QUESTION 1 MULTIPLE CHOICE QUESTIONS SOUCE: EXAM (2007) 1. Participative budgeting offers which of the following advantages? A. It helps to motivate employees, which may lead to higher levels of employee performance. B. It involves individuals whose knowledge of local conditions may enhance the budgeting process. C. It communicates a sense of employee responsibility. D. All of the above are advantages of participative budgeting. SOUCE: EXAM (2009) THE FOLLOWING DATA IS APPLICABLE TO QUESTIONS 2-7 BELOW. A company is to commence operations producing a single product. Budgeted operating data at the break-even capacity (41.6666667%* of available capacity) as well as 100% capacity for the first year of business is as follows: 1 CAPACITY Break-even* 100% 000 000 evenue 4 350 10 440 Less: Cost of sales (3 750) (6 830) aw materials 1 650 3 960 Labour 500 920 Fixed production overheads (includes 360 000 depreciation) 1 200 1 200 Packaging 400 750 Gross profit 600 3 610 Less: Management & administration (includes 60 000 depreciation) 600 880 Net profit - 2 730 Operations have been budgeted to occur evenly throughout the year and each month s capacity is regarded to be equal. The expectation is that all sales will be on credit and that debtors will settle their accounts by paying 60% following the month of sale and their balance in the month thereafter. 80% of raw material purchases are on credit and paid in the month following the date of purchase. You may assume all other transactions will occur on a cash basis. 2. The company s budgeted total variable cost at 100% capacity amounts to: A. 3 360 000 B. 4 880 000 C. 5 510 000 D. 5 630 000 E. 5 760 000
3. The company s budgeted total fixed costs amount to: A. 4 350 000 B. 2 830 000 C. 2 200 000 D. 2 080 000 E. 1 950 000 4. If the company operates at 80% capacity the budgeted debtors at year end will be: A. 696 000 B. 870 000 C. 974 400 D. 1 113 600 E. 1 218 000 5. If the company operates at 100% capacity the budgeted creditors at year end will be: A. 264 000 B. 297 000 C. 330 000 D. 528 000 E. None of the above 6. If the company operates at 100% capacity the budgeted net cash inflow from operations at year end will be: A. 1 512 000 B. 1 572 000 C. 1 932 000 D. 2 196 000 E. 2 730 000 7. If a company producing a single product (which requires 0.75 kg raw materials per unit) has opening inventory of 3 000 kg of raw material and 4 000 completed units and plans to have 2 000 kg of the raw material as well as 5 000 completed units inventory at the end of the year, the quantity of raw material to purchase to meet the planned production of 85 000 units is: A. 62 000kg B. 62 750kg C. 63 000kg D. 63 750kg E. 64 000kg 2
DAZZLING DIAMONDS (PTY) LTD SOUCE: CLASS TEST 5 (2010) Mr Diamond is a jeweller in South Africa whose claim to fame is his world-class tennis bracelets (diamond bracelets). He decided to use his new found fame to start his own company (Dazzling Diamonds (Pty) Ltd) which opened its doors on 1 January 2010. Dazzling Diamonds has attracted a regular client base over the last 11 months but is now experiencing severe cash flow difficulties due to the lack of planning. In an attempt to solve this problem before the festive season, Mr Diamond did some research on the Internet and came across a lecture on cash budgets in which he also found the basic structure of a cash budget. The following is Mr Diamond s attempt (on 30 November 2010) at completing the cash budget for December 2010 as well as all the information he was able to obtain: CASH BUDGET FO DECEMBE 2010: Note OPENING BALANCE 5 000 000 INFLOW? Sales (December 2010) 1.? Debtors 1.? Accrued income 2. 10 000 OUTFLOW? Direct raw material 3.? Direct labour? Total production overheads? Bad debts written off 1. 50 000 Net capital expenditure (replacement of security door and sale of? existing door) CLOSING BALANCE? Notes: 1. Mr Diamond is unsure what their sales demand will be over the festive season and he has thus decided to base his expected demand on the budgeted information of a similar company (at alternative demand levels) applicable to December 2010: Demand Level 1 Demand Level 2 Standard deviation 24 units 28 units Coefficient of variation 0.4 0.35 Tennis bracelets are sold for 50 000 each. Dazzling Diamonds sells on both credit and cash. It is estimated that 20% of all sales are made on credit. The credit terms are as follows: 50 % deposit on purchase; 30% in the first calendar month following the month of the purchase; and 20 % in the second calendar month following the month of the purchase. 3
Credit sales in respect of the 3 months before December 2010 were as follows: September 2010 180 000 October 2010 190 000 November 2010 200 000 According to Mr Diamond, he plans to write off bad debts to the value of 50 000 during December 2010. The bad debts relate to a credit sale made in February 2010. 2. Mr. Diamond has entered into a contract (effective from 1 December 2010) with a designer friend to sell some of his old equipment for 10 000. He will however, per the agreement, only receive the proceeds in January 2011. 3. Given the expected increase in demand he is planning to make the following cash purchases at the start of December 2010: Cost Price Gold 1 200 000 Diamonds 1 600 000 Mr. Diamond received a consignment of diamonds in November 2010 which were of an inferior quality and he thus expects to receive an 18.75% trade discount in respect of diamonds purchased during December 2010. EQUIED: Complete or correct (where necessary) the line items of Mr Diamond s cash budget by answering the following multiple choice questions: PLEASE NOTE: Questions 8 18 are INDEPENDENT of one another. 8. Which of the following items were COECTLY included in the budget? A. Opening balance B. Accrued income C. Bad debts written off D. All of the above E. None of the above 9. In what order would the budgets have been prepared to determine the raw material purchase requirements for December 2010? A. Sales Budget, Purchases Budget, Production Budget B. Purchases Budget, Production Budget, Capital Budget C. Sales Budget, Production Budget, Purchases Budget D. Production Budget, Purchases Budget, Sales Budget E. The order in which the budgets are prepared is irrelevant 10. If Mr Diamond is a risk-seeker, expected cash sales will amount to: A. 4 000 000 B. 3 000 000 C. 2 400 000 D. 490 000 E. 480 000 4
11. The debtors balance at the end of November 2010 will amount to: A. 138 000 B. 188 000 C. 193 000 D. 200 000 E. 231 000 12. Assuming that Dazzling Diamonds (Pty) Ltd will sell 80 bracelets in December 2010, the amount to be included in the cash budget in respect of debtors (ignoring any possible bad debts) will be: A. 2 098 000 B. 898 000 C. 553 600 D. 398 000 E. 498 000 13. Calculate the amount of direct raw material purchases during December 2010. A. 2 275 000 B. 2 575 000 C. 2 800 000 D. 2 500 000 E. 2 725 000 Mr. Diamond is unsure as to how to budget the amount for total production overheads. He managed to find the following data amongst his accounting records: Month Units produced Units sold Total cash overheads August 25 30 695 000* September 15 5 645 000 October 20 15 700 000 November 10 6 650 000 *At 31 August 2010, the landlord decreased the monthly rent with a significant amount for months to come, as agreed in the original lease. Mr. Diamond expects a fixed overhead under-recovery of 15 000 during December 2010. Overheads will be allocated at 10 000 per unit. He has approved the production of 70 bracelets to ensure sufficient stock will be available for the expected demand of 80 bracelets. 14. Determine the variable cash overhead cost per unit that applied in the previous months using the high-low method. A. 5 000 B. 3 000 C. 2 000 D. 3 800 E. 11 000 15. Calculate the amount for the line item total production overheads in the cash budget. You may assume all budgeted overheads are cash. A. 815 000 B. 785 000 C. 715 000 D. 685 000 E. None of the above 5
16. If regression analysis (least squares method) was used to split the past variable and fixed elements of total production overheads, the equation of the total production overheads line would be: A. Y = 2 027x + 652 226 B. Y = 3 800x + 621 200 C. Y = 5 000x + 605 000 D. Y = 5 000x + 590 000 E. Y = 5 522x + 633 709 17. Assume the company s variable cost per unit is 4 000 and the total fixed cost amounts to 620 000. If the company were to only produce items ordered, how many units need to be produced/ sold to limit the total cost to 700 000? A. 175 units B. 155 units C. 20 units D. 15 units E. None of the above There has been a sharp increase in robberies in the mall from which Dazzling Diamond (Pty) Ltd is trading. Mr. Diamond has subsequently decided to install a new top of the range security door in December 2010 for 15 000 cash. This door not only entraps the culprit but also blinds him with pepper spray. The current door will be sold for cash during December 2010. It originally cost 10 000 and from its sale Mr. Diamond will realise an accounting profit of 2 000, due to its pristine condition. Depreciation of 1 000 in respect of the current door has been accounted for to date. 18. Calculate the net amount of the capital expenditure to be included in the cash budget for December 2010. A. ( 5 000) B. ( 2 000) C. ( 7 000) D. ( 3 000) E. ( 4 000) SOUCE: CLASS TEST 5 (2010) 19. Which of the following statements are TUE? A. Variable (flexed) budgeting adjusts the budget to reflect actual volumes. B. Zero-based budgeting draws up the budget from scratch. C. Incremental budgeting commences with historical actual costs which is then adjusted by an estimated increase e.g. expected inflation %. D. All of the above. E. None of the above. 20. Identify which of the following is FALSE in respect of budgeting? A. Experienced personnel prepare the budgets and thus errors in budgets are impossible. B. Managers of the different divisions have to coordinate operations to maximise profit objectives. C. Budgeting enables proper planning and evaluation in the organization. D. The cost of budgeting may outweigh the benefit the budget provides. E. All of the above. 6
SOUCE: CLASS TEST 5 (2011) The following information should be used to answer questions 21 to 29 only. U-DgetB (Pty) Limited is about to commence production of two products, namely product F and product G. The company plans to carry inventory on hand (valued on an absorption basis) of 1 000 units of product F and 5 000 units of product G by the end of month 2 onwards, to be achieved as follows: Product F Product G Units in addition to sales demand to be produced in month 1 300 2000 Units in addition to sales demand to be produced in month 2 700 3000 1000 5000 The unit data has been reliably budgeted as follows: Product F Product G aw material 1 (purchased for 60 per kg) 0.375 kg 0.250 kg aw material 2 (purchased for 75 per kg) 0.500 kg 0.125 kg Direct labour cost 20.00 25.00 Overhead cost (recovered on annual production hours) 37.50 52.50 Selling price 165.00 140.00 Constant sales per month 20 000 units 80 000 units All transactions, unless otherwise stated or implied, occur on a cash basis except for the following: 80% of sales will be on credit 60% of debtors will settle within 30 days of their statement (issued at end of month in which transaction is incurred) and the balance in 60 days Creditors for raw material purchases (all purchased on credit) will be settled within 30 days of statement date (issued at end of month in which transaction occurs) in order to qualify for 2.5% settlement discount. The machine required for the production will be depreciated on the straight-line basis of 5 years at 18 million per annum. 21. The company s sales budget for month 2 (per the income statement) will amount to: A. 3 300 000 B. 11 200 000 C. 14 500 000 D. 15 035 500 E. 16 000 000 22. If the company plans to have 500 kg of raw material 2 on hand at the end of month 1, the budgeted purchases (in kilograms) for the month will be: A. 22 025 B. 20 900 C. 20 500 D. 15 825 E. None of the above. 7
23. The raw material creditor s balance at the end of month 2 will be represented by: % of month 1 purchases % of month 2 purchases A. 0% and 100% B. 0% and 97.5% C. 97.5% and 100% D. 100% and 97.5% E. 100% and 100% 24. The labour budget for month 2 (to the nearest rand) will amount to: A. 2 489 000 B. 2 412 083 C. 2 400 000 D. 2 177 500 E. None of the above. 25. The acquisition of the machine will be financed with a 12% loan (interest compounded monthly in arrears) with a residual value of 500 000 after 5 years. The company will have to budget for a monthly repayment of (to the nearest and): A. 394 278 B. 1 967 989 C. 1 995 878 D. 2 002 000 E. 2 074 014 26. If the budgeted gross profit (after settlement discount) for the 2nd month is 4 078 750, the budgeted net profit (before tax) for the month will amount to (to the nearest and): A. 4 225 750 B. 3 997 122 C. 3 750 000 D. 3 189 709 E. None of the above. 27. The debtors balance at the end of month 3 will amount to: A. 16 240 000 B. 16 773 840 C. 18 560 000 D. 20 300 000 E. 23 200 000 28. If 20% of the overhead cost per unit is variable to production, the fixed overhead costs (incurred evenly during the year) to be paid per month will amount to: A. 2 480 000 B. 2 760 000 C. 3 450 000 D. 3 980 000 E. 4 975 000 8
29. Which of the following is not a function of budgeting? A. Decision-making B. Planning C. Control D. All of the above are functions of budgeting. E. None of the above is a function of budgeting. 9
QUESTION 2 SOUCE: CLASS TEST 5 (2007) BUDGET (PTY) LIMITED The following information is available for Budget (Pty) Limited: ACTUAL BUDGET Sales: Cash Credit Purchases Salaries and wages Other expenses FEB MA AP MAY JUN 250 000 410 500 595 400 65 800 18 700 290 500 500 500 685 700 65 800 19 400 305 700 585 800 700 800 65 800 25 400 300 000 580 000 690 000 65 800 20 500 320 000 600 000 710 000 65 800 21 500 ADDITIONAL INFOMATION: 1. Credit sales are collected as follows: 50% within 30 days (i.e. in month following transaction); 30% within 60 days; 15% within 90 days; 5% uncollectable (bad debt). 2. The following discounts are given on sales: 10% on all cash sales (not yet incorporated above); and 5% on credit sales if paid within 30 days. 3. All salaries, wages and other expenses are paid in cash. 4. Other expenses include depreciation of 3 000 per month. 5. Sixty percent (60%) of all purchases are on credit and are paid for in the following month. The balance represents cash purchases. 6. A dividend of 5 000 was declared on 30 June. 7. Cash in the bank on 30 April amounted to 15 500. EQUIED Prepare Budget Limited's cash budget for the months of May and June. 10
QUESTION 3 SUPPOTE LIMITED SOUCE: CLASS TEST 5 (2009) Supporter Limited (Supporter) a company with several branches countrywide produces and sells only Vuvuzelas and South African Flags. You have been approached to assist with completion of the company s financial statements as well as budgets for the next year, given the soccer world cup tournament taking place in 2010. INFOMATION FO THE 2009 FINANCIAL YEA (BUDGETED & ACTUAL) Extract from the Statement of Comprehensive Income: year ended 30 September 2009 - Sales units VUVUZELAS 295 000 FLAGS 440 000 TOTAL 735 000 Sales 11 800 000 25 080 000 36 880 000 Cost of sales (9 762 840) (18 389 640) (28 152 480) - Opening inventory 110 735 166 160 276 895 - Production costs 9 979 295 18 844 735 28 824 030 - Closing inventory (327 190) (621 255) (948 445) Gross profit 2 037 160 6 690 360 8 727 520 Over/ (Under) ecovery? Other expenses (fixed) (286 000) Net Profit You determined that the opening inventory comprises raw materials only and that the closing inventory comprises of only completed units. There was no work-in-progress and all inventories are valued on the first-in-first-out (FIFO) basis. To supplement the above the following information has been obtained for the year ended 30 September 2009:? Production volumes (units) - Vuvuzelas - Flags Direct raw materials per unit - Vuvuzelas - Flags Budget 300 000 450 000 3.50 5.00 Total Production Overheads 21 250 000 - Packaging costs (Labour intensive) 10 500 000 - aw material orders 1 250 000 - Quality control 9 500 000 Actual 305 000 455 000 4.01 6.00 BUDGETED ACTIVITY DATA 2009 VUVUZELAS FLAGS - Labour hours 300 000 hours 600 000 hours - Order forms 75 000 forms 112 500 forms - Inspections 6 batches 10 batches 11
The actual fixed production overheads for the current financial year amounted to 20 800 000. Supporter applies an Activity Based Costing Approach to assign fixed overhead production costs to their respective products. Further to the above you obtained the following raw material composition in respect of the finished goods, per product: DETAILS VUVUZELA FLAGS Plastic 1.34m³ @ 2.00 per m³ 0 Material 0 0.8m² @ 6.00 per m² Dye 0.7l @ 1.90 per l 40ml @ 0.03 per ml INFOMATION FO THE 2010 FINANCIAL YEA (BUDGETED) DETAILS VUVUZELAS FLAGS Sales 307 000 units 442 000 units Closing balances - Plastic 15 800.40 0 - Material 0 18 144 - Dye 7 900.20 162 - Finished goods 9 000 units 7 500 units The following budgeted data, based on the 2009 actual data, has been presented: Increase in the sales price per unit 10% Increase in the variable costs per unit 8% Increase in the total fixed costs 6% Budgeted depreciation for 2010 in total amounts to 4 500 000 EQUIED For the year ended 30 September 2009: a) Calculate the budgeted unit production overheads recovered, per product; b) Calculate the actual labour cost per unit for both products; and c) Calculate the fixed production overheads over- or under recovered balance; and For the year ended 30 September 2010: d) Calculate the budgeted increase / (decrease) in the bank account given the information provided above. You may assume that no transactions will occur on credit. OUND OFF ALL CALCULATIONS/ANSWES TO THE NEAEST 3 DECIMALS. 12
QUESTION 4 SOUCE: CLASS TEST 5 (2008) TEGDUB (PTY) LIMITED TEGDUB (PTY) LIMITED makes two types of electrical packs for the chemical industry, the AC and the DC. Both electrical packs use the same type of material and labour but in different amounts. An extract of the company s most recent statements of financial position included the following: 30 September 2008 31 October 2008 Current assets 438 170 394 875 Debtors 253 470 261 660 Inventory raw materials 31 700 29 600 Inventory finished goods 93 000 103 615 Cash in bank 60 000 - Current liabilities 185 000 206 000 Trade creditor for raw material 185 000 170 000 SAS - 16 000 Overdraft - 20 000 You are the management accountant and you are responsible for preparing the production and resource budgets for both products. The company operates a five-day week for both production and sales and prepares production and resource budgets every twenty working days. You are given the following information relating to period 9, the twenty working days ending 30 November 2008. Forecast sales volumes AC DC Period 9: 20 days to 30 November 2008 8 820 units 5 800 units Period 10: percentage increase from period 9 volumes 20% 30% Selling price per unit (since March 2008) 19 27 You may also assume that sales occur evenly during each month. You also ascertained that sales occur as follows: 30% of all sales are on a cash basis and 70% on a credit basis All credit sales are received as follows: 70% in the month following the sale and the balance in the next month. You established that August sales amounted to 8 000 units of AC and 5 000 units of DC Finished Stocks At the beginning of period 9, there will be 4 410 ACs and 2 320 DCs in finished stock. The finished stock of ACs at the end of period 9 must be equal to 10 working days sales of ACs in period 10. The finished stock of DCs at the end of period 9 must be equal to 8 working days sales of DCs in period 10. 13
Materials Each AC requires 5 square metres and each DC requires 7 square metres of materials. This is after accounting for any losses or wastage. The cost of material is 2.00 per square metre. 2% of material issued to production is lost through wastage. At the beginning of period 9, the opening material stock will be 16 950 square metres. At the end of period 9 the plan is to have closing material stock of 18 000 square metres. All raw materials are purchased on credit and paid 2 months after the month in which they were purchased. The total credit purchases for September 2008 amounted to 112 500. Labour Tegdub produces 6 ACs per labour hour and 4 DCs per labour hour. The company employs 22 production employees who work a 35-hour, five-day week. The labour rate per hour is 8.00 and any overtime is at a premium of 50% per hour. Any overtime premium is charged to the production overhead account and not directly to production. All labour (wages) is paid on the 30 th of each month. Production overheads Overheads are charged to production at predetermined budgeted rate of 12.00 per labour hour and the budgeted overheads, payable in the month they are incurred, for period 9 (November 2008) are as follows: Factory rental 10 000 Indirect production salaries 6 000 Consumables 4 000 Depreciation production machinery 12 000 Total 32 000 Other The SAS account will be paid on 25 November 2008. You also ascertained that production costs have varied greatly during recent months. EQUIED Assume today s date is 31 October 2008 Prepare the following information for period 9, the 20 working days ending 30 November 2008: (a) Production budgets in units for the AC and the DC; (b) Material purchase budget in square metres; (c) The labour budget (in ands); and (d) The cash budget. 14