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# Budgeting exercise

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### Budgeting exercise

1. 1. Problem 1 The following information has been made available from records of Hindustan Precision Tools Limited for the last 6 months of 2008 ( and of only the sales of January 2009) in respect of product X. 1- The units to be sold in different months are: July 1,100 November 2,500 August 1,100 December 2,300 September 1,700 January 2,000 October 1,900 There will be no work in process at the end of any month Finished unit equal half of sales for the next month will be in stock at the end of every month ( including June 2008) Budgeted production and production cost for the year ending 31st December, 2008 are as follows: Production (units) 22,000 Direct material cost per unit \$10.00 Direct wages cost per unit \$ 4.00 Total factory overhead apportion to product \$88,000 It is required to prepare: A production budget for each of the last six months of 2005, and A summary production cost budget for the same period. Problem 2 Nesley Ltd. Has prepared the following budget for the first five months of 2008 Sales budget (Units) January 10,800 February 15,600 March 12,200 April 10,400 May 9,800 Inventory of finished goods at the end of every month is to be equal to 25% of sales estimate for next month. On 1st of January, 2008, there were 2,700 units of product on hand. There is no work in process at the end of any month. Every unit of product requires two types of materials in the following quantities: Material A – 4Kg Material B – 5Kg Material equal to one-half of the requirement of next month’s production are to be in hand at the end of very month. This requirement has met on 1st January, 2008: Prepare: Production budget (quantitative) Material purchase budget (Quantitative).
2. 2. Problem 3 P. Ltd manufactures two products using one types of material and one grade of labor. Shown below is an extract from the company’s working papers for the next period’s budget: Product A Product B Budgeted Sales (units) 3,600 4,800 Budgeted material consumption per product (kg) 5 3 Budgeted material cost \$12 per Kg Standard hours allowed per product 5 4 Budgeted wage rate \$8 per hour Overtime premium is 50% and is payable, if a worker works for more than 40 hours a week. There are 90 direct workers. The target productivity ratio (or efficiency ratio) for the productive hours worked by the direct workers in actually manufacturing the product is 80%, in addition, the non-productive down time is budgeted at 20% of the productive hours worked. There are twelve 5-day weeks in the budget period and it is anticipated that sales and production will occur evenly throughout the whole period. It is anticipated that stock at the beginning of the period will be: Product A: 1,020 units, Product B: 2,400 units, Raw materials 4,300 Kgs The target closing stock; expressed in terms of anticipated activity during the budget period are: Product A: 15 days sales; Product B: 20 days sales; Raw materials 10 days consumption. Required: Calculate the material purchases budget and the wages budget for direct worker showing the quantities and values, for the next period.
3. 3. Problem 4 Prepare sales overhead budget for January, February, and March from the estimate given below: \$ Advertisements 2,500 Salaries of sales department 5,000 Expenses of sales department 1,500 Counter salesmen’s salaries and allowance 6,000 Commission to counter salesmen at 2% on their sales. Traveling salesmen’s commission at 15% on their sales and expense at 5% on their sales. The sales during the period were estimated as follows: Month Counter Sales (\$) Traveling sales (\$) January 80,000 10,000 February 120,000 15,000 March 140,000 20,000 Problem 5 A company expects to have \$37,500 cash in hand on 1St April 2008 and requires you to prepare an estimate of cash position during the three months, April to June, 2008. The following information is supplied to you: Sales Purchase Wages Factory exp. Office exp. Selling exp February 75,000 45,000 9,000 7,500 6,000 4,500 March 84,000 48,000 9,750 8,250 6,000 4,500 April 90,000 52,000 10,500 9,000 6,000 5,250 May 120,000 60,000 13,500 11,250 6,000 6,570 June 135,000 60,000 14,250 14,000 7,000 7,000 Other information: 1- Period of credit allowed by supplier is 2 months 2- 20% of Sales is for cash and period of credit allowed to customers for credit sales is one month. 3- Delay in payment of all expenses- one month 4- Income tax of \$57,500is due to be paid on June 15, 2008. 5- The company is to pay dividends and bonus to workers of \$15,000 and \$22,500 respectively in the month of April. 6- Plant has been ordered to be received and paid in May. It will cost \$120,000.
4. 4. Problem 6 The profitability statement of AZ Co., Ltd has been summarized as follows: \$ \$ Sales 1,500,000 Direct Materials 450,000 Direct wages 300,000 Variable overhead 120,000 Fixed Overhead 440,000 1,310,000 Profit 190,000 The budget capacity of the company is \$2,000,000 but the key fact is sales demand. It is proposed that in order to utilize the existing capacity the selling price of this only product manufactured by the company should be reduced by 5%. You are required to prepare a forecast statement which should show the effect of proposed reduction in selling price and include any changes in costs expected during the coming year. The following additional information is given: 1- Sales forecast \$ 1,900,000 ( after reduction) 2- Direct material price are expected to increase by: 2% 3- Direct wages rate are expected to increase by 5% per unit 4- Variable overheads are expected to increase by 5% per unit 5- Fixed overheads will increase by \$20,000. Problem 7 A department of TOYOTA Company attains sales of \$600,000 at 80% of its normal capacity. Its expenses are given below: \$ Office salary 90,000 General expenses 2% of sales Depreciation 7,500 Rent and rates 8,750 Selling cost: Salaries 8% of sales Traveling expenses 2% of sales Sales office 1% of sales General expenses 1% of sales Distribution cost: Wages 15,000 Rent 1% of sales Other expenses 4% of sales Draw up flexible Administration, Selling and distribution costs budget, operating at 90%, 100%, and 110% of normal capacity.
5. 5. I- Good year Ltd. Produces and sells a single product. Sales budget for the calendar year 2008 by quarter is as below: Quarter number of units to be sold I 12,000 II 15,000 III 16,500 IV 18,000 The year 2008 is expected to open with an inventory of 4,000 units o finished product and closing inventory of 6,500 units. Production is customarily scheduled to provide two-thirds of the current quarter’s sales demand plus one-third of the following quarter’s demand. Thus production anticipates sales volume by about one month. Standard costs details for one unit of product is as follow: Direct material 10Kg @ \$0.5 per Kg Direct labor 1 hour and 30 minutes @ \$4 per hour Variable overheads 1 hour and 30 minutes \$ 1 per hour Fixed overheads 1 hour and 30 minutes \$ 2 per hour based on a budgeted production volume of 90,000 direct labor hours for the year. 1- Prepare a production budget for 2008, by quarter, showing the number of units to be produced, and the total cost of direct material, direct labor, variable overheads and fixed overheads. 2- If the budgeted selling price per unit is \$17, what would be the budgeted profit for the year as a whole? 3- In which quarter of the year is the company expected to break even? II- Prepare a cash budget for the three months ending 30th June, 2008 from the information given below: Month Sales Material Wages overheads February 14,000 9,600 3,000 1,700 March 15,000 9,000 3,000 1,900 April 16,000 9,200 3,200 2,000 May 17,000 10,000 3,600 2,200 June 18,000 10,000 4,000 2,300 a- credit terms are: Sales/debtor-10% sales are on cash, 50% of credit sales are collected next month and the balance in the following month. Creditors: Materials 2 months Wages ¼ month Overheads ½ month b- Cash and bank balance on 1st April, 2008 is expected to be \$6,000. c- Other relevant information is: - Plant and Machinery will be installed in February 2008 at a cost of \$96,000. The monthly installments of \$2,000 is payable from April onwards. - Dividend @ 5% on preference share capital of \$200,000 will be paid on 1st June. - Advance to be received for sales of vehicles \$ 9,000 in June. - Dividends from investments amounting to \$1,000 are expected to be received in June. - Income tax (advance) to be paid in June is \$ 2,000.
6. 6. III- Based on the following information, prepare a cash budget for ABC Ltd. 1st Qtr (\$) 2nd Qtr (\$) 3rd Qtr (\$) 4th Qtr (\$) Opening cash balance 10,000 - - - Collection from customers 125,000 150,000 160,000 221,000 Payments: Purchase materials 20,000 35,000 35,000 54,200 Other expenses 25,000 20,000 20,000 17,000 Salary and wages 90,000 95,000 95,000 109,200 Income Tax 5,000 - - - Purchase of Machinery - - - 20,000 The Company decides to maintain a cash balance of \$15,000 at the end of each quarter. Cash can be borrowed or repaid in multiples of \$5,000 at an interest of 10% per annum. Management does not want to borrow cash more than what is necessary and wants to repay as early as possible. In any event, loan can not be extended beyond four quarters. Interest is computed and paid when the principal is repaid. Assume that borrowings take place at the beginning and repayments are made at the end of the quarter. IV- A newly started company wishes to prepare cash budget from January. Prepare a cash budget for the first six months from the following estimated revenues and expenses: Months Total sales Materials Wages Production Selling & Distribution January 20,000 20,000 4,000 3,200 800 February 22,000 14,000 4,400 3,300 900 March 24,000 14,000 4,600 3,300 800 April 26,000 12,000 4,600 3,400 900 May 28,000 12,000 4,800 3,500 900 June 30,000 16,000 4,800 3,600 1,000 Cash balance on 1st January was \$100,000. A new machine to be installed at cost \$30,000 on credit and will be paid by two equal installments in March and April. Sales commission @ 5% on total sales is to be paid within the month following actual sales. \$10,000 being the amount of 2nd call may be received in March. Share premium amounting to \$2,000 is also obtainable with 2nd call. Period of credit allowed by suppliers 2 months Period of credit allowed by customers 1 month Delay in payment of overheads 1 month Delay in payment of wages ½ month Assume cash sales to be 50% of total sales. V- A single product company estimates its sales for the next year as quarter as under Quarter Units sales I 30,000 II 37,500 III 41,250 IV 45,200 The opening stock of finished goods is 10,000 units at the end of the year. The production pattern in each quarter is based on 80% of the sales of the current quarter and 20% of the sales of the next quarter.
7. 7. The opening stock of raw materials in the beginning of the year is 10,000 Kgs and the closing stock at the end of the year is required to be maintained at 5,000 Kgs. Each unit of output requires 2 kgs of raw materials. The company proposes to purchases the entire annual requirement of raw materials in the first three quarters in the proportion and at the prices given below: Quarter purchase of raw material % to total Price per Kg (\$) annual requirement in quantity I 30% 2 II 50% 3 III 20% 4 The value of the opening stock of raw materials in the beginning of the year is \$20,000. You are required to present the following for the next year, quarter: 1-production budget in unit 2- Raw material consumption budget in quantity 3- Raw material purchase budget in quantity and value 4- Price store ledger card of the raw material using First in first out method. VI- The expense budget for production of 10,000 units in a factory are finished as below: Items (\$) per unit Materials 70 Labor 25 Variable overheads 20 Fixed overheads (\$100,000) 10 Variable expenses ( direct) 5 Selling expenses (10% fixed) 13 Distribution expenses (20% fixed) 7 Administration expenses (\$50,000) 5 Total cost of sales per unit ( to make and sell) 155 Prepare a budget for production of 8,000 units and 6,000 units of showing total and per unit cost. Assume that administration expenses are rigid for all levels of production. VII- monthly budgets for manufacturing overheads of a concern for two levels of activity were as under: Capacity 60% 100% Budgeted production in unit 300 500 Insurance (\$) 3,000 3,000 Wages (\$) 3,600 6,000 Consumable stores (\$) 4,500 7,500 Depreciation (\$) 12,000 12,000 Maintenance (\$) 3,300 4,500 Power and Fuel (\$) 4,000 5,000 1- Prepare budget for 85% capacity and 2- Find the total cost segregated into fixed and variable; per unit of output at 60%, 85% and 100% capacity.