BUDGET REVIEW QUESTIONS
Question 1
Wollongong wishes to calculate an operating budget for the forthcoming period.
Information regarding products, costs and sales levels is as follows:
Product A B
Materials required
X (kg) 2 3
Y (litres) 1 4
Labour hours required
Skilled (hours) 4 2
Semi-skilled (hours) 2 5
Sales level (units) 2000 1500
Opening stocks (units) 100 200
Closing stock of materials and finished goods will be sufficient to meet 10% of demand.
Opening stocks of material X was 300 kg and for material Y was 1000 litres. Material
prices are £10 per kg for material X and £7 per litre for material Y. Labour costs are £12
per hour for the skilled workers and £8 per hour for the semi-skilled workers.
Required:
Produce the following budgets:
a. Production (units);
b. Materials usage (kg and litres);
c. Materials purchases (kg, litres and £); and
d. Labour (hours and £).
Question 2
A division of Bud plc is engaged in the manual assembly of finished products F1 and F2
from bought-in components. These products are sold to external customers. The
budgeted sales volumes and prices for Month 9 are as follows:
Product Units Price
F1 34 000 £50.00
F2 58 000 £30.00
Finished goods stockholding budgeted for the end of Month 9, is 1000 units of F1 and
2000 units of F2, with no stock at the beginning of that month. The purchased
components C3 and C4 are used in the finished products in the quantities shown below.
The unit price is for just-in-time delivery of the components; the company holds no
component stocks.
Component
Product C3 C4
F1 (per unit) 8 units 4 units
F2 (per unit) 4 units 3 units
Price (each) £1.25 £1.80
The standard direct labour times and labour rates and the budgeted monthly
manufacturing overhead costs for the assembly and finishing departments for Month 9
are given below:
Product Assembly Finishing
F1 (per unit) 30 minutes 12 minutes
F2 (per unit) 15 minutes 10 minutes
Labour rate (per hour) £5.00 £6.00
Manufacturing overhead
cost for the month £617 500 £204 000
Every month a predetermined direct labour hour recovery rate is computed in each
department for manufacturing overhead and applied to items produced in that month.
The selling overhead of £344 000 per month is applied to products based on a
predetermined percentage of the budgeted sales value in each month.
Required:
a. Prepare summaries of the following budgets for Month 9:
i. Component purchase and usage (units and value);
ii. Direct labour (hours and value);
iii. Departmental manufacturing overhead recovery rates;
iv. Selling overhead recovery rate;
v. Stock value at the month-end.
b. Tabulate the standard unit cost and profit of each of F1 and F2 in Month 9.
c. Prepare a budgeted profit and loss account for Month 9 which clearly
incorporates the budget values obtained in (a) above.
d. Explain clearly the implications of the company’s treatment of manufacturing
overheads, i.e. computing a monthly overhead rate, compared to a
predetermined overhead rate prepared annually.
Question 3
A redundant manager who received compensation of £80 000 decides to commence
business on 4 January, manufacturing a product for which he knows there is a ready
market. He intends to employ some of his former workers who were also made
redundant but they will not all commence on 4 January. Suitable premises have been
found to rent and second-hand machinery costing £60 000 has been bought out of the
£80 000. This machinery has an estimated life of five years from January and no residual
value.
Other data
1.Production will begin on 4 January and 25% of the following month’s sales will be
manufactured in January. Each month thereafter the production will consist of 75% of
the current month’s sales and 25% of the following month’s sales.
2. Estimated sales are
(Units) (£)
January Nil Nil
February 3200 80 000
March 3600 90 000
April 4000 100 000
May 4000 100 000
3. Variable production cost per unit
(£)
Direct materials 7
Direct wages 6
Variable overhead 2
15
4. Raw material stocks costing £10 000 have been purchased (out of the manager’s £80
000) to enable production to commence and it is intended to buy, each month, 50% of
the materials required for the following month’s production requirements. The other
50% will be purchased in the month of production. Payment will be made 30 days after
purchase.
5. Direct workers have agreed to have their wages paid into bank accounts on the
seventh working day of each month in respect of the previous month’s earnings.
6. Variable production overhead: 60% is to be paid in the month following the month it
was incurred and 40% is to be paid one month later.
7. Fixed overheads are £4000 per month. One quarter of this is paid in the month
incurred, one half in the following month, and the remainder represents depreciation
on the second-hand machinery.
8. Amounts receivable: a 5% cash discount is allowed for payment in the current month
and 20% of each month’s sales qualify for this discount. 50% of each month’s sales are
received in the following month, 20% in the third month and 8% in the fourth month.
The balance of 2% represents anticipated bad debts.
You are required to:
(a) (i) Prepare a cash budget for each of the first four months, assuming that overdraft
facilities will be available;
(ii) State the amount receivable from customers in may;
(b) Describe briefly the benefits to cash budgeting from the use of a particular type of
software package.
Question 4
The following data and estimates are available for ABC Limited for June, July and
August.
June July August
(£) (£) (£)
Sales 45 000 50 000 60 000
Wages 12 000 13 000 14 500
Overheads 8 500 9 500 9 000
The following information is available regarding direct materials:
June July August September
(£) (£) (£) (£)
Opening stock 5000 3500 6 000 4000
Material usage 8000 9000 10 000
Notes:
1. 10% of sales are for cash, the balance is received the following month. The amount
received in June for May’s sales is £29 500.
2. Wages are paid in the month they are incurred.
3. Overheads include £1500 per month for depreciation. Overheads are settled the
month following. £6500 is to be paid in June for May’s overheads.
4. Purchases of direct materials are paid for in the month purchased.
5. The opening cash balance in June is £11 750.
6. A tax bill of £25 000 is to be paid in July.
Required:
(a) Calculate the amount of direct material purchases in each of the months of June, July
and August.
(b) Prepare cash budgets for June, July and August.
(c) Describe briefly the advantages of preparing cash budgets.
