Budget Question MAY 2021 PDF

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FUN FUNCT CT CTION ION IONAL AL / D DEP EP EPART ART ARTMEN MEN MENTAL TAL BU BUDGE DGE DGETS TS A functional budget is one which is related to functions of the business as for example, production budget relating to the manufacturing function. Functional budgets are prepared by heads of each functions and they are subsidiary to the master budget of the business. The various types of functional budgets to be prepared will vary according to the size and nature of the business. The various commonly used functional budgets are: i. ii. iii. iv. v. vi. vii. viii. ix. x.

Sales budget Production budget Direct-material usage budget Direct-material purchased budget Direct-labour budget Factory overhead budget Production cost budget Selling and distribution cost budget Administrative expenses budget Cash budget

The important functional budgets (also known as schedules to master budget) will be carefully illustrated below: 1.

Sales bu budget: dget: The sales budget is an estimate of total sales which may be articulated in financial or quantitative terms. It is normally forms the fundamental basis on which all other budgets are constructed. In practice, quantitative budget is prepared first then it is translated into economic terms. While preparing the Sales Budget, the Quantitative Budget is generally the starting point in the operation of budgetary control because sales become, more often than not, the principal budget factor. The factor to be consider in forecasting sales are as follows:     

Study of past sales to determine trends in the market. Estimates made by salesman various markets of company products. Changes of business policy and method. Government policy, controls, rules and Guidelines etc. Potential market and availability of material and supply.

2. Production budget: The production budget is a forecast of the production for budget period. Usually, the production budget is based on the sales budget. At the time of preparing the budget, the production manager will consider the physical facilities like plant, power, factory space, materials and labour, available for the period. Production budget envisages the production program for achieving the sales target. The budget may be expressed in terms of quantities or money or both. 3.

Material usa usage ge budget: This is a type of budget prepared to show estimates of the materials which are required to meet the production budget. The budget also includes any projected loss or damages that might arise on the use of the material during production.

4.

Material purcha purchased: sed: The direct materials purchase budget is the responsibility of the purchasing manager, since it will be he or she who is responsible for obtaining the planned quantities of raw materials to meet the production requirements. The objective is to purchase these materials at the right time at the planned purchase price.

5. Direc Directt labou labourr bud budget: get: The direct labour budget is the responsibility of the respective managers of each department involved in the production of the finished product(s). They will prepare estimates of the departments ’ labour hours required to meet the planned production. Where different grades of labour exist, these should be specified separately in the budget as well as any idle time or overtime work if any.

BUDGETING QUESTIONS – DUBEM (ACA,B.SC)

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QUE QUEST ST STION ION BANK BANK:: Q1. BU BUNMI NMI Syst Systems ems Lim Limited ited BUNMI System Limited manufactures three products X, Y and Z. Relevant cost data relating to the products are as follows: MATERIALS

UNIT COST

UNITS IN FINAL PRODUCT

(KOBO)

X

Y

Z

A

55

5

4

-

B

50

3

2

6

C

35

-

3

5

D

60

-

1

4

E

80

1

1

-

No losses occurred in the use of materials A, B, C and D. The standard yield of material E is 90%. This is an ideal standard. The expected yield is 80%. During the four-week period, budgeted sales are: Pro Product duct ductss X Y Z

Sale Saless U Units nits 12,000 15,000 10,000

It is anticipated that 5% of the production of product Y will not pass inspection and will be disposed off immediately. The stocks on hand at the beginning of the period are expected to be: FIN FINISHE ISHE ISHED D GOOD GOODS S X Y Z

UN UNITS ITS 1,80 1,800 0 2,00 2,000 0 1,60 1,600 0

MA MATE TE TERIALS RIALS A B C D E

20,0 20,000 00 30,00 30,000 0 15,0 15,000 00 5,00 5,000 0 9,0 9,000 00

It is planned to increase finished goods stocks in order to satisfy orders more quickly. Production in period 1 will be sufficient to increase stocks by 10% by the end of the period. Material stocks however, are considered to be too high and a reduction of 10% is planned by the end of period 1. You are req require uire uired d to pre prepare pare bud budgets gets for; BUDGETING QUESTIONS – DUBEM (ACA,B.SC)

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i) Production (in quantity) ii) Materials usage (in quantity) iii) Materials purchased (in quantity and value). Q2. BU BUDEX DEX Plc Plc.. Budex Plc. wishes to calculate an operating budget for the forthcoming period. Information regarding products, costs and sales levels is as follows: Prod Product uct

A

B

Material required X (kg) Y (litres)

2 1

3 4

Labour hours required Skilled (hrs) Semi-skilled (hrs)

4 2

2 5

2000 30

1500 45

100

200

Sales level (units) Sales price/unit (N N) Opening stocks (units)

Closing stock of materials and finished goods will be sufficient to meet 10% of sales demand on materials and demand. Opening stocks of material X was 300 kg and for material Y was 1000 litres. Material prices are N10 per kg for material X and N7 per litre for material Y. Labour costs are N12 per hour for the skilled workers and N8 per hour for the semi-skilled workers. The warehouse and stores managers have suggested that a provision should be made for damages and deterioration of items held in store, as follows: Pro Product duct A: Loss of 50 units Mate Materia ria riall X: Loss of 350 Kg Pro Product duct B: Loss of 100 units Mate Materia ria riall Y: Loss of 200 Litres Req Require uire uired: d: Produce the following budgets: (a) Sales budget in units and value (b) production (units); (c) materials usage (kg and litres); (d) materials purchase (kg, litres and value); and (e) labour (hours and value). Q3 Q3.. AB ABATA ATA PLC. AB ABATA ATA PLC. Manufactures and sells three sizes of extendable ladder for the use of PHCH in sizes of 3-metre, 5metre and 10-metre, information relating to each of these is given below: 3-m 3-metre etre N 300

5-m 5-metre etre N 580

10 10-met -met -metre/ re/ N 950

Aluminum 3.5/6/12 metres @ N20

70

120

240

Fixing 100/200/400 @ N0.1

10

20

40

Direct labour; 0.1/0.5/1.0 hrs @N80

8

40

80

Standard data per unit Selling price Raw material costs:

BUDGETING QUESTIONS – DUBEM (ACA,B.SC)

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Anticipated sales volume in current year (units) Anticipated stock level at end of current year Finished goods (units) Raw materials: Aluminum (Total)

20,000

15,000

4,000

2,000

16,000 metres

Fixing (Total)

60,000 units

10,000 800

At the end of next year, management wishes stocks of both finished goods and raw materials to be 25% lower than anticipated levels at the end of the current year. It is expected that sales volume next year will be 20% higher than the current year for both 3-metre and 5-metre ladders, and 10% lower than the current year for 10-metre ladders. Each of the company’s direct workers has a 35-hour working week for 48 weeks with only 75% being productive, the rest being lost to sickness, machine which are used to staple and fix the ladders, each being capable of producing any length of ladder. Req Require uire uired: d: Prepare the following functional budgets for ABATA PLC. For next year a) Sales in units and revenue for each product and in total b) Production in units for each product c) Material usage in metres and units for aluminum and fixing d) Material purchases in metres and units for aluminum and fixing along with the purchase costs for each type and total. e) Direct labour hours for budgeted output for each product and in total, plus the number of direct workers required for overall production. Q4. AB ABAX AX LI LIMIT MIT MITED ED You have recently been appointed as the management accountant to Abax Limited, a small company manufacturing two products. Dab and CAB both products use the same type of material and labour but in different proportions in the past. The company has had poor control over its working capital. To remedy this, you have recommended to the directors that a budgetary control system be introduced. This proposal has been approved by the board. Because Abax Limited’s production and sales are spread evenly over the years, it was agreed that the annual budget should be broken down into four periods, each of 13 weeks, commencing with the 13 weeks ending April 4. To help you in this task, the sales and production directors have provided you with the following information: (i)

Marketing and production data: Budgeted sales for 13 weeks (units) Material content per unit (kilograms) Labour per unit (standard hour)

DAB

CAB

845 7

1235 8

8

5

(ii) Production Labour: Each of the 24 production employees works a 37-hour, five-day week at N80 per hour. Any hours in excess of these will require Abax Limited to pay an overtime premium of 25%. Because of technical problems, this will continue over the next 13 weeks, employees are only able to work at 95% efficiency compared to standard. (iii) Purchasing and Opening Inventory: The production director estimates that raw material will cost N120 per kilogram over the budget period. He also plans to revise the quantity of raw materials inventory held in stock. He estimates that the raw materials inventory levels at commencement of the budget period will be as follows: BUDGETING QUESTIONS – DUBEM (ACA,B.SC)

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Raw material 2,328 kilograms

DAB 163 units

CAB 361 units

(iv) Closing Inventory: At the end of the 13- week period, closing inventories are planned to change on the assumption that production and sales volumes for the second budget period will be similar to those in the first period: • raw material inventory should be sufficient 13 days production: • finished inventory of DAB should be equivalent to 6 days sales volume: • finished inventory of CAB should be equivalent to 14 days sales volume: Req Require uire uired d Prepare in the form of a statement the following information for the 13- week period ended April 4: i. the production budget in units for DAB and CAB; (3 Marks) ii. the purchasing budget for Abax Limited in units: (4 Marks) iii. the production labour budget for Abax Limited in hours: (5 Marks) iv. the cost of production labour for the period. (2 Marks)

FLE FLEXIB XIB XIBLE LE B BUDG UDG UDGET ET The Chartered Institute of Management Accountants, London defines flexible budget as a budget which by recognizing different cost behaviour patterns, is designed to change as volume of output changes. It is a budget prepared in a manner so as to give the budgeted cost for any level of activity. It is a budget which by recognizing the difference between fixed, semi-fixed and variable cost is designed to change in relation to the activity attained. It is designed to furnish budgeted cost at any level of activity attained. Flexible budgeting is desirable in the following cases: (i) Where the level of activity during the year varies from period to period, either due to the seasonal nature of the industry or to variation in demand. (ii) Where the business is a new one and is difficult to foresee the demand. (iii) Where the undertaking is suffering from shortage of a factor of production such as materials, labour, plant capacity, etc. The main characteristic of flexible budget is that it shows the expenditure appropriate to various levels of output. If the volume changes the expenditure appropriate to it can be established from the flexible budget for comparison with actual expenditure as a means of control. It provides a logical comparison of budget allowances with actual cost. When flexible budget is prepared, actual cost at actual activity is compared with budgeted cost at actual activity i.e. two things to a like base. For preparation of flexible budget, items of cost have to be analyzed individually to determine how different items of cost behave to change in volume. Therefore, in-depth cost analysis and cost identification is required for preparation of flexible budget.

Q5. TAYO BOX FABRICATORS Sales Director of Tayo Box Fabricators has become aware of the disadvantages of static budget. The Director asks you as the Management Accountant to prepare a flexible budget for October 2018 for its main brand of boxes. The following data are available for the actual operation in September 2018: Boxes produced and sold BUDGETING QUESTIONS – DUBEM (ACA,B.SC)

4,500 units PAGE 5

Direct materials costs Direct Manufacturing labour costs Depreciation and other fixed Manufacturing costs Average selling price per box Fixed marketing costs

N180,000 N135,000 N101,400 N140 N162,700

Assume no stock of boxes at the beginning or end of the period. A 10% increase in the selling price is expected in October. The only variable marketing cost is a commission of N0.50 per unit paid to the manufacturer’s representatives, who bear all their own costs of travelling, entertaining customers, e.t.c... A patent royalty of N2 per box manufactured is paid to an independent design firm. Salary increases that will become effective in October are N12,000 per year for the production supervisor and N15,000 per year for sales manager. A 10% increase in direct material prices is expected to become effective in October. No changes are expected in direct manufacturing labour wage rates or in the productivity of the direct manufacturing labour personnel standard costs for any of its inputs. You are required to: Prepare flexible budget for October 2018 showing budgeted amounts at each of these output levels of boxes, 4,000 units, 5,000 units and 6,000 units. Q6. OTIWOLE INC. The budgeted level of output for OTIWOLE INC. is 18,000 hours per period and it is desire to produce a flexible budget for its factory overhead. The rate of pay for direct labour is N1 per 1 hour. The following is available: Variable cost: indirect labour per direct labour hour. N1

Fixed cost:

Consumable supplies

N10 kobo

Power

N25 kobo

Holiday and sick pay

5% of direct labour

Rent rate per period

N6,000

Depreciation per period

N3,500

Head office charges

N2,000

Supervision for period

N4,000

Semi-variable cost – for this purpose, these costs may be regarded as partly fixed and partly variable. The previous 4 months’ costs compared with direct labour hours worked were as follows: Months

Direct Labour Hours

Semi-Variable Costs

1

17,600

N13,200

2

16,400

N12,600

3

17,000

N12,900

4

18,800

N13,800

You are required to:

BUDGETING QUESTIONS – DUBEM (ACA,B.SC)

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1. Prepare a flexible budget for the company at 80%, 90% and 110% of the budgeted level of output. 2. Calculate the total overhead rate per direct labour hour that would absorb the budgeted cost of the company. Divide the rate into its variable and fixed components. Q7. GO-DOWN-LOW NIGERIA LTD. Go-Down-Low Nigeria Ltd. had the following budgeted sales and production units for the first three quarters of the year ending 31 December, 2017. Quarters 1st Units

2nd units

3rd units

Sales

1,000

1,200

1,500

Production

1,200

1,500

1,800

The standard selling price is N50 per unit, and the budgeted costs, based on the production output figures for the first quarter are:

Quarters 1st N

2nd N

3rd N

Direct materials

12,000

15,000

18,000

Direct labour

24,000

30,000

36,000

Production overheads

14,000

15,500

17,000

Selling and administration O’H

6,700

7,000

7,300

Depreciation included in overhead costs is: Production overhead – N2,000 per quarter Selling and administration O’H – N500 per quarter. In the fourth quarter, the unit cost for direct labour is budgeted to reduce to 80% of the unit cost in the third quarter. The unit cost of direct materials in the fourth quarter is budgeted to increase by 10% over that of the third quarter. The variable portions of cost fluctuate with output; the fixed portions are not affected by output levels. Sales in the fourth quarter are uncertain and could be within the range of 2,000 to 2,500 units. Customers are allowed a two-month credit period and suppliers of direct materials allow three months’ credit. Wages and overheads are paid as incurred. Required: a) Prepare flexible budget figures for the fourth quarter showing sales, cost and profit figures, assuming sales and production to be BUDGETING QUESTIONS – DUBEM (ACA,B.SC)

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i) 2,000 units ii) 2,200 units iii) 2,500 units Overhead costs should be analyzed under variable and fixed headings with supporting calculations. b) Show the budgeted cash flow figures for the fourth quarter for the three sales and production levels is (a) above. Q.8 PAPAPA LIMITED Papapa Limited is currently producing at 40% capacity as a result of global meltdown. The following data have been extracted from the company’s records: PRODUCTION CAPACITY

30% N

50% N

75% N

Direct materials

300,000

500,000

750,000

Direct labour

600,000

1,000,000

1,500,000

Direct expenses

150,000

250,000

375,000

Production overhead

220,000

300,000

400,000

Administrative and selling overheads

240,000

300,000

375,000

a) You are required to prepare a flexible budget at 40%, 60% and 90% if mark-up is 40%. b) Assuming 100% capacity utilization is 100,000 units, you are required to state the unit selling prices at 40%, 60% and 90% capacity utilization. Q9. ABC PLC. ABC Plc. is a manufacturing company, which makes a product Zeta. The budgeted monthly production and sales are 200,000 units. A standard cost has been estimated on the basis of direct costs of N7.00 for materials (2kg @ N3.50 per kg) and N6.00 for wages (h...