Questions: budget preparation

1 Which of the following statements about budgets is false?

A A continuous budget is feasible only for sales projections.

A continuous budget is a budgeting approach where a company continually
prepares budgets for a set period, such as 12 months, with a new budget created
every month or quarter as the previous one ends. Continuous budgets can be used
for various types of budgets, not just sales projections. These budgets may include
direct material budgets, direct labor budgets, overhead budgets, and cash budgets.
Therefore, option A is false, and the other statements are true. The direct labor
budget is dependent on the production budget, the budgeting process usually
begins with a sales budget, and the cash budget is indeed an element of the
master budget.

B The direct labour budget is specifically dependent on the production

budget.

C The budgeting process normally begins with preparation of a sales budget

D The cash budget is an element of a master budget.

2 Ratty has budgeted next month’s sales at 2500 units.

Opening and closing inventories are as follows:
Opening Closing
(actual) (budgeted)
Finished goods (units) 2000 2500
Raw materials (kilos) 400 1400
Work in progress 0 0

Each item of finished goods requires:

2 kilos of direct material at 3 $ a kilo
1 hour of direct labour at 11 $ per hour
Factory overhead is applied at 7 $ per direct labour hour.

What is the expected production cost for next month?

Production=Sales + closing bal finished goods – opening bal finished goods

Purchases=material usage +closing bal rm – opening bal rm
production= 2500 + 2500 – 2000 = 3000 units
now that we know how many units r to be produced, we can calculate the amount of rm
needed.
since 2 kg are used for each unit, means for 3000 units we need:
3000 x 2 = 6000 kg.

we can now calculate the purchases:

purchases = usage + cl bal – op bal
purchases = 6000 +1400 – 400 = 7000 kg
thus we need to purchase 7000 kg and the cost will be:
7000 x 3 = $21,000
For the labor cost, the rate is $11/hr and 1 labor hr is used to produce one unit of finished
goods.

so, the cost of 3000 units will be 3000 hrs x 11 = 33,000.

 the overhead rate is $7/hr of direct labor hour. since the labor hrs are 3000, the total overhead
cost will be:

3000 hrs x 7 – 21,000

total cost is: 21,000 + 33,000 + 21,000 =75,000
or
72 000$

3 Hiccup expects the following sales volumes for the first quarter of next year:
January 5000 units
February 4000 units
March 8000 units
Finished goods inventory on 1 January is expected to be 1000 units.
However, the company’s policy for next year will be to maintain finished goods
inventory level at 80 % of the following month’s sales.

How many units should be budgeted for production in January?

7 200 units

4 Bling has estimated the following for the next budget period:
$000
Sales 5000
Fixed manufacturing costs 2000

Bling’s variable manufacturing costs are budgeted to be 40 % of sales revenue.

Inventory levels are expected to remain constant.
What is the budgeted cost of goods sold?

Variable manufacturing costs = 40% of Sales

= 40% of $5000,000
= $2000,000

The budgeted cost of goods sold can be calculated as:

Cost of goods sold = Fixed manufacturing costs +

Variable manufacturing costs
= $2000,000 + $2000,000
= $4000,000
$4 000 000

5 A manufacturing company always carries finished goods inventory equal to 20 % of

the next month’s budgeted sales.
Sales for the current month are 2000 units and are budgeted to be 20 %
higher next month.

How many units will be produced in the current month?

The closing inventory last month must be 20% of this

months sales: 20% x 2000 = 400.
Next months sales are 2000 + 20% = 2400, so the
closing inventory this month must be 20% x 2400 =
480
 So the production this month is 2000 (sales) – 400
(opening inventory) + 480 closing inventory = 2080

6 A government funded hospital offers free treatment to patients.

Which of the following is the most likely principal budget factor?

A Demand
B Labour hours
C Materials
D Cash

A - Demand is the most likely principal budget factor for a

government-funded hospital that offers free treatment to
patients. This is because the demand for healthcare services
is likely to be the primary driver of the hospital's budget. As
demand increases, the hospital will need to allocate more
resources to provide treatment to patients, such as hiring
additional staff, purchasing more equipment and supplies,
and expanding facilities. Therefore, demand is likely to have
the greatest impact on the hospital's budget, as it will
determine the level of resources needed to provide
healthcare services to the community. Labour hours,
materials, and cash are important budget factors as well, but
they are likely to be secondary to demand in this case.

7 What would be the usual order of budget preparation for a manufacturing company,
whose principal budget factor is sales demand?

A Production budget, sales budget, purchases budget

B Production budget, purchases budget, sales budget
C Sales budget, purchases budget, production budget
D Sales budget, production budget, purchases budget

The sales budget is the first budget to be prepared, as it is the principal budget factor and drives
the other budgets. The sales budget will provide information on the expected sales volume,
which is needed for the other budgets.
The purchases budget is then prepared, as it is dependent on the sales budget. The purchases
budget will provide information on the amount and timing of materials, supplies, and other
resources needed to support the production process.
Finally, the production budget is prepared, which is based on the sales and purchases budgets.
The production budget will provide information on the number of units to be produced and the
resources required to produce them, including labor, overheads, and direct materials.
Therefore, the correct order of budget preparation for a manufacturing company, whose
principal budget factor is sales demand, is Sales budget, purchases budget, and production
budget.
8 A retailer forecasts the following data for the coming period: $
Sales 500
000
Opening inventory 40 000
Closing inventory 50 000
 %
Mark-up 25
What amount should be budgeted for purchases?

$50,000 – $40,000 + ($500,000 ÷1·25) = $410,000 (Materials purchases ($))

9 A retailer forecasts that sales in the first month of the year will be 600 000 $ and
will then grow a 4 % per month for the next three months.
It prices its products by adding a mark-up of 20 % to its purchase cost.
The retailer always carries sufficient inventory to cover the next month’s forecast sales.

What is the forecast inventory (to the nearest dollar) at the end of the 2 month of
the year?

The cost of sales in the first month will be 100/120 x 600,000 = 500,000.

Since they are growing at 4% per month, then in the second month they will be
500,000 x 1.04, and in the third month they will be 500,000 x 1.04 x 1.04 (or 500,000 x
1.04^2).

So the inventory at the end of the second month will be 500,000 x 1.04^2 = 540,800

10 A company manufactures two products, X and Y, from the same direct material. An
equal number of each product will be produced this period. Information regarding
costs:
Product X Y
Materials required
Material kg 2 3

The company always holds closing inventory of raw material sufficient for 40 % of
the next period’s production.
The budgeted closing raw material inventory for the previous period is 900 kgs.

What is the budgeted production of X for the current period?

The material for this period’s production will be 900/40% = 2,250 kg.

It takes 5kg to produce 1 unit of each of X and of Y, and therefore they have enough kgs
to produce 2,250/5 – 450 units of X and 450 units of Y.

11 Which of the following is a master budget?

A Labour budget
B Material purchases budget
C Budgeted statement of profit or loss
D Production budget
A master budget is a comprehensive financial plan that outlines an organization's
expected financial results for a specific period, typically a year. It includes various
sub-budgets that are interdependent and integrated to form a complete plan.
The budgeted statement of profit or loss is a key component of the master
budget, as it summarizes the expected revenues, costs, and expenses of the
organization and provides an overall view of the organization's financial
performance.

The other options, such as labor budget, material purchases budget, and
production budget, are sub-budgets that are part of the master budget. These
sub-budgets provide detailed information on specific aspects of the
organization's operations, such as the expected labor costs, material
requirements, and production targets, but they do not provide an overall view of
the organization's financial performance.

12 OC had December sales of 30 000 $.

Anticipated sales during January are 40 000 $, and February sales
are projected at 37 500 $.
40 % of sales are for cash, the remainder on credit terms.
For credit sales OC expects to collect 50 % in the month of sale and 45 % in the
following month.
5 % of accounts receivable are expected to be uncollectible.

How much cash is expected to be received in February?

$37,050
January sales collected in February are $10,800 ($40,000 X 60% X 45%). February cash
sales are $15,000 ($37,500 X 40%). February credit sales collected in February are
$11,250 ($37,500 X 60% X 50%). Total cash collections are $37,050 ($10,800 + $15,000 +
$11,250).

13 BD is preparing a cash budget. An extract from its sales budget shows the following
sales: $
March 60 000
April 70 000
May 55 000
June 65 000

40 % of its sales are expected to be for cash. Of its credit sales,

70 % are expected to pay in the month after sale and take a
2 % discount;
27 % are expected to pay in the following month, and
the remainder are presumed to be irrecoverable.

What amount should be included for receipts from sales in the cash budget for May?

40% of May sales for cash (40% x $55,000) 22,000

70% of April credit sales less 2% discount (70% x 60% x $70,000 x 98%) 28,812
 27% of March credit sales (27% x 60% x $60,000) 9,720
60,532

So in March they receive 40% of March sales, in April 40% of Aprils sales and so on.

The other 60% are on credit.

So 60% of March sales are on credit . 60% of Aprils sales are on credit and so on.

Of the sales on credit, 70% are one month later.

So 60% of March sales are on credit, and 70% of those are received in April (less the
discount). 27% of those 60% are received two months later, in May; and 3% of those
60% are not received at all because they are bad debts.

The same thing happens for each month.

14 The following details have been extracted from the trade receivables records of CL:
%
Invoices paid in 30 days 50
Invoices paid in 60 days 30
Invoices paid in 90 days 15
Irrecoverable debts 5
Invoices are issued on the last day of each month. Customers paying in 30 days are entitled
to to deduct a 3% settlement discount. Credit sales for July to October are budgeted as
follows: $
July 80 000
August 60 000
September 100 000
October 70 000
How much should be included in the cash budget in October for receipts from trade
receivables?

Expected collections for July sales:

 50% paid in 30 days = 50% x $80,000 = $40,000

 30% paid in 60 days = 30% x $80,000 = $24,000
 15% paid in 90 days = 15% x $80,000 = $12,000
 5% irrecoverable debts = 5% x $80,000 = $4,000 Total expected collections = $76,000

Expected collections for August sales:

 50% paid in 30 days = 50% x $60,000 = $30,000

 30% paid in 60 days = 30% x $60,000 = $18,000
 15% paid in 90 days = 15% x $60,000 = $9,000
 5% irrecoverable debts = 5% x $60,000 = $3,000 Total expected collections = $60,000

Expected collections for September sales:

  50% paid in 30 days = 50% x $100,000 = $50,000
 30% paid in 60 days = 30% x $100,000 = $30,000
 15% paid in 90 days = 15% x $100,000 = $15,000
 5% irrecoverable debts = 5% x $100,000 = $5,000 Total expected collections =
$100,000

Expected collections for October sales:

 50% paid in 30 days = 50% x $70,000 = $35,000

 30% paid in 60 days = 30% x $70,000 = $21,000
 15% paid in 90 days = 15% x $70,000 = $10,500
 5% irrecoverable debts = 5% x $70,000 = $3,500 Total expected collections = $70,000

Now, for the collections in October, we need to consider the collections from the July sales
that were paid in 30 days and were entitled to a 3% settlement discount. Therefore, the total
receipts from trade receivables in October would be:

$35,000 (collections from October sales)

 $40,000 x (1 - 3%) (collections from July sales paid in 30 days after settlement
discount)
 $24,000 (collections from July sales paid in 60 days)
 $12,000 (collections from July sales paid in 90 days)
 $3,500 (irrecoverable debts from October sales) = $107,320

Therefore, $107,320 should be included in the cash budget in October for receipts from trade
receivables.

15 Which of the following items would be included in a cash budget?

(1) Depreciation
(2) Allowances for irrecoverable debts
(3) Profit on the sale of equipment
A 1 only
B 2 only
C 3 only
D None of them

only allowances for irrecoverable debts would be included in a cash budget because they
represent cash outflows. Depreciation and profit on the sale of equipment are non-cash
items and would not be included in a cash budget.

16 Which of the following would be included in the cash budget?

(1) Repayment of loan notes
(2) The trade-in value of a car sold in an exchange for a new model
(3) Write-off of an irrecoverable debt
A 1 only
B 2 only
C 1 and 2 only
 D 3 only

both repayment of loan notes and write-off of an irrecoverable debt would be included in a cash
budget because they represent cash outflows.
However, the trade-in value of a car sold in exchange for a new model would not be included in a
cash budget because it represents a non-cash transaction.

17 A company manufactures and sells one product which requires 5 kg of raw material in its
manufacture. The budgeted data relating to the next period are as follows: Units
Sales 21
000
Opening inventory of finished goods 3 500
Closing inventory of finished goods 5 000
Kg
Opening inventory of raw materials 50
000
Closing inventory of raw materials 46
000
What is the quantity of budgeted raw material purchases for next period?

1. material purchases = material usage + closing bal – opening bal

2. units produced=units sold + closing bal – opening bal

units produced = 21 000+5 000 -3500 = 22 500

this means we need to produce 18000 units next period
this means the material usage will be 22 500 x 5 kg =112,500 kg
using eqn 1
material purchase=112,500+46000-50000=108 500

18. A company manufactures a single product. Budgeted production (in

units) for the first three months (M1, M2 and M3) of
next year is as follows: $
M1 4 000
M2 5 000
M3 3 500

Each unit of production uses 3 kg of raw material costing 4

$ per kg.
The budgeted raw material inventory at the end of each month is to be
10 % of the following month’s production.
What are the budgeted raw material purchases for month M2 next year?

In month M2 the company would purchase 90% of its materials needs for that month and
10% of the requirements for month M3. So its materials purchases would be: [0.9×5,000 +
0.1×3,500] ×3×$4 = $58,200.

Because the question says that at the end of each month they have inventory of 10% of the
following months production, it means that at the end of M1 (start of M2) they have 10% of
 M2’s production in inventory. So they already have 500 units which is why they only need
4500 units to have enough for M2.

EXCEL
18 A company manufactures a single product. In a computer spreadsheet the cells F1 to F12
contain the budgeted monthly sales units for the twelve months of next year in sequence
with January sales in cell F1 and finishing with December sales in F12. The company policy
is for the closing inventory of finished goods each month to be 10% of the budgeted sales
units for the following month.
Which of the following formula will generate the budgeted production (in units)
for March next year?
A [F3 + (0.1*F4)]
B [F3 – (0.1*F4)]
C [(1.1*F3) – (0.1*F4)]
D [(0.9*F3) + (0.1*F4)]

20 An accountant wishes to use the following spreadsheet to calculate budgeted production units:

Which formula should be entered in cell B5?

A A = B3 – C4 + B4
B B = B3 – B4
C C = B3 + C4
D D = B3 + C4 – B4

units = sales units + closing inventory of finished goods – opening inventory of finished goods,
and that the opening inventory for August was the closing inventory for July.