Master Budget …..

Feb 2020

Q. 1 Cash Budget and Projected Income Statement (ICMAP May 2000)

On 31st March, 2000, the balance sheet of Apex Limited, retailers of electronic
equipment was as follows:
(Rupees in thousand)
Assets Capital and Liabilities
Equipment at cost 2,000 Ordinary shares 2,000
Depreciation 500 Unappropriated profit 6,000
1,500 Trade creditors 4,000
Stock 2,000 Proposed dividend 1,500
Debtors 1,500
Balance at bank 8,500
13,500 13,500

The company is developing a system of forward planning and on 1 April 2000, collects
the following information:
Credit Cash Credit
Sales Sales Purchases
March 2000 (Actual) 1,500 1,400 4,000
April (Budgeted) 1,800 500 2,300
May (Budgeted) 2,000 600 2,700
June (Budgeted) 2,500 800 2,600

All trade debtors are allowed one month's credit and are expected to settle promptly, the
trade creditors are paid in the month following delivery.
On 1st April, 2000, all the equipments were replaced at a cost of Rs. 3,000. Rs. 1,400
was allowed on the old equipment and a net payment made of Rs. 1,600. Depreciation
is to be provided at the rate of 10% per annum.
The proposed dividend will be paid in June 2000.
The following expenses will be paid
Wages Rs. 300 per month
Administration: Rs. 150 per month.
Rent : Rs. 360 for year to 31st March, 2001, ( to be paid in April 2000)
The gross profit percentage on sales is estimated at 25%.
Required: 12
1 Prepare a cash budget for each of the months, April, May and June 2000.
2 Prepare projected income statement and balance for the three months
ending June 30,2000. 8

Q. 2 Master Budget
The budgeted balance sheet of KTU Ltd as on 28-2-2005 is as follows:
Depreciation
Cost to date Net
Fixed Assets: Rs. Rs. Rs.
Land and Building 500,000 500,000
Machinery 110,000 74,500 35,500
Vehicles 42,000 16,400 25,600
652,000 90,900 561,100
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Current Assets:
Stock of row materials - 500 units 4,320
Stock of finished goods - 110 units * 10,450
Debtors - January Rs. 6,680
February Rs. 15,400 22,080
Cash and bank 6,790
43,640
Less: Creditors - raw materials (3,900)
600,840
Represented by:
Ordinary shares Rs 10 each 400,000
Share premium 160,000
Profit and loss 40,840
600,840
* The stock of finished goods was valued at marginal cost
The estimates for the next four month period are as follows:
March April May June
Sales - units 80 84 96 94
Production - units 80 80 85 85
Purchase of raw materials - units 350 375 450 450
Wages and variable overhead - Rs 5,200 5,200 5,525 5,525
Fixed overhead Rs 1,200 1,200 1,200 1,200

The company intends to sell each unit for Rs. 219 and has estimated that it will have to
pay Rs. 9 per unit for raw material. 5 units of raw materials are needed for each unit of
finished product.
Wages and variable overhead will be at the rate of Rs. 65 per unit.
All sales and purchases of raw materials are on credit. Debtors are allowed two months
credit and suppliers of raw materials are paid after one month's credit. The wages,
variable overheads and fixed overheads are paid in the month in which they are incurred.
It is company's policy to maintain a minimum cash balance of Rs. 5,000.
Cash from a secured loan upto Rs. 150,000 at an interest rate of 10% can be obtained
in the multiple of Rs. 5,000. The loan interest is payable half yearly from September
onwards. It is assumed that loan will be obtained at the beginning of the month while
any repayment is made at the end of the month.
Machinery costing Rs. 60,000 will be purchased by cash in April.
An interim dividend of Rs. 0.50 per share will be paid in June.
Depreciation for the four months including that on the new machinery is:
- machinery Rs. 10,000
- motor vehicle Rs. 1,500
The company uses the FIFO method of stock valuation. Ignore taxation.
Required:
a) Calculate and present the raw materials budget and finished goods budget in terms
of units for each month from March to June.
b) Calculate the corresponding sales budgets and the production cost budget.
c) Prepare cash budget for each of four month.
d) Prepare budgeted trading and profit and loss account for the four months to 30
June and budgeted balance sheet as at 30 June.

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Q3 (a) The management of Opal Limited (OL) is in the process of preparing next year’s
budget and has gathered the following information:
(i) Sales 180,000 units per month @ Rs. 110 per unit
(ii) Material “A” 75% of finished product @ Rs. 45 per unit
(iii) Material “B” 25% of finished product @ Rs. 30 per unit
(iv) Yield 80%
(v) Labour Rate Rs. 18,000 per month
(vi) Average working hours in a month 200 hours
(vii) Time required for each unit of product 20 minutes
(viii) Variable overhead Rs. 15 per unit of raw material consumed
(ix) Fixed Overhead Rs. 10,000,000 per annum

Required:
Assuming there is no beginning or ending inventory of the product, calculate OL’s
budgeted gross profit for the next year. (06 marks)

(b) The Board of Directors of Opal Limited while reviewing next year’s budgeted margins,
as calculated in (a) above, expressed their serious concerns on the projected profits.
After careful analysis of all activities by a cross-functional team of OL, the directors
approved a plan of action to improve the overall performance of the company.
The salient features of their plan are as under:
(i) Import of Material “A” from abroad at a cost of Rs. 48 per unit, this is expected to
improve the overall yield by 12.5%.
(ii) Based on a detailed study, the installation of a new system of production has been
proposed. The expected cost of the system is Rs. 7.5 million with an expected useful
life of 5 years. An incentive scheme for the workers have also been proposed by
allowing them to share 45% of the time saved for making each unit of product.
The above measures are expected to reduce the average time for making each unit of
product by 30%.
(iii) Introduction of improved management standards which is expected to reduce the
variable overheads by 20%.
(iv) Re-assessment of controllable fixed overhead expenses. This is likely to reduce OL’s
existing fixed overheads by 15%.

Required:
In view of the preceding improvement plan and the data provided in (a) above, calculate
OL’s revised budgeted gross profit for the next year. (13 marks)

Q4 Grace Furnitures, a renowned company, makes stylish and modern furniture. The
March company not only sells wide range of furniture locally but also makes some units on
2015 special orders for India. The Chief Executive Officer (CEO) of Grace Furnitures,
Mr. Ahmed is concerned about the recent downturn in local industry and its impact on
company’s operating income. The following income statement shows the current year
financial performance of Grace Furnitures:

Grace Furnitures
Income statement
For the year ended December 31, 2014

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 Rs. ‘000’
Sales Revenue:
Local sales 1,500,000
Special order sales 420,000 1,920,000
Cost of goods sold 1,152,000
Gross margin 768,000
Operating Costs:
Product design cost 50,000
Maintenance cost 230,000
Marketing and advertising cost 100,000
Selling and distributing cost 65,000
Total operating costs 445,000
Operating income 323,000

The Manager of the company, Mr. Hamza, gathered the information about local sales and
pleased to ascertain that downturn is over and sales have been increasing than expected.
Moreover, one of the key competitors in the local market could not survive in recession
period and left the market.

Mr. Hamza predicted that a little more efforts in marketing will grow local as well as
international sales. Further quality improvements and little more marketing will make
following changes in costs and selling price of the next financial year 2015:

over. Since the economic recovery begins, Grace Furnitures is expecting increase
in special order sales from India by 8% units in the next year.

selling price of special order sales will remain unchanged.

stylish and attractive. Resultantly, product design cost is expected to increase by

Rs. 12,000,000.

marketing and advertising cost to Rs. 135,000,000.

customer service who will assemble furniture at customer place. This will increase
maintenance cost by Rs. 75,000,000.

Required:
The CEO of Grace Furnitures wants to know whether the predictions of Mr. Hamza would
result in improved financial performance of the company and asked you to prepare
budgeted income statement for the year ended December 31, 2015. Comment and
support your answer with appropriate calculations. 08

Q5 Beta (Private) Limited (BPL) deals in manufacturing and marketing of bed sheets. The
management of the company is in the phase of preparation of budget for the year 20X3-X4.
BPL has production capacity of 4 million bed sheets per annum. Currently the factory is
operating at 68% of the capacity. The results for the recently concluded year are as follows:
Rs. in million
Sales 3,400

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 Cost of goods sold
Material (1,493)
Labour (367)
Manufacturing overheads (635)
Gross profit 905
Selling expenses (60% variable) (287)
Administration expenses (100% fixed) (105)
Net profit before tax 513

Other relevant information is as under:

(i) The raw material and labour costs are expected to increase by 5%, while selling and
distribution costs will increase by 4% and 8% respectively. All overheads and fixed
expenses except depreciation will increase by 5%.
(ii) Manufacturing overheads include depreciation of Rs. 285 million and other fixed overheads
of Rs. 165 million. During the year 20X3–X4 major overhaul of a machine is planned at a
cost of Rs. 35 million which will increase the remaining life from 5 to 12 years.
The current book value of the machine is Rs. 40 million and it has a salvage value of
Rs. 5 million. At the end of 12 years, salvage value will increase on account of general
inflation to Rs. 9 million. The company uses straight line method for depreciating the assets.

(iii) Variable manufacturing overheads are directly proportional to the production.

(iv) Selling expenses include distribution expenses of Rs. 85 million, which are all variable
(v) Administration expenses include depreciation of Rs. 18 million. During 20X3–X4, an asset
having book value of Rs. 1.5 million will be sold at Rs. 1.8 million. No replacement will be
made during the year. Depreciation for the year 20X3-X4 would reduce to Rs. 17 million.
The management has planned following steps to increase the sale and improve cost efficiency:

introduced besides fixed salaries. The commission will be paid on the entire sale and
the rate of commission will be as follows:
No. of units Commission % on total sales
Less than 35,000 1.00%
35,000 – 40,000 1.25%
40,000 – 50,000 1.50%
Above 50,000 1.75%

Currently the sales force is categorized into categories A, B and C. Number of

persons in each category is 20, 30 and 40 respectively. Previous data shows that total
sales generated by each category is same. Moreover, sales generated by each person in a
particular category is also the same. The trend is expected to continue in future. The overall
efficiency of the workforce can be increased by 15% if management allows a bonus of 20%.
Further increase in production can be achieved by hiring additional labour at Rs. 180 per unit.
Required:
Prepare profit and loss budget for the year 20X3–X4. (20)

Q8 Shahid Limited is engaged in manufacturing and sale of footwear. The company sells its
products through company operated retail outlets as well as through distributors. The
management is in the process of preparing the budget for the year 20X0-X1 on the basis
of following information:
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 (i) The marketing director has provided the following annual sales projections:
No. of units Retail price range
Men 1,200,000 Rs. 1,000 – 4,000
Women 500,000 Rs. 800 – 2,500

The previous pattern of sales indicates that 60% of units are sold at the minimum price;
10% units are sold at the maximum price and remaining 30% at a price of Rs.2,000 and
Rs. 1,200 per footwear for men and women respectively.
(ii) It has been estimated that 30% of the units would be sold through distributors who are offered
20% commission on retail price. The remaining 70% will be sold through company operated
retail outlets.
(iii) The company operates 22 outlets all over the country. The fixed costs per outlet are
Rs. 1.2 million per month and include rent, electricity, maintenance, salaries etc.
(iv) Sales through company outlets include sales of cut size footwears which are sold at 40%
below the normal retail price and represent 5% of the total sales of the retail outlets.
(v) The company keeps a profit margin of 120% on variable cost (excluding distributors’
commission) while calculating the retail price.
(vi) Fixed costs of the factory and head office are Rs. 45 million and Rs. 15 million
per month respectively.

Required:
Prepare budgeted profit and loss account for the year 20X0 – 20X1. (16)

Q9 The home appliances division of Umair Enterprises assembles and markets television sets. The
company has a long term agreement with a foreign supplier for the supply of electronic kits for
its television sets.
Relevant details extracted from the budget for the next financial year are as follows:
Rupees
C&F value of each electronic kit 9,500
Estimated cost of import related expenses, duties etc. 900
Variable cost of local value addition for each set 3,500
Variable selling and admin expenses per set 900
Annual fixed production expenses 12,000,000
Annual fixed selling and admin expenses 9,000,000

Fixed production overheads are allocated on the basis of budgeted production which is 5,000
units.The present supply chain is as follows:
i) The company sells to distributors at cost of production plus 25% mark-up.
(ii) Distributors sell to wholesalers at 10% margin.
(iii) Wholesalers sell to retailers at 4% margin.
(iv) Retailers sell to consumers at retail price i.e. at 10% mark-up on their cost.

Performance of the division had not been satisfactory for the last few years. A business
consulting firm was hired to assess the situation and it has recommended the following steps:
(a) Reduce the existing supply chain by eliminating the distributors and wholesalers.
(b) Reduce the retail price by 5%.
(c) Offer sales commission to retailers at 15% of retail price.
(d) Provide after sales services.
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 (e) Launch advertisement campaign; expected cost of campaign would be around Rs. 5 million.
It is expected that the above steps will increase the demand by 1,500 sets. The average cost of
providing after sales service is estimated at Rs. 450 per set.
Required:
Compute the total budgeted profit:
(i) under the present situation; and
(ii) if the recommendations of the consultants are accepted and implemented.

Q 10 RS Enterprises is a family concern headed by Mr. Rameez. It is engaged in manufacturing of a

single product but under two brand names i.e. A and B. Brand B is of high quality and over the
past many years, the company has been charging a 60% higher price as compared to brand A.
As the company has progressed, Mr. Rameez has felt the need for better planning and control.
He has compiled the following data pertaining to the year ended November 30,20X8:
Rupees
Sales 5,522,400
Production costs:
Raw materials 2,310,000
Direct labour 777,600
Overheads 630,000
Gross profit 1,804,800
Selling and administration expenses 800,000

Product A B
No. of units sold 5400 3600
Labour hours required per unit 5 6
Other information is as follows:
(i) 20% of B was sold to a corporate buyer who was given a discount of 10%. The buyer has
agreed to double the purchases in 20X9 and Mr. Rameez has agreed to increase
the discount to 15%.
(ii) In view of better margins in B, Mr. Rameez has decided to promote its sale at a cost of
Rs. 250,000. As a result, its sales to customers other than the corporate customer, are
expected to increase by 30%. However, the production capacity is limited. He intends to
reduce the production/sale of A if necessary. Mr. Rameez has ascertained that 90% capacity
was utilized during the year ended November 30, 20X8 whereas the time required to produce
one unit of B is 20% more than the time required to produce a unit of A.
(iii) 2.4 kgs of the same raw material is used for both brands but the process of manufacturing
B is slightly complex and 10% of material is wasted in the process. Wastage in processing
A is 4%.
(iv) The price of raw material has remained the same for the past many years. However, the
supplier has indicated that the price will be increased by 10% with effect from March 1, 20X9.
(v) Direct labour per hour is expected to increase by 15%.
(vi) 40% of production overheads are fixed. These are expected to increase by 5%. Variable
overheads per unit of B are twice the variable overheads per unit of A. For 20X9, the effect
of inflation on variable overheads is estimated at 10%.
(vii) Selling and administration expenses (excluding the cost of promotional campaign
on B) are expected to increase by 10%.
Required:
Prepare a profit forecast statement for the year ending November 30, 20X9. (22)
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Q 11 Flexible budget
TJ Ltd is recovering from the recent recession. The directors of the company
hope next year to be operating at 85% of the capacity, although currently the
company is operating at only 65% of capacity output of 10,000 units of the
single product which is produced and sold. One hundred direct workers are
employed on production for 200,000 hours in the current year.
The flexed budget for the current year are:
Rupees in thousands
55% 65% 75%
Direct materials 8,461.5 10,000.0 11,538.5
Direct wages 14,807.7 17,500.0 20,192.3
Production overhead 5,961.7 6,500.0 7,038.3
Selling and distribution overhead 1,923.1 2,000.0 2,076.9
Administration overhead 1,200.0 1,200.0 1,200.0
32,354.0 37,200.0 42,046.0

Profit in any year is budgeted to be 20% of sales

The following percentage increases in costs are expected for next year
Increase %
Direct materials 6.0
Direct wages 3.0
Variable production overhead 7.0
Variable selling & distr. Overhead 7.0
Fixed production overhead 10.0
Fixed selling & distr. overhead 7.5
Administration overhead 10.0
Required:
1 Prepare for next year a flexible budget statement on the assumption
that the company operates at 85% capacity; your statement should
show both contribution and profit. Marks: 15
2 State who is likely to serve on a budget committee operated by TJ Ltd
and explain the purpose of such committee. Marks: 5

Q 12 Francis Company 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 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 (units) 5,000 5,500 500 F
Rs. '000' Rs. '000' Rs. '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) 8 A
Divisional fixed overhead (200) (190) 10 F
100 118 18 F
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 The manager of the appliances division does not believe that the variances calculated
give a fair assessment of his division's performance. He 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 he provides the following information.
1 Budgeted selling price is Rs. 200 and actual selling price was Rs. 196 per unit.
2 Direct material is variable cost.
3 Budgeted direct labour cost has a fixed element of Rs. 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:
Oct. 2004 Sept. 2004
Budgeted output (units) 4,000 3,000
Budgeted cost 210,000 170,000
There is step up of Rs. 50,000 in the fixed element for volume in excess of 4,500 units.
Required:
Prepare a flexed budget for the appliance division for November 2004 and recalculate

Q 13 The Computer division of Bright Vocational Training Institute runs short courses of
Feb 17 `MS Office' and `Advance Excel' at its small campus. The campus has a total capacity
of 20 students per course and can run five courses in a month.
Divisional management planned five courses for the campus in February 2017 and
expect 80 students to participate in these courses. Budgeted data for revenue and
cost of the campus is as under:
Fixed Cost Coaching Fee
Rupees per Month Per Course Per Student
Revenue 4,000
Instructor wages 20,000
Classroom and lab supplies 400
Utilities 10,000 1,000
Campus rent 40,000
Insurance 4,000
Administrative expenses 35,000 2,000 200

The actual operating results for February 2017 were as under:

Rupees
Revenue (after 5% discount offered) 285,000
Instructor wages 82,000
Classroom and lab supplies 20,000
Utilities 15,000
Campus rent (10% rent increased) 44,000
Insurance 4,000
Administrative expenses 45,000
Courses offered (No.) 4
Students enrolled (No.) 75
Required:
Prepare the following budgets for the month of February 2017:
(a) Planning Budget 06
(b)Flexible Budget 06
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