A Level

9706
Accounting

[BUDGETING]
By Muhammad Luqman
 Budgeting
Page
Name Year
No.
1 Echoes plc 9706/41/M/J/11 1
2 Gala Ltd 9706/43/M/J/11 3
3 Ada Campellini 9706/42/O/N/11 4
4 Zeresh Limited 9706/41/M/J/13 5
5 Riffatulah 9706/43/o/N/13 6
6 MW Limited 9706/43/M/J/14 8
7 Drosnan Retail Limited 9706/42/O/N/14 9
8 Seko Limited 9706/43/O/N/14 10
9 Slanting Stores Limited 9706/32/O/N/16 12
10 Sunil 9706/33/O/N/16 13
11 J Limited 9706/32/O/N/17 14
12 Luke’s 9706/33/O/N/17 15
13 Hyung Min 9706/32/F/M/18 16
14 C Limited 9706/31/M/J/18 17
15 Stanley 9706/32/O/N/18 19
16 Abida 9706/32/O/N/19 20
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3 Echoes plc has the following statement of financial position (balance sheet) at 30 April 2011.

$000 $000 $000

Cost Depreciation NBV

Non-current assets
Land and buildings 1200 50 1150
Equipment 230 90 140
Motor vehicles 210 115 95
1640 255 1385
Current assets
Inventory 150
Trade receivables 122
Prepaid rates and insurance 8
280
Current liabilities
Trade payables 75
Tax 30
Cash and cash equivalents 15 120
160
1545
Equity
Ordinary shares of $0.50 each 800
Share premium 100
Retained earnings 645
1545

Sales and purchases budgets have been produced for Echoes plc for the year ending
30 April 2012 as follows:

$000 $000
Sales Purchases
May to February 1060 560
March 100 60
April 100 60
Total 1260 680

Other information is as follows:

1 All sales are on credit.

50% of customers pay in the month after sale and the remaining customers pay in the
second month.

On 1 May 2011 the company is introducing a 5% cash discount for customers paying in
the month after sale, applicable to sales made on or after that date.
Discount will only be accounted for when funds are received.

2 Purchases accrue evenly over the month. The company pays its suppliers 1½ months
after receipt of goods.

3 The company pays rates six months in advance on 1 June and 1 December each year.
Each payment amounts to $9000.

4 The company pays an annual premium for insurance, in advance, on 1 October each
year. It is expected that in 2011 the premium will be $30 000.
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5 All other selling, distribution and administration payments for the year, including wages
and salaries, are expected to amount to $184 000.

6 The company plans to modernise its equipment and upgrade its vehicles during the year.

It plans to sell all the vehicles for $80 000 and buy new ones at a total cost of $400 000.

It also plans to sell half the equipment for $75 000 and replace it with new equipment
costing $310 000.

7 The cost of land and buildings is split $800 000 for the land and $400 000 for the
buildings.

8 The company provides a full year’s depreciation on non-current assets purchased during
the year but none in the year of disposal. Annual depreciation rates are:

Buildings 2.5% on cost

Equipment 20% on cost
Motor vehicles 30% on net book value

9 The company plans to issue 100 000 new shares at a price of $1.70 on 1 July 2011 to
part fund the purchase of the non-current assets.

It also plans to issue $300 000 6% debentures, redeemable in 2028, on 1 July 2011. The
first interest payment on the debentures will be paid on 30 April 2012.

10 Tax is provided for at 20% of profit after finance charges and is paid ten months after the
financial year end.

11 Inventory is expected to increase by 10% over the year.

12 The company intends to pay a dividend of $0.03 per share on 30 June 2011.

REQUIRED

(a) Calculate the bank balance expected on 30 April 2012. [14]

(b) Prepare the forecast income statement (profit and loss account) for the year ending
30 April 2012. [12]

(c) Prepare the statement of financial position (balance sheet) at 30 April 2012. [14]

[Total: 40]

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3 Gala Ltd manufactures one product, the Durrell. Its sales for a six month period are expected
to be:

2011 Durrells
July 800
August 1050
September 1400
October 1100
November 950
December 850

On 1 July Gala Ltd expects to have 100 Durrells in inventory. It intends to hold inventory levels of
250 Durrells at the end of July and August, 200 at the end of September and October, and 100
thereafter.

REQUIRED

(a) Prepare a monthly production budget for Gala Ltd for the six months July to December. [6]

Each Durrell requires 2 kilos of raw material. Until 31 August this is expected to cost $4 per kilo
and $4.50 from 1 September to 30 November and $5 per kilo thereafter.

REQUIRED

(b) Prepare a monthly raw materials purchasing budget for the six months July to December. [6]

Selling prices for the Durrell are expected to be $190 each in July, August and September and
$200 each thereafter.

All sales are on credit.

50% of debtors pay in the month following sale and receive 4% cash discount, and the remainder
pay in the second month following sale.

REQUIRED

(c) Calculate the expected value of trade receivables on 1 September. [2]

(d) Prepare a monthly trade receivables budget for the four months September to December.
[21]

(e) State three advantages to Gala Ltd of using budgets. [3]

(f) (i) Name one item which may appear in an income statement (profit and loss account)
which cannot appear in a cash budget. [1]
(ii) Name one item which may appear in a cash budget which cannot appear in an income
statement (profit and loss account). [1]

[Total: 40]

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every
reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the
publisher will be pleased to make amends at the earliest possible opportunity.

University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of
Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

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3 Ada Campellini runs a business which retails high quality clothing. It is particularly busy during the
festive season.

The budgeted sales and purchases figures for September 2012 to January 2013 are as follows:

September October November December January

$ $ $ $ $
Sales 215 000 225 000 310 000 425 000 195 000
Purchases 175 000 190 000 245 000 135 000 135 000

Additional information:

1 50% of sales are expected to be paid for by cash and these customers will receive a 6%
discount.
50% of the remaining sales are expected to be paid in the following month and these
customers will receive a 3% discount.
The remainder will pay 2 months after the sale.

2 30% of purchases are expected to be paid for in the month of purchase and will receive a 4%
discount.
40% of purchases are expected to be paid for in the month after purchase and will receive a
2% discount.
The remainder are paid for 2 months after purchase.

3 The inventories held on 1 November 2012 are budgeted at $180 000.

The inventories held on 31 January 2013 are budgeted at $129 000.

4 Total general expenses are budgeted at $18 000 in November 2012 with an expected 10%
rise in December and a 15% reduction (on the December total) in January 2013.
All general expenses are expected to be paid in full in the month in which they occur.

5 The depreciation on the non-current assets acquired before November 2012 will be $1 750
per month.

6 On 1 November 2012 Ada will acquire a new storage system at a cost of $24 000 and will pay
50% of the cost immediately. The remainder will be paid in equal instalments over the following
12 months without any interest charges.

This new non-current asset will be depreciated at 10% per annum on a monthly basis.

7 Ada will make drawings of $3 000 every month except for December 2012. In this month she
expects to draw 1.5% of the month’s expected sales.

8 The bank balance at 1 November 2012 is expected to be $34 850.

REQUIRED:

(a) Prepare a cash budget, in columnar format, for the 3 months commencing with November 2012.
[30]

(b) Prepare a budgeted income statement (profit and loss account) in as much detail as possible
from the given information for this 3 month period ending in January 2013. [10]

[Total: 40]

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3 Zeresh Limited provides the following information from its sales budget for 2014.

Units Sales price per unit

$
January 10 000 20
February 11 000 20
March 11 000 21
April 12 000 21
May 12 000 21
June 14 000 24

Additional information

Inventory of finished goods at each month end is maintained at 20% of the units expected to
be sold in the following month.

Each unit requires 0.5 kilos of raw materials, which costs $3 a kilo.

Half a month’s inventory of raw materials is maintained, based on the expected usage in the
following month.

The total production cost of each unit is $11 and this is the value used for inventory
valuation.

REQUIRED

(a) (i) Prepare the production budget for each of the five months January to May 2014. [11]

(ii) Prepare the purchases budget for raw materials for each of the four months January to
April 2014. Show purchases of raw materials in both kilos and dollars. [9]

(b) Calculate the value of finished goods and raw materials inventory at both 1 January 2014
and 30 April 2014. [4]

(c) (i) Prepare a summarised manufacturing account for the four month period ending
30 April 2014. [6]

(ii) Prepare the trading account section of the income statement for the same period. [6]

(d) State two advantages and two disadvantages to a company of using a budgetary control
system. [4]

[Total: 40]

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3 Riffatulah, a retailer, is preparing his budgets for the year ending 31 May 2014. He provides the
following information.

Statement of Financial Position at 31 May 2013

$ $ $
Assets
Non-current assets Cost Depreciation Net book value
Fixtures and fittings 19 200 7 100 12 100
Vehicle 15 100 11 200 3 900
34 300 18 300 16 000

Current assets
Inventories 4 800
Trade receivables 11 900
Other receivables (insurance) 350
Cash and cash equivalents 6 600
23 650
Total assets 39 650

Capital
Total capital 25 550

Liabilities
Non-current liabilities
Bank loan (6%) 8 000
Current liabilities
Trade payables 6 100
Total liabilities 14 100

Total capital and liabilities 39 650

He prepares budgets using three month periods as follows:

Period
1 1 June to 31 August
2 1 September to 30 November
3 1 December to 28 February
4 1 March to 31 May

He provides the following budgeted information for the year ending 31 May 2014.

Period 1 2 3 4
Sales (units) 4200 4800 4600 4500
Unit selling price $3.10 $3.20 $3.40 $3.30

Purchases (units) 4700 4600 4500 4500

Unit purchase price $1.20 $1.30 $1.30 $1.40

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Schedule of receipts and payments

1 2 3 4
$ $ $ $
Receipts
Customer receipts 16 500 14 200 14 000 15 000
Proceeds of vehicle sale 3 400
Legacy from uncle 5 000
Total receipts 16 500 19 200 17 400 15 000
Payments
Supplier payments 5 800 5 700 5 200 4 000
Purchase of new vehicle 18 000
Purchase of fixtures 3 800
Rent 2 500 2 500 2 500 2 500
Loan interest 240
Drawings 3 000 4 000 3 000 5 000
Insurance 2 000
Administration costs 2 400 2 600 2 600 2 700
Total payments 13 700 20 840 31 300 14 200

Additional information

1 Inventory on 31 May 2014 is expected to have a value of $5100.

2 Discount allowed for the year is expected to be 2% of total sales. Bad debts are
expected to be 1% of total sales.

3 Discount received is expected to be 1% of purchases.

4 Riffatulah depreciates vehicles at a rate of 40% a year on the reducing balance basis.
He depreciates fixtures and fittings at a rate of 10% a year on cost. He provides a full
year’s depreciation in the year of purchase and none in the year of disposal. He only
keeps one vehicle at a time.

5 The insurance policy runs from 1 September to 31 August each year.

REQUIRED

(a) Prepare a budgeted income statement for the year ending 31 May 2014. [13]

(b) Prepare a budgeted statement of financial position at 31 May 2014. [17]

(c) Using only figures from your answers to (a) and (b), calculate Riffatulah’s working capital
cycle. [7]

(d) Suggest three ways Riffatulah could improve his working capital cycle and reduce his bank
overdraft. [3]

[Total: 40]

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3 MW Limited manufactures a single product, a Tu. The finance director prepares monthly budgets.

The following budgeted information is available for the first three months of 2015.

1 The selling price will be fixed at $60 per unit. In January 2015 sales are expected to be
24 000 units. It is anticipated that there will be a 5% increase in sales volume in every
subsequent month up to April 2015.

2 The finished goods inventory level at the end of each month will be maintained at one-third of
the expected sales volume in the following month. The inventory of finished goods at
31 December 2014 is expected to be 7 500 units with a value of $242 000. The finished
goods inventory value at 31 March 2015 is expected to be $298 000.

3 Each unit of Tu requires 10 kilos of raw material. The closing inventory of raw materials each
month is expected to meet 20% of the production requirement of the following month. The
inventory of raw materials at 31 December 2014 is expected to be 48 000 kilos. The
purchase price will remain at $1.50 per kilo.

4 Direct labour for the first three months of 2015 is expected to be $850 000. Manufacturing
overhead is expected to be 50% of direct labour.

REQUIRED

(a) Prepare the sales budget for the period January to March 2015. State the units and revenue
for each month. [6]

(b) Prepare the production budget for the period January to March 2015. State the units for each
month. [9]

(c) Prepare the purchases budgets for the period January to March 2015. State the units and
cost for each month. [15]

(d) Prepare the budgeted trading section of the income statement for the three months ending
31 March 2015. [10]

[Total: 40]

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3 The directors of Drosnan Retail Limited provide the following budgeted information.

Revenue Purchases Monthly Administration

depreciation costs
2014 $ $ $ $
November 24 000 14 000 120 6 300
December 26 000 17 000 120 6 200
2015
January 30 000 18 000 120 6 200
February 26 000 15 000 120 6 800
March 28 000 19 000 150 7 100
April 32 000 13 000 150 6 700

Other information is as follows.

1. 10% of all revenue are cash sales.

2. 50% of credit customers pay in the month following the sale and receive a 4% cash
discount. Remaining trade receivables pay in the second month following the sale.

3. All purchases are on credit and are paid for in the month following purchase, after
deducting a 5% early settlement discount.

4. The business rent is $9000 a year. This is paid in two equal instalments on 1 February
and 1 August each year.

5. A dividend of $3100 is expected to be paid on 19 January 2015.

6. Administration costs are paid in the month after the one in which they are incurred.

7. The company expects to take out a bank loan of $10 000 with an interest rate of 7.8%
per annum on 1 March 2015. This is to help finance the purchase of a new vehicle in
March which is expected to cost $12 000. The loan is to be repaid in full together with the
interest after one year.

8. The company directors intend to sell an old vehicle in April 2015. This originally cost
$7200 and by the date of disposal will have accumulated depreciation of $5100. The
sales proceeds are anticipated to be $1100.

9. Inventory on 1 January 2015 is expected to have a value of $2100. Inventory on

30 April 2015 is expected to be valued at $3800.

10. It is expected that there will be a bank overdraft of $1303 on 1 January 2015.

REQUIRED

(a) Prepare a cash budget for each of the four months January to April 2015. [15]

(b) Prepare a budgeted income statement for the four month period ending 30 April 2015. [14]

(c) Explain two reasons why the change in the bank balance calculated in (a) is different from
the profit figure in (b). [4]

(d) State two reasons why management prepares a cash budget. [2]

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2 The financial statements of Seko Limited for the year ended 30 June 2014 were as follows.

Income statement for the year ended 30 June 2014

$000 $000
Revenue 3000
Cost of goods sold 1650
Gross profit 1350

Operating expenses
Administrative salaries 700
Heating and lighting 98
Rent and rates 340
Depreciation on plant and machinery 60
Depreciation on motor vehicles 48
Bad debts 4
Sundry expenses 72 1322
Profit for the year 28

Statement of financial position at 30 June 2014

$000 $000
Assets
Non-current assets
Plant and machinery 300
Accumulated provision for depreciation 160 140

Motor vehicles 240

Accumulated provision for depreciation 150 90
230

Current assets
Inventory 120
Trade receivables 245
Cash and cash equivalents 86
451

Total assets 681

Equity and liabilities

Equity and reserves

200 000 ordinary shares of $1 each 200
Retained earnings 286
486
Current liabilities
Trade payables 186
Accrued administrative salaries 9
Total liabilities 195

Total equity and liabilities 681

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Seko Limited plans to expand its business in the following year and would like to prepare a
budget for the year ending 30 June 2015.

1 Additional plant and machinery $220 000 and motor vehicles $130 000 are to be purchased
on 1 July 2014.

To finance the non-current assets, a 4-year 10% loan $100 000 and a new issue of 250 000
ordinary shares at $1 each will be raised on the same day. The first payment of loan interest
and capital will be made on 1 July 2015.

2 Sales volume is expected to increase by 60% and the selling price is expected to increase by
10%.

3 Gross profit as a percentage of sales is expected to decrease by 5%.

4 Sales and purchases are expected to be made evenly during the year. All sales and
purchases are on credit. The sales credit period will be one month while the purchases credit
period will be two months.

5 The closing inventory is expected to be $180 000 on 30 June 2015.

6 Two salesmen will be employed to strengthen the selling activities. Apart from their total
annual salaries of $123 000, the salesmen will be entitled to:

Commission – 3% of gross sales (payable in July 2015)

Bonus – 5% of the profit for the year after charging the bonus (payable in July 2015)

7 All other expenses are expected to increase by 5% in line with the expected inflation rate.

8 Depreciation on non-current assets held at 30 June 2015 will be charged at 20% on the
straight-line basis.

9 No bad debts are anticipated. However, a provision for doubtful debts will be made at 2% of
the trade receivables at the year end.

REQUIRED

(a) Prepare the budgeted income statement for the year ending 30 June 2015. [16]

(b) Prepare the budgeted bank account for the year ending 30 June 2015. [8]

(c) Prepare the budgeted statement of financial position at 30 June 2015. [12]

(d) Explain two reasons why a business prepares a budget. [4]

[Total: 40]

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6 The directors of Slanting Stores Limited have prepared a cash budget.

REQUIRED

(a) (i) State one difference between a cash budget and a statement of cash flows. [1]

(ii) State two benefits of preparing a cash budget. [2]

Additional information

Slanting Stores Limited makes all its sales on credit. Half of all credit customers pay in the month
of sale, receiving a cash discount for early payment. The remainder pay in the following month.
Purchases for resale are paid for in the month after purchase.

The cash budget for the three months ending 31 March 2017 is as follows:

Cash budget for the three months ending 31 March 2017

January February March

$ $ $
Opening balance 17 800 17 300 (1 600)
Receipts – month of sale 28 500 26 125 30 875
Receipts – month following sale 40 000 30 000 27 500
Payments to suppliers (44 000) (33 000) (35 750)
Wages (10 000) (10 125) (8 575)
Other expenses (15 000) (14 800) (12 200)
Dividend paid – (8 000) –
Purchase of non-current asset – (9 100) –
Closing balance 17 300 (1 600) 250

REQUIRED

(b) Calculate

(i) the value of sales for each of the three months January to March 2017, [3]

(ii) the value of cash discount for each of the three months January to March 2017, [3]

(iii) the rate of cash discount given. [1]

(c) Prepare the trade receivables budget for each of the three months January to March 2017.
Trade receivables at 1 January 2017 are expected to be $40 000. [8]

Additional information

The directors wish to eliminate the expected deficit in cash at the end of February. They are
considering paying $15 000 in January for an advertising campaign which is expected to increase
sales from February onwards.

REQUIRED

(d) Calculate the required increase in February’s sales, after the advertising campaign, needed
to avoid the negative cash balance. [5]

(e) Suggest two possible actions the directors could take, other than the advertising campaign,
to improve the cash flow. [2]

[Total: 25]

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6 Sunil is preparing the annual budgets for his manufacturing business.

REQUIRED

(a) Explain what is meant by a master budget. [2]

Additional information

The finished goods inventory held at 1 January 2017 is expected to be 200 units. This is
expected to increase by 20 units each month until 31 March 2017.

Unit sales from December 2016 to April 2017 are expected to be:

December January February March April

350 370 410 380 430

REQUIRED

(b) Prepare a production budget for each of the four months from January to April 2017. [4]

Additional information

1 Goods will be sold on credit with a selling price of $30 per unit. One third is expected to be
received in the month of sale with the balance being received in the following month.

2 Other income will arise from the interest received on an investment of $50 000 at 4% per
annum. Interest will be received quarterly starting 1 January 2017.

3 Unit product costs are expected to be as follows:

$
Direct materials 7
Direct labour 5
Overheads 6
18

4 Direct materials will be purchased to meet the current month’s production. Half the amount
due will be paid by cash in the month of production and the balance will be paid in the
following month. The number of units produced in December 2016 is expected to be 340.

5 Direct labour will be paid in the month that the cost is incurred.

6 Four-fifths of the overheads will be paid in the month in which they are incurred with the
balance being paid in the following month.

7 Some new equipment is expected to be acquired on 1 January 2017 at a cost of $12 000. A
50% deposit will be paid on delivery, with the remainder being paid on 1 April 2017. This
equipment will be depreciated at 10% using the straight-line method.

8 The bank account balance at 1 January 2017 is expected to be overdrawn by $10 450.

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6 J Limited sells a single product at a mark-up of 25%. The following information is available:

1 Sales revenue:

$
2017
November 150 000
December 180 000

2018
January 200 000
February 210 000
March 225 000
April 240 000

2 All sales are on credit and customers have a credit period of 2 months.

3 All purchases are on credit and suppliers are paid in the month following purchases.

4 Inventory level at the end of each month will be maintained at 25% of the sales volume in the
following month.

5 Monthly operating costs are expected to be $18 000, which includes $3000 depreciation.

6 Balance at bank at 1 January 2018 is expected to be $4500.

REQUIRED

(a) Prepare the cash budget for each of the three months from January to March 2018. [9]

(b) Prepare a budgeted income statement for the three-month period ending 31 March 2018. [3]

(c) Prepare a reconciliation of the profit from operations for the three-month period ending
31 March 2018 to the net cash at 31 March 2018. [8]

Additional information

The directors are considering investing $60 000 in a new computer system to improve inventory
control. According to the payment terms, 50% is payable in March 2018 and the remaining
50% in the following month.

REQUIRED

(d) Advise the directors whether or not they should purchase the new computer. Justify your
answer. [5]

[Total: 25]

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6 Luke’s business is due to start on 1 April 2018, selling a single product obtained from a sole
supplier.

The purchase price is $40 per unit and Luke will sell each unit at a mark-up of 60%.

He also wants to maintain inventory at a level sufficient to cover 50% of the next month’s sales.

Budgeted unit sales for the first four months of trading are as follows:

April May June July

5000 8000 4000 3000

The following information is also available:

1 Luke will introduce $150 000 capital into the business bank account on 1 April 2018. On the
same day, equipment costing $48 000 will be purchased by cheque.

2 Equipment will be depreciated over a period of 60 months with no residual value.

3 All purchases are expected to be paid one month after the purchases are made.

4 All sales will be on credit.

20% of customers are expected to take a cash discount of 1 1 % and pay in the month of sale.
2

30% of customers are expected to pay one month after the sales are made.

The remaining customers are expected to pay two months after the sales are made.

5 Monthly operating expenses will be paid in the month they are incurred. They are expected to
be $43 000 including depreciation.

REQUIRED

(a) State two benefits of preparing a cash budget. [2]

(b) Prepare the cash budget for each of the three months April, May and June 2018. [11]

(c) Comment on Luke’s working capital management. [6]

(d) Prepare a budgeted income statement for the three-month period ending 30 June 2018. [6]

[Total: 25]

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Section B: Cost and Management Accounting

Question 5

Source B1

Hyung Min manufactures glass vases.

Each vase passes through three production departments: casting, polishing and finishing.

Hyung Min had the following budgeted information for the year ending 31 January 2018.

1 All vases produced were expected to be sold. The selling price would be $60.25 each.

2 The fixed overheads were expected to be $240 000 per annum and are absorbed on the
basis of production labour hours.

3 The business is open for 50 weeks a year and each employee works for 40 hours a week.

4 The production costs per vase were expected to be:

Casting department Polishing department Finishing department

25 grams at $8 per 25 grams at $16 per

Materials 0
100 grams 100 grams

Labour 40 minutes at $12 per hour 15 minutes at $8 per hour 2 hours at $14 per hour

5 A total of 24 000 vases were budgeted to be produced and sold for the year ending
31 January 2018.

Answer the following questions in the Question Paper. Questions are printed here for
reference only.

(a) Explain what is meant by the term ‘budgetary control’. [2]

(b) Prepare the labour budget for the year ending 31 January 2018.

Clearly show the number of labour hours, the number of employees and the annual labour
cost for each department. [9]

(c) Analyse the benefits to Hyung Min of using budgetary control in order to achieve his target
profit. [6]

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Section B: Cost and Management Accounting

Question 5

Source B1

C Limited is a small manufacturing company which operates a budgetary control system.

The following information is available:

1 The budgeted sales in units for the first five months of 2019 are expected to be:

Jan Feb Mar Apr May

3500 4000 4750 3750 4250

2 The inventory of finished goods at 1 January 2019 is expected to be 10% of the budgeted
January sales.

The monthly closing inventory of finished goods is to be maintained at the same percentage
of the following month’s budgeted sales.

3 There is a maximum inventory holding of 450 units.

Answer the following questions in the Question Paper. Questions are printed here for
reference only.

(a) State three advantages and two disadvantages of operating a budgetary control system. [5]

(b) Prepare the production budget in units for each of the four months from January to April 2019.
[6]

Additional information

Each unit produced requires 3 kilos of raw material which is expected to cost $2 per kilo.

The opening inventory of raw material at 1 January 2019 is expected to be 200 kilos. The closing
inventory of raw material is expected to remain the same for January. It is then expected to
increase by 10% for February and a further 10% for March. After that it will remain unchanged.

(c) Prepare the purchases budget in both kilos and dollars for each of the four months from
January to April 2019. [6]

Additional information

The directors are expecting an increase in demand later in the year and are considering a
proposal to increase the storage capacity of the warehouse. The proposal will be beneficial to the
company as it will allow an increase in the maximum inventory of finished goods holding to
500 units. The cost associated with the storage of each unit (holding cost) is $10.

(d) Calculate for the month of February the difference between the current holding cost for the
closing inventory of finished goods and the holding cost if the proposal is accepted. [4]

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Additional information

The cost of increasing the storage capacity is expected to be $20 000. A cash budget which
includes this proposed cost has been prepared. This shows an overdrawn bank balance of
$18 000 at the end of February.

However, the bank has refused to give the business an overdraft. The directors are now
considering investing their own money as a loan to the business to finance the proposal.

(e) Discuss the advantages and disadvantages to the directors of investing their own funds into
the business. [4]

[Total: 25]

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Question 6
Source B2

Stanley has been operating as a sole trader for many years with a year end of 31 December. He is
preparing a cash budget and provides the following information for the three-month period from
July 2019 to September 2019.

1 Total income of $120 000 from trade receivables for credit sales will be collected in equal
amounts over the three-month period.

2 Cash sales are expected to be 25% of the cash collected each month from credit sales.
There will be no trade receivables at 1 July 2019.

3 Total credit purchases of $75 000 will be paid for in equal amounts over the three-month
period.

4 Cash purchases are expected to be 20% of the cash paid each month for credit purchases.
There will be no trade payables at 1 July 2019.

5 The bank balance on 1 July 2019 is expected to be $3500.

6 Stanley is expected to receive a bank loan of $30 000 on 1 August 2019. Interest will be
payable monthly in arrears at 5% per annum. No capital will be repaid until July 2020.

7 New machinery costing $60 000 will be purchased by cheque on 15 August 2019. Stanley’s
policy is to depreciate machinery at 25% per annum using the straight-line method. A full
year’s depreciation is charged in the year of acquisition.

8 Stanley rents part of his business premises for $6000 per annum and receives this rental
income on a monthly basis.

9 General expenses are paid for in the month following that in which they are incurred. General
expenses incurred in June amounted to $6000. These are expected to increase by 5% in
July 2019 and a further 5% in August 2019.

10 Stanley makes annual cash drawings of $15 000 in equal instalments on 1 January and
1 July each year.

Answer the following questions in the Question Paper. Questions are printed here for
reference only.

(a) Explain three advantages of preparing a cash budget. [6]

(b) Prepare the cash budget for each of the three months beginning on 1 July 2019. [14]

Additional information

Stanley has calculated the payback period for the new machine as 4 years. He has been advised
to evaluate his purchase using the net present value (NPV) method.

(c) Discuss how the NPV method might give Stanley a more accurate evaluation compared to
the payback method. [5]
[Total: 25]

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Question 6

Source B2

Abida is a manufacturer of a product which has a seasonal peak demand during certain months. The
following budgeted information is available.

June July August September October November

Sales (units) 5000 12 000 18 000 6000 3000 1800

Each unit of production requires 1.5 kilos of direct material at $3 per kilo. There will be a cost increase
of 10% in August, and this will be in force for the rest of the year.

The following information is also available.

1 Abida manufactures the product one month before the month of sale.

2 Closing inventory is 20% of the following month’s sale.

3 Purchases of direct material are made one month before production starts. The company only
purchases sufficient raw materials each month to meet the following month’s production
requirement.

Answer the following questions in the Question Paper. Questions are printed here for
reference only.

(a) Prepare for each of the four months June to September:

(i) the production budget in units [5]

(ii) the purchases budget in both kilos and dollars. [5]

Additional information

Abida encourages her managers to prepare their own departmental budgets.

(b) State two advantages and three disadvantages to Abida of continuing to allow the
departmental managers to prepare their own budgets. [5]

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Additional information

Abida had also prepared an annual budget for a second product she manufactures. The following
budgeted information is available for the year for this product.

Per unit
Selling price $10.50
Direct materials at $3.30 per kilo 1.5 kilos
Direct labour at $6.50 per hour 0.5 hours

Fixed costs $27 000 per year.

The actual activity level for the year was 85 000 units. The following actual information is also
available.

Per unit
Selling price $10.25
Direct materials at $3.00 per kilo 1.5 kilos
Direct labour at $7.00 per hour 0.6 hours

Fixed costs $28 000 for the year.

(c) State two reasons why flexible budgeting may help a business. [2]

(d) Prepare the flexed budgeted profit statement for the year. Your statement should show
clearly the variances between the actual and flexed budgeted figures.
[8]

[Total: 25]

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