economically.
 To create a good business practice by planning for the future.
 To fix responsibilities of different departments or heads.
 To coordinate the activities of various departments.

Basically, there are two types of budgets namely the subsidiary budgets and the master
budget. The subsidiary budgets (functional budgets) relate to the various functions or
departments of the organisation. Examples: sales budget, production budget, selling and
distribution budget etc.
Master budget is a summary budget incorporating functional budgets which is finally
approved, adopted and employed. It usually comprises the budgeted profit or loss account,
budgeted statement of financial position and budgeted statement of cash flows.

The budget setting process (stages in a budgeting process)

1. Establish who will take responsibility
2. Communicate budget guidelines to relevant managers.
3. Identify key or limiting factor(s)
4. Prepare the budget for the area of the limiting factor.
5. Prepare draft budgets for all other areas
6. Review and co-ordinate budgets
7. Communicate the budgets to all interested parties
8. Monitor performance relative to the budget.

Budget differs from forecast in the following ways:

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1) Forecast is a prediction or an estimate of changes, if any, in characteristics, economic

phenomena which may affect one’s business plans. It is a study into the future. When the
forecasts are given a shape and approved by management as a commitment, they become
budgets. Estimate: a judgement that you make without having the exact details or figures
about the size, amount, cost etc. of something
2) Forecast is the base while a budget is the structure built on the bases
3) Forecast is mainly concerned with probable events; but budget is concerned with planned
event
4) Forecast is only a tentative estimate and can be revised; but budget usually remains
unchanged for the budget period.
5) Forecast refers to the events over which there is/may be no control while a budget is an
endeavour to control the events.

The conflicting roles of budgets

How a budget can cause conflict between motivation and control
When preparing the whole company’s budget it is important to have a realistic forecast of
what is likely to happen, particularly for cash, purchases, labour and capital budgets.
However, for budget to be effective for motivation, targets must be set that are challenging.
It is also argued that for control purposes the budget must be a realistic benchmark against
which actual performance can be compared, that is, it must be close to a forecast. The
difficulty is that both of these objectives are valid and beneficial, but difficult to achieve
simultaneously. Thus the issue becomes whether one budget can do both tasks or whether
companies need to choose which task the budget will be used for.

Elements of a good budget

 It must be comprehensive and expressed in financial terms.
 It must show specific plans but not vague generalities of production.
 It is necessary that the budget serves as a tool of control.
 The budget must give a basis of evaluating actual results.

Some terms associated with budgeting and budgetary control

Budget period: is the period for which a budget is prepared and used, which may then be
subdivided into control periods. It is the period it takes for a budget to be prepared,
approved upon and implemented.
Budget committee: is a group of people selected from various sections of the organisation
and who have been charged with the duty of preparing and ensuring the implementation of
the budget.
Budget officer: is a person who controls the budget administration on day to day basis. He
is responsible to the budget committee.

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Budget manual: is a detailed set of documents providing guidelines and information about
the budget process. It can also be defined as a document which provides instructions to
guide the preparation and implementation of the budget. It sets out standing instructions to
govern the responsibilities of persons as well as the procedures, forms and records that
relate to the preparation and use of the budgets.

Typical contents of a budget manual:

(a) An introductory explanation of the budgetary planning and control process including a
statement of the budgetary objective and desired results.
(b) A form of organisation chart to show who is responsible for the preparation of each
functional budget and the way in which the budgets are interrelate
(c) A timetable for the preparation of each budget.
(d) Copies of all forms to be completed by those responsible for preparing budgets, with
explanations concerning their completion.
(e) A list of the organisation’s account codes, with full explanations of how to use them.
(f) Information concerning key assumptions to be made by managers in their budgets e.g. the
rate of inflation, key exchange rates etc.
(g) The names and location of the person to be contacted concerning any problems encountered
in preparing budgetary plans. This will usually be the coordinator of the budget committee
(budget officer) and will probably be a senior accountant.
Budget centre: a section of an entity for which control may be exercised and budgets
prepared.
Budget slack: the intentional overestimation of expenses and/or underestimation of
revenues in the budgeting process.
Fixed budget: a budget which is normally set prior to the start of an accounting period,
and which is not changed in response to subsequent changes in activity or cost/revenues
Flexible budget: a budget which by recognising different cost behaviour patterns, is
designed to change as volume of activity changes.

Budgetary Planning and Control

Budgetary control is defined as the establishment of budgets relating the responsibilities of
executives to the requirement of a policy and the continuous comparison of actual with
budgeted results, either to secure by individual action the objectives of that policy or to
provide a basis for its revision (CIMA Official Terminology). Budgetary control can be
undertaken using the feedback control or feed forward control concepts/systems. Feedback
controls relates to information about past events. Actual results are compared to planned
results as part of the control mechanism. E.g. variance analysis Feedforward control is a
system where deviations from plan are anticipated and corrective action is taken in
advance. An example is a cash flow projection which for e.g. can highlight in advance any

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shortages of cash and therefore action can be taken to avoid any problems this may cause.
Budgeting may be said to be the act of building budgets.

The following are the budgetary control procedures:

 The determination of a top management policy
 To fix in monetary terms the objectives which the business set out to achieve in that period
and to ensure that adequate working capital including liquid resources will be available for
attaining such objectives.
 The preparation of functional budgets or departmental budgets.
 The co-ordination of functional budgets.
 Constant comparison of budgeted target with actual target.
 Remedial action to be take where necessary to correct any deviation.

Objectives of budgetary control

 To establish a plan or budget covering all activities of the firm for a given period.
 To define the normal operating conditions technical or commercial of the business for the
periods of the budgets and to lay down the standards which the company should have
adhered to.
 To provide management with a means of decentralisation of responsibilities for cost and
expenditure of all kinds among the heads of department where they are incurred.
 To determine shortfalls in a particular department and to enable management take
corrective measures.
 To enable management centralise control.
 To fix in monetary terms the objectives which the business sets out to achieve in that period
and to ensure that adequate working capital including liquid resources will be available for
obtaining such objectives.

Advantages of budgetary control

 It helps fix responsibility to each cost centre, a department etc. in the organisation.
 It helps each organisation or unit to achieve what is probably the best for all units
concerned.
 It enhances better motivation and co-operation as each person contributing to a plan sees
how his part is fitting with others.
 A good budget is a basis of departmental control.
 The existence of budget in each department makes the heads of those departments cost
cautious.

Problems of budgetary control

 Budgeting may hide inefficiencies

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 Too much detail in budgetary control renders it meaningless and is expensive.

 Budgets are developed around existing organisational structures and departments which
may be inappropriate for current conditions and may not reflect the underlying economic
reality.
 There may be too much reliance on techniques as a substitute for good management.

Principal budget factor (Limiting or key factor)

Is a factor which at any given time is an overriding planning limitation on the activities of
the organisation. The principal budget factor may be as follows:
 Production capacity
 Shortage of labour
 Shortage of materials
 Lack of finance
 The level of demand for goods and services etc.

Participative budgeting
A budgeting system in which all budgets holders are given the opportunity to participate
in setting their own budgets. This may also be referred to as “bottom-up budgeting”. It
contrasts with imposed or top-down budgets where the ultimate budget holder does not
have the opportunity to participate in the budgeting process.

The advantages are:

1) Improved quality of forecasts to use as the basis for the budget.
2) Improved motivation: budget holders are more likely to want to work to achieve a budget
that they have been involved in setting themselves, rather than one that has been imposed
on them from above.

The main disadvantage of participative budgeting is that it tends to result in a more

extended and complex budgetary process.

Rolling budgets
A rolling budget may be defined as a budget continuously updated by adding a further
accounting period (month or quarter) when the earliest accounting period has expired. Its
use is particularly beneficial where future cost and/or activities cannot be forecast
accurately. A system of rolling budget is also known as continuous budgeting. It is not
necessary for all of the budgets in a system to be prepared on a rolling basis. For example
many organisation will use a rolling system for the cash budget only.

Incremental budgeting

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A method of budgeting where the budget for each period is determined by reference to
what was spent last period plus an allowance for anticipated inflation. It is assumed that
the basic structure of the old budget is acceptable and that adjustments will be made to
allow for changes in volume, efficiency and price levels. The focus, therefore, tends to be
on the existing use of resources rather than on identifying objective and alternatives
strategies for the future budget period.

The weaknesses of incremental budgeting are:

 The resource allocation is not clearly linked to a business plan and the consideration of
alternative means of achieving objectives.
 There is a tendency to constrain new high-priority activities.
 There is insufficient focus on efficiency and effectiveness and the alternative methods by
which they may be achieved.
 It often leads to arbitrary cuts being made in order to meet overall financial targets.
 It tends not to lead to management commitment to the budget process.

Zero based budgeting (ZBB) (Priority based budgeting)

A method of budgeting which requires each cost element to be specifically justified as
though the activities to which the budget related were being undertaken for the first time.
Without approval, the budget allowance is zero. ZBB is so called because it requires each
cost to be specifically justified by the benefits to be expected from zero, instead of simply
using last year’s budget as a base.

The following are steps involved in ZBB

1) Determine the activities that are to be used as the object of decision packages.
2) Request the managers identified in (1) above to prepare number of alternative decision
packages for those individual activities for which they are responsible.
3) Rank the decision packages in order of their contribution towards the organisation’s
objectives.
4) Fund the decision packages according to the ranking established under (3) above until the
available funds are exhausted.

Advantages of ZBB
 It avoids the complacency inherent in the traditional incremental approach, where it is
simply assumed that future activities will be very similar to current ones.
 ZBB encourages a questioning approach, by focusing attention not only on the cost of an
activity, but also on the benefits it provides, as the relative benefits of different types and
levels of expenditure. Forcing managers to articulate benefits encourages them to think
clearly about their activities.

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 Preparation of the decision packages will normally require the involvement of many
employees, and thus provides an opportunity for their views to be considered. This
involvement may produce useful ideas, and promote job satisfaction among the wider staff.

Disadvantages of ZBB
 The worked involved in the creation of decision packages, and their subsequent ranking by
top management is very considerable.
 The ranking process is inherently difficult, as value judgements are inevitable. This is a
particular problem in public sector bodies, where choices between very disparate
programmes are made, for example, public health against law and order.
 In applying ZBB, activities may continue to be identified with traditional functional
departments, rather than cross-functional activities, and thus distract the attention of
management from the real cost reduction issues.

Fixed and flexible budgets

A fixed budget is one which remains unchanged regardless of the actual level of activity.
In situation where activity level are likely to change, and there is significant proportion of
variable costs, it is difficult to control expenditure satisfactorily with the fixed budget. A
fixed budget is one which is set before the beginning of an accounting period, and that
shows, in financial terms, the results of the budgeted, or planned activities for the forth
coming period. The budget therefore is based on single-point estimates with respect to the
variables such as sales quantity, production volume, production mix and so on. The fixed
budget is used for planning purposes.

A flexible budget is designed to show the allowed expenditure for the actual number of
units produced and sold. It can help managers to make more valid comparisons.

Behavioural aspects of budgetary control

Behavioural aspects of budget has to do with how budgetary control systems impact on the
human beings who will operate and be judged by those systems. Thus budgetary control
should not focus on only economic considerations but should also focus on other social,
cultural and environmental factors that affect human beings who operate the budget. If
these factors are not carefully considered, people may be induced to do things that are not
in the best interest of the organisation.

Specific behavioural issues are:

 Motivation and co-operation: to be fully effective, any system of financial control must
provide motivation and incentive. If this requirement is not satisfied, managers will
approach their responsibilities in a very cautious and conservative manner.

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 Failure of goal congruence: that is where managers of various departments concentrate

on the achievement of their specific goals at the expense of wider organisational goals.
 The budget as a pot of cash: in some environments, managers may come to consider the
budget as sum of money that has to be spent.
 Budget negotiation: budgets are normally arrived at by a process of negotiation with the
managers concerned. Clearly, a manager has an incentive to negotiate a budget that is not
difficult to achieve. This produces a phenomenon known as ‘padding the budget’ or
‘budgetary slack’. A manager will exaggerate the costs required to achieve objectives.
 Influences on accounting policies: this happens when mangers attempt to influence the
accounting policies that are used. For example the apportionment of indirect costs between
departments often contains subjective elements. The manner in which the indirect costs are
apportioned can have a considerable impact on how the performance of individual
departments is perceived. This position creates the scope and incentive for managers to
argue over accounting policies.

Cash Budget and Cash Forecast

A cash forecast may be defined as the estimating of cash receipts and payments of future
period before any necessary adjustments are made. A cash budget may also be defined as
the estimating of cash receipts and payments for a future period only after due
consideration has been given to expected conditions and the overall budget plan.
Benefits of a cash budget
 It brings about the efficient use of cash.
 The preparation of cash budget will enable a company to know whether to borrow at short
term or long term basis.
 It helps in financing seasonal business fluctuation.
 With the help of cash budget, the company can know when there would be surplus cash so
that the surplus cash can be invested to generate additional income.

Preparation of cash budget

A cash budget shows projected cash receipts and payments usually month after month. It
must be noted that depreciation, provision for doubtful debts, bad debts written off,
discounts etc. do not appear in the cash budget. Discounts affect cash receipts or payments
but are not separate items in the cash budget.

TUTORIAL QUESTIONS
1) A company manufactures a single product and the following data show the actual results
for costs for the month of April compared with the budgeted figure.
Operating statement for April.
Actual Budget Variance

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Units produced 1,000 1,200 200A

GH¢ GH¢ GH¢
Direct material 16,490 19,200 2,710F
Direct labour 12,380 13,200 820F
Production overhead 24,120 24,000 120A
Administrative overhead 21,600 21,000 600A
Selling & distribution overhead 16,200 16,400 200F
90,790 93,800 3,010F

Management have identified that the following costs are fixed:

GH¢
Direct labour 8,400
Production overhead 18,000
Administrative overheads 21,000
Selling & distribution overheads 14,000

Required:
Prepare a flexible budget based on the above information and comment on your results.

2) The following monthly budgeted cost values have been taken from the budget working
papers of ABC Ltd for the year ended 30 September 2019.
Activity level 75% 85% 95%
GH¢ GH¢ GH¢
Direct materials 9,375 10,625 11,875
Direct labour 11,250 12,750 14,250
Direct expenses 4,875 5,525 6,175
Production overhead 6,200 7,500 7,000
Selling overhead 10,000 11,000 12,000
Administration overhead 13,000 13,000 13,000
54,700 60,400 64,300

During September 2018, actual activity was 1,292 units (which was equal to 68% activity)
GH¢
Direct materials 10,500
Direct labour 12,250
Direct expenses 5,600
Production overhead 6,250
Selling overhead 15,150
Administration overhead 14,200
63,950
Required:

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Prepare a budgetary control statement for ABC Ltd on a flexible budget basis for the month
of September 2019.

3) Memuna Ltd is reviewing the selling price of its product for the coming year. A forecast
of the annual costs that would be incurred by Memuna Ltd in respect of this product at
differing activity levels is as follows:
Annual production (unit) 100,000 160,000 200,000
GH¢000 GH¢000 GH¢000
Direct materials 200 320 400
Direct labour 600 960 1,200
Overhead 880 1,228 1,460
The cost behaviour represented in the above forecast will apply for the whole range of
output up to 300,000 units per annum of this product.

Required:
a) Calculate the total variable cost per unit and total fixed overhead.
b) State the total cost function.

4)
a) APZ has recently opened a fast-food restaurant in a small town. Fast-food restaurants are
characterised by their quick food service. The fast-food restaurant market in the town is
dominated by a small number of long established restaurants. APZ is seeking to grow its
business and attract the town’s residents with its burger meals.

The performance report for the first month of business is to be presented at the restaurant’s
monthly management meeting.
A draft of the performance report for the first month of business is reproduced below:
Budget Actual Variance
Sales (number of meals) 6,000 5,400 (600)
GH¢ GH¢ GH¢
Revenue 45,000 40,365 (4,635)
Variable costs 26,400 24,632 1,768
Fixed costs 5,250 4,950 300
Profit 13,350 10,783 (2,567)

The management accountant at APZ has realised that the size of the fast-food market that
was used to derive the budget number of meals to be sold has been over-estimated. The
management accountant has calculated the value of the sales volume contribution planning
variance to be GH¢2,480 adverse.

Required:
a) Prepare a revised budget based on the new estimate of the market.
b) Prepare a performance report for the month based on flexed budget.

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c) Explain two non-financial measures that APZ could use to monitor the performance of the
new fast-food restaurant.

b) A company uses a top-down approach to budgeting. Budgets are imposed by senior

management and budget holders are not given the opportunity to participate in the budget
setting process.

Required:
Explain one advantage and two disadvantages to the company of using this top-down
budgeting approach.

5) JS has decided to purchase t-shirts and print them with a logo to commemorate a major
international sporting event.

Sales
The commemorative t-shirts will be sold for GH¢10 each and predicted sales are as
follows:
July 9,000 t-shirts
August 18,000 t-shirts
September 22,500 t-shirts

One third of sales will be for cash. The remainder will be on credit with the customer
paying the month after sale.

Purchases
The t-shirts will cost GH¢6 each and will be purchased in the month prior to sale. It is
expected that 10% of the t-shirts purchased will be damaged during the printing process
and will not be suitable for sale. The supplier has offered two months’ credit.

Capital investment
To print the t-shirts with the logo of the sporting event will require the purchase of a
machine costing GH¢30,000. The machine will be bought at the start of the project and
paid for in August. The machine will have a five-year useful life but no expected residual
value. The machine will be used elsewhere in the business at the end of this project.

Expenses
Expenses, excluding advertising, of GH¢20,000 per month will be incurred each month
and paid in the month incurred. Advertising costs of GH¢5,000 per month will be incurred
in each of the months July, August and September and will be paid one month in arrears.

Required:
a) Produce a cash budget for the project for each of the three months July, August and
September.

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b) Explain why it is important for a business to prepare a cash budget.

c) State three ways, other than borrowing, of improving the cash flow position of a business.

6) A company has prepared the following fixed budget for the coming year.
Sales 10,000 units
Production 10,000 units

GH¢
Direct materials 50,000
Direct labour 25,000
Variable overheads 12,500
Fixed overheads 10,000
97,500

Budgeted selling price GH¢10 per unit.

At the end of the year, the following costs had been incurred for the actual production of
12,000 units.
GH¢
Direct materials 60,000
Direct labour 28,500
Variable overheads 15,000
Fixed overheads 11,000
114,500

The actual sales were 12,000 units for GH¢122,000

Required:
Prepare a flexed budget for the actual activity for the year

7) RF Ltd is a new company which plans to manufacture a specialist electrical component.

The company founders will invest GH¢16,250 on the first day of operations, that is, Month
1. They will also transfer fixed capital assets to the company.
The following information is available:
Sales
The forecast sales for the first four months are as follows:
Month Number of components
1 1,500
2 1,750
3 2,000
4 2,100

The selling price has been set at GH¢10 per component in the first four months.

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Sales receipts
Time of payment % of customers
Month of sale 20
One month later 45
Two months later 25
Three months later 5

The balance represents anticipated bad debts.

A 2% discount is given to customers for payment received in the month of sale.

Production
There will be no opening inventory of finished goods in Month 1 but after that it will be
policy for the closing inventory to be equal to 20% of the following month’s forecast sales.

Variable production cost

The variable production cost is expected to be GH¢6·40 per component
GH¢
Direct materials 1·90
Direct wages 3·30
Variable production overheads 1·20
Total variable cost 6·40

Notes:
Direct materials: 100% of the materials required for production will be purchased in the
month of production. No inventory of materials will be held. Direct materials will be paid
for in the month following purchase.

Direct wages will be paid in the month in which production occurs.

Variable production overheads: 60% will be paid in the month in which production
occurs and the remainder will be paid one month later.

Fixed overhead costs

Fixed overhead costs are estimated at GH¢75,000 per annum and are expected to be
incurred in equal amounts each month. 60% of the fixed overhead costs will be paid in the
month in which they are incurred and 30% in the following month. The balance represents
depreciation of fixed assets.

Calculations are to be made to the nearest GH¢1.

Required:
Prepare a cash budget for each of the first three months and in total.

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8) As the senior management accountant of BBF Limited, you are preparing the budgets for
the three months ending 30th September, 2020 and you are given the following data.
 Sales or projected sales (GH¢)
April May June July Aug Sep Oct
31,500 24,000 30,000 39,000 36,000 42,000 45,000

 All sales are on credit and on average 80% of the sales results in the customer paying in
the month of the sale taking a 5% settlement discount; 10% paid in the month following
the sales; 8% in the second month following the sales; 2% prove uncollectable.
 Goods are purchased in anticipation of sales in the month preceding the sales. Sales are
invoiced at cost plus 331/3%.
 Suppliers are paid two months after the receipts of the goods.
 Overheads are GH¢7,500 a month, paid as incurred.
 The overdraft as at 30th June 2020 was GH¢4,650

Required
a) Prepare cash collection from customers for April to September 2020.
b) Prepare disbursement for purchases schedule for April to September 2020.
 Prepare cash budget for the three months to September 2020 showing the budgeted cash
balance as at 30th September, 2020.

9) AW Ltd produces two products, A and C. In the last year (20X8) it produced 640 units of
A and 350 units of C incurring costs of GH¢672,000. Analysis of the costs has shown that
75% of the total costs are variable. 60% of these variable costs vary in line with the number
of A produced and the remainder with the number of C.

The budget for the year 20X9 is now being prepared using an incremental budgeting
approach. The following additional information is available for 20X9:
 All costs will be 4% higher than the average paid in 20X8.
 Efficiency levels will remain unchanged.
 Expected output of A is 750 units and of C is 340 units.

Required:
Calculate the budgeted:
a) Total variable cost of products A and C for the full year 20X9.
b) Total cost of production for the full year 20X9

10. The XYZ Company produces three products, X, Y, and Z. For the coming accounting
period budgets are to be prepared using the following information:
Budgeted sales
Product X 2000 units at GH¢100 each
Product Y 4000 units at GH¢130 each

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Product Z 3000 units at GH¢150 each

Standard usage of raw material

Wood(kg per unit) Varnish(litres per unit)
Product X 5 2
Product Y 3 2
Product Z 2 1
Standard cost of raw material GH¢8 GH¢4

Inventories of finished goods X Y Z

Opening 500 units 800 units 700 units
Closing 600 units 1000 units 800 units

Inventories of raw materials

Wood Varnish
Opening 21,000 10,000
Closing 18,000 9,000

Labour
X Y Z
Standard hours per unit 4 6 8
Labour is paid at the rate of GH¢3 per hour

Using the information provided above, prepare the following budgets:

a) Sales budget (quantity and value)
b) Production budget (units)
c) Material usage budget (quantities)
d) Material purchases budget (quantities and value)
e) Labour budget (hours and value)

11. A company makes and sells two products, X and Y, for which the budgeted sales price
and variable costs per unit are:
Product X Product Y
Variable cost GH¢2 GH¢4
Sales price GH¢5 GH¢8

Budgeted fixed costs are GH¢140,000. Budgeted sales are 30,000 units of Product X and
15,000 units of Product Y.

Required:
a) Calculate the budgeted profit
b) Calculate how profit would be affected in each of the following separate circumstances:
 If the variable cost of Product Y were 25% higher than expected

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 If the sales of Product X were 10% less than budgeted

 If sales of Product X were 5% less than budgeted and unit variable costs of X were 10%
higher than budgeted
 If total sales revenue is the same as in the original budget, but the sales mix (by revenue)
is 50% of Product X and 50% of Product Y.

12. Osman Ltd is engaged in manufacturing and sale of footwear. The company maintains one
central factory and warehouse and sells its products through company operated retail
outlets as well as through distributors. Management is in the process of preparing the
budget for the year 2020 on the basis of the following information:
 The marketing director has provided the following annual sales projections:
No. of units Retail price range (GH¢)
Men 1,200,000 100 – 400
Women 500,000 85 – 250

 It has been estimated that 30% of the units would be sold through distributors who paid
GH¢95 and GH¢70 per footwear for men and women respectively.
 The remaining 70% will be sold through company operated retail outlets.
 The previous pattern of sales indicates that 60% of these units are sold at the minimum
price; 10% units are sold at the maximum price and remaining 30% at a price of GH¢200
and GH¢120 per footwear for men and women respectively.
 The company incurs variable cost of GH¢45 per footwear regardless of whether sales is
through company operated retail outlet or distributors.
 The company operates 22 outlets all over the country. The fixed costs per outlet are
GH¢12,000 per month and include rent, electricity, maintenance etc.
 Fixed costs for the factory and head office are GH¢4.5 million and GH¢1.5 million per
month respectively.

Required
Prepare budgeted profit and loss account for the year 2020 for Osman Ltd.

13.
a) X Ltd manufactures specialist insulating products that are used in both residential and
commercial buildings. One of the products, Product W, is made using two different raw
materials and two types of labour. The company operates a standard absorption costing
system and is now preparing its budgets for the next four quarters. The following
information has been identified for Product W:
Sales
Selling price GH¢220 per unit
Sales demand
Quarter 1 2,250 units

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Quarter 2 2,050 units

Quarter 3 1,650 units
Quarter 4 2,050 units
Quarter 5 1,250 units
Quarter 6 2,050 units
Costs
Materials
A 5 kgs per unit @ GH¢4 per kg
B 3 kgs per unit @ GH¢7 per kg

Labour
Skilled 4 hours per unit @ GH¢15 per hour
Semi-skilled 6 hours per unit @ GH¢9 per hour

Annual overheads GH¢280,000.

40% of these overheads are fixed and the remainder varies
with total labour hours. Fixed overheads are absorbed on a unit
basis.

Inventory holding policy

Closing inventory of finished goods 30% of the following quarter’s sales demand
Closing inventory of materials 45% of the following quarter’s materials usage

The management team are concerned that X Ltd has recently faced increasing competition
in the market place for Product W. As a consequence, there have been issues concerning
the availability and costs of the specialised materials and employees needed to manufacture
Product W, and there is concern that these might cause problems in the current budget
setting process.

Required:
Prepare the following budgets for each quarter for X Ltd:
a) Sales budget in kg and value.
b) Production budget in units;
c) Raw material purchases budget in kgs and value for Material B.
d) X Ltd has just been informed that Material A may be in short supply during the year for
which it is preparing budgets. Discuss the impact this will have on budget preparation and
other areas of X Ltd.

b) Assuming that the budgeted production of Product W was 7,700 units and that the
following actual results were incurred for labour and overheads in the year:
Actual production 7,250 units

Actual overheads

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Variable GH¢185,000
Fixed GH¢105,000

Actual labour costs

Skilled GH¢16.25 per hour GH¢568,750
Semi-skilled GH¢8 per hour GH¢332,400

Required:
Prepare a flexible budget statement for X Ltd showing the total variances that have
occurred for the above four costs only

14. Mercury Company’s management wants to prepare budgets for one of its products,
TomaCan, for October 2019.

The firm sells the product for GH¢75 per unit and has the following expected sales (in
units) for these months in 2019:

July August September October November December

6,000 7,000 8,000 9,000 10,000 11,000

The production process requires 5 kilos of Atadwe and 3 kilos of Ginger. The firm’s policy
is to maintain an ending finished goods. Inventory each month equal to 15% of the
following month’s budgeted sales, but in no case less than 1,300 units. All materials
inventories are to be maintained at 10 % of the production needs for the next month, but
not to exceed 3,000 kilos. The firm expects all inventories at the end of September to be
within the guidelines. The purchase department expects the materials to cost GH¢1.75 per
kilo and GH¢5.00 per kilo for Ginger and Atadwe respectively.

The production process requires direct labour at two Skill Levels (SL). The rate for labour
at SL1 is GH¢45 per hour and for SL2 is GH¢25 per hour. SL1 can process one batch of
TomaCan per hour while SL2 uses double the time of SL1 for the same output. Each batch
consists of 10 units.
Variable manufacturing overhead is GH¢100 per batch plus GH¢75 per direct labour-hour.
Fixed production overhead is GH¢51,240. It is the plan of Mercury Company to spend a
third of variable and fixed production overhead costs on selling and administration
expenses. The company is in the 25% tax bracket but enjoys a rebate of 50% because of its
location. The company uses an actual cost system. The unit cost of production in October
is the same as that of September.

Required:
On the basis of the preceding data and projections, prepare the following budgets:
a) Production budget for October (in units).
b) Direct materials purchases budget for October (in kilos).

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c) Direct materials purchases budget for October (in Cedis).

d) Direct manufacturing labour budget for October (in Cedis).

15. The budgeted Income Statement for Zeeman Company for the year 2020 is presented
below.
GH¢
Sales revenue 930,000
Cost of sales 558,000
Gross profit 372,000
Total expenses 225,000
Net profit 147,000

a) Monthly sales in each quarter is the same. The sales for January is GH¢50,000 and this will
remain unchanged up to March when it will increase by GH¢20,000 from April and remain
unchanged for the remaining two months in the quarter. Third quarter monthly sales will
be GH¢90,000 each while those of the fourth quarter is GH¢100,000 each.

b) 20% of all sales are on cash basis, 40% of the monthly sales are paid in the month after
sales, and the balance is paid the second month after sales. No bad debt is expected.

c) The monthly cost of sales represents 60% of the current month's sales. Inventory is kept at
60% of the following month's cost of sales. All purchases are paid in full after one month.

d) Included in the expenses is a depreciation of GH¢87,000. The monthly expenses paid as

and when incurred is GH¢10,000. This is fixed in January but increased by 20% effective
April.

Required:
Extract the Cash Budget for the second quarter of the year, showing the cash balance for
each month in the quarter.

16. Toby Nigeria Limited is a publishing company established in the early 1970’s. The
company has recently been taken over by Superior Quality Limited – a multinational
company operating in Europe.
Mr. Edet Akpan, a staff of Superior Quality Limited has been sent from the company’s
headquarters to review, among other things, the budgeting and reporting system used by
Toby Nigeria Limited.
During his visit to all the departments, he discovered that monthly budgets are prepared for
each department in the company. Upon request, the last budget statement for the School
Stationery Production Department (SSP) for period V was presented to him.

The budget statement presented was as follows:

Budget statement for period V

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Department: SSP Department

Actual results:
Units produced 45,000
Labour hours 130,050

Actual Budget Variances

Results
$’000 $’000 $’000
Direct materials 907.2 800 (107.2)
Direct Labour 442.8 400 (42.8)
Variable production overhead 284.4 240 (44.4)
Fixed production overhead 212.4 187 (25.4)
Variable admin. overhead 147.6 133 (14.6)
Fixed admin overhead 180.0 160 (20.0)
Total costs 2,174.4 1,920 (254.4)
Sales value of production 2,790 2,480 310
Profit 615.6 560 55.6

Mr. Tola Ademola

School Stationery Manager
Interaction with Mr. Tola Ademola the School Stationery Manager, revealed that the
budget statement presented was based on 40,000 units with a standard labour content of 3
hours per unit.

Mr. Akpan observed that Tola was not in any way enthusiastic about the budget system.
He saw it as a pressure system imposed by the company’s top management to indict some
of the managers. He pointed out that the system was hurriedly introduced by High Flyer
Consults, about twelve months ago. The consultant never took time to talk to the managers
or provide explanation that could assist users to understand the system. The experienced
School Stationery Manager was doubtful about the competence of the consultant. He was
of the opinion that the system introduced in Toby Nigeria Limited was either a ready-made
one developed for another company or that the consultant did not understand the system
well enough to give him the needed confidence to educate the users. He concluded by
stating that he was sure his department made a loss as against the positive figure recorded
in the report and there was the possibility of reporting a loss at another period when profit
was actually made. The situation reported above cuts across virtually all the departments
and so the need to nip the situation in the bud became very urgent.

The task of making budgeting system more useful and acceptable in a biased environment
like this, no doubt, seems difficult therefore, Mr. Akpan has requested from you an advice
that will assist him in getting out of the woods.

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 ASSURANCE PROFESSIONAL SCHOOL
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Required:
a) Redraft the budget statement in a more informative manner.
b) Discuss the behavioural problems brought out in this situation.
c) Discuss the steps Mr. Akpan should take to remedy the situation.

17. Mega Laboratories plc. is a successful manufacturing company in the pharmaceutical

industry. The company manufactures a number of household drugs. Since the advent of the
Covid-2019 pandemic, its products have been in high demand. One of its newest products
is known as ‘vacineDcovid’. In order to manufacture the product, a single raw material,
Zithromax is used.

Budgets are to be prepared for the quarter ending 30 June 2021 and the following
information is available for this purpose:
i. At 31 March 2021 various balances were as follows:
Receivables $500,700
Creditors (suppliers of Zithromix) $153,000
Inventory of vacineDcovid 20,300 units
Inventory of Zithromix 200,000 kg

ii. Extracts from the ‘standard cost card’ – vacineDcovid are as follows:
$/unit
Direct material Zithromax, 10kg at $5.00 per kg $50.00
Direct labour, 2 hours at $6.00 per hour $12.00

iii. Suppliers of Zithromax give two months credit to the company, whereas customers take
one month’s credit.

iv. Sales expectations for the quarter ending 30th June 2021 are as follows:
25,000 units of vacineDcovid at a selling price of $95.00 per unit.

v. Assume that sales of vacineDcovid and purchases of Zithromix will be evenly spread over
the three months to 30 June 2021.

vi. Depreciation relating to plant and machinery is $55,000 for the quarter ending 30th June
2021.

vii. ‘Other expenses’ are paid immediately in cash, and are estimated to be $200,000 for the
quarter ending 30th June 2021.

viii. The anticipated inventory levels at 30 June 2021 are as follows:

Inventory of vacineDcovid 15,000 units
Inventory of Zithromix 150,500 kgs

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ix. Assume there is no work-in-progress and that stocks of vacineDcovid and Zithromix are
valued at standard direct cost – see (ii) above.

Required:
For the quarter ending 30th June 2021 prepare:
a) A cash budget (amounts for each separate month are not required).
b) Income Statement budget. (clearly state any assumptions you have made)
c) Briefly state the benefits of a Cash Budget to Mega Laboratories plc.

20. Ezenwa Nigeria Limited is a company which produces a single product on an assembly
line. The budget personnel has been availed with the following information which
represents the extremes of high and low volumes of production which the company will
achieve over a three month period.
Production of Production of
80,000 units 160,000 units
$ $
Direct materials 3,200,000 6,400,000
Indirect materials 480,000 800,000
Direct labour 2,000,000 4,000,000
Power 720,000 960,000
Repairs 800,000 1,200,000
Supervision 800,000 1,440,000
Rent, insurance and rates 360,000 360,000

Additional Information:
Supervision is a ‘step function’. To this end, one supervisor is employed for all production
levels up to and including 100,000 units. For higher levels of production, an assistant
supervisor whose remuneration is $640,000 will be added.

Required:
a) Prepare a set of flexible budgets for presentation to the Production Director to cover the
following levels of production over a period of three months:
 80,000 Units
 100,000 Units
 120,000 Units
 140,000 Units
 160,000 Units

b) During the three months July to September 2021, 100,000 units were produced. Actual
costs incurred during this period were as follows:
$
Direct materials 4,150,000

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Indirect materials 580,000

Direct labour 2,700,000
Power 760,000
Repairs 885,000
Supervision 850,000
Rent, insurance and rates 320,000

Required:
a) Prepare a budget report for presentation to the Production Director displaying all relevant
variances.
b) For each variance, suggest any further investigations which might be required and the
necessary actions required to be taken by the Director.

21. Eko Limited is a small manufacturing company producing two high quality products called
‘Kay’ and ‘Lay’. Both products use a raw material Tee (costing $30 per kg) in their
manufacture. The Directors are reviewing the company’s stock management policies for
the forthcoming year as part of the annual budget preparation cycle.

Due to the product specification, quality is an important factor and a quality control
inspection takes place immediately after the production cycle has ended. At this point, any
inferior products are rejected and only good production becomes available for sale. In
addition to these losses, a certain quantity of waste is unavoidable from material Tee due
to the cutting process for both products.

The following forecast information has been extracted from departmental estimates for the
year ending 31st December 2020 (the budget period).
Product Kay Product Lay
Sales (quality approved units) 23,000 10,000
Finished goods stock increase by year-end 275 185
Post-production rejection rate (%) 2 3
Material Tee usage (per completed unit, net of 2kg 3kg
wastage)
Material Tee wastage (%) 5 10

Additional information:
 Usage of raw material Tee is expected to be at a constant rate over the period.
 Annual cost of holding one unit of raw material in stock is 17% of the material cost.
 The cost of placing orders is $30 per order.
 Eko Limited maintains a constant 1,000kg of safety/buffer stock of material Tee regardless
of the quantity ordered each time.

Required:

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a) Prepare operational budgets for the year ending 31st December 2020 under the following
headings: (Show your workings clearly)
 Production budget for Products Kay and Lay (in units).
 Purchases budget for Material Tee (in kgs and value).
b) Calculate the Economic Order Quantity for Material Tee

22. Abigail Acheampong is in the process of preparing budgets for the period October to
December 2017. The following information has been provided to assist in the budgeting
process:
 Budgeted monthly sales revenue is as follows:
GH¢
October 40,000
November 70,000
December 50,000
January 2018 45,000
 Sales are 20% cash and 80% credit. Credit sales are collected over a three month period,
15% in the month of sale, 70% in the month following sale and 15% in the second month
following sale. Bad debts of 5% are anticipated on all credit sales.
 Total sales revenue in August amounts to GH¢30,000 and September’s total sales revenue
amounts to GH¢36,000.
 Cost of sales is expected to amount to 60% of sales revenue each month.
 The business maintains its closing inventory levels at 75% of the following month’s cost
of sales. Inventory at the beginning of October is expected to amount to GH¢18,000.
 50% of inventory purchased is paid in the month of purchase. The remaining 50% is paid
for in the month following purchase. As at 30 September 2017, amount owed for purchases
are GH¢11,700.
 A grant of GH¢20,000 is expected to be received in mid-October.
 A second hand van which cost GH¢8,000 three years ago is expected to be sold in
December 2017 for GH¢3,000. At this time the expected net book value of the van is
GH¢1,800.
 Equipment costing GH¢4,500 will be purchased and paid for in November 2017. The
equipment will be depreciated on a straight line basis over three years.
 Operating expenses are paid as incurred. These have been estimated as follows:
GH¢
October 12,800
November 18,900
December 14,600
The above figures include depreciation on existing assets of GH¢2,000 per month.
 The cash balance on 1 October is expected to amount to GH¢8,000

Required:

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 ASSURANCE PROFESSIONAL SCHOOL
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a) Calculate the purchases figure for each month from October 2017 to December 2017.

b) Prepare a cash budget on a monthly basis and in total for the period October 2017 to
December 2017

23. Ghanaman Senior High School (SHS) which has an enrollment of 2,500 students
(residential) is one of the schools that depend on the government for the supply of food
items. The bursar has proposed that a 50 kilogram-bag of rice can feed 200 students per
meal while the same 50 kilogram-bag of beans can be used for 350 students. Per the menu
plan, rice will be served three times and beans twice a week. The SHSs will run two
semesters of 16 weeks each for the year 2023.

Other information:
Opening inventory:
Rice: 40 bags of 50kg
Beans: 10 bags of 50 kg

Inventory policy: Closing inventory;

Rice: 20% of annual requirement
Beans: 15% of annual requirement

Required:
Prepare the budget for the supply of both rice and beans needed to feed students for the
two semesters of the year 2023.

24. Squash Refinery has planned the following monthly sales for the first four months in the
year:
Months 1 2 3 4
Gasoline(litres) 140,000 200,000 220,000 250,000
Diesel (litres) 100,000 130,000 180,000 210,000

The proposed ex-refinery prices are GH¢12.5 and GH¢10.8 per litre for gasoline and diesel
respectively.
One metric tonne of crude oil when processed can yield 2,000 litres of Gasoline and 2,500
litres of diesel. The inventory policy of the company is as follows:
 Closing inventory at the end of each month:
Finished products: Twice of the monthly sales for gasoline and 150% of the monthly sales
for diesel.
Crude: 80% of the following month’s requirement.
 The opening inventory are:

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Finished Products: Gasoline 200,000 litres, diesel 180,000 litres and crude: 140 metric
tonnes.

Note: The purchased of crude is based on the production requirement of gasoline.

Required:
Prepare the following budgets for each of the first three months:
a) Sales for gasoline and diesel
b) Quantity of crude to be purchased.

25. Noble is a restaurant that is only open in the evenings, on SIX days of the week. It has eight
restaurant and kitchen staff, each paid a wage of $8 per hour on the basis of hours actually
worked. It also has a restaurant manager and a head chef, each of whom is paid a monthly
salary of $4,300. Noble’s budget and actual figures for the month of May was as follows:
Budget Actual
Number of meals 1,200 1,560
$ $
Revenue:
Food 48,000 60,840
Drinks 12,000 11,700
60,000 72,540
Variable costs:
Staff wages (9,216) (13,248)
Food costs (6,000) (7,180)
Drink costs (2,400) (5,280)
Energy costs (3,387) (3,500)
Total variable cost (21,003) (29,208)
Contribution 38,997 43,332
Fixed costs:
Manager’s and chef’s pay (8,600) (8,600)
Rent, rates and depreciation (4,500) (4,500)
Operating profit 25,897 30,232

The budget above is based on the following assumptions:

a) The restaurant is only open six days a week and there are four weeks in a month. The
average number of orders each day is 50 and demand is evenly spread across all the days
in the month.
b) The restaurant offers two meals: Meal A, which costs $35 per meal and Meal B, which
costs $45 per meal. In addition to this, irrespective of which meal the customer orders, the
average customer consumes four drinks each at $2·50 per drink. Therefore, the average
spend per customer is either $45 or $55 including drinks, depending on the type of meal

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selected. The May budget is based on 50% of customers ordering Meal A and 50% of
customers ordering Meal B.
c) Food costs represent 12·5% of revenue from food sales.
d) Drink costs represent 20% of revenue from drinks sales.
e) When the number of orders per day does not exceed 50, each member of hourly paid staff
is required to work exactly six hours per day. For every incremental increase of five in the
average number of orders per day, each member of staff has to work 0·5 hours of overtime
for which they are paid at the increased rate of $12 per hour.

You should assume that all costs for hourly paid staff are treated wholly as variable costs.
f) Energy costs are deemed to be related to the total number of hours worked by each of the
hourly paid staff, and are absorbed at the rate of $2·94 per hour worked by each of the
eight staff.

Required:
Prepare a flexed budget for the month of May, assuming that the standard mix of customers
remains the same as budgeted.

26. Below in an extract from the statement of financial position of Apan Ltd as at December,
2023:
GH¢
Inventory 22,000
Receivables 103,600
Bank 42,000
167,600
Creditors (98,000)
69,600

The following sales target have been proposed for the first four months of 2024:
Month January February March April
Sales (GH¢) 110,000 132,000 140,000 135,000

Notes:
a) Payment arrangements with customers; 40% down payment, 35% the month following the
month of sales and the balance paid in the second month after the sales. GH¢10,000 of the
receivables relates to November 2023 sales.
b) The monthly cost of sales represents 70% of each month’s sales. Closing inventory at the
end of each month are expected to be 60% of the month’s cost of sales. Suppliers give 30
days credit.
c) Monthly operating expenses will be 35% of sales out of which fixed non-cash expenses are
GH¢10,000. These expenses are paid in the month in which they are incurred.

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 ASSURANCE PROFESSIONAL SCHOOL
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Required:
Prepare the monthly cash budget of Apan Ltd for the first quarter of 2024.

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