CH-23 Budgeting for Planning and Control – Accounting : Book Guide

Chapter 23: Budgeting for planning and control Please note: GST versions of the end-of chapter questions are not appropriate for this chapter. Discussion questions 1. Explain how budgeting helps in running a business efficiently and effectively. The process of budgeting assists managers by requiring them to set goals for the financial period. This provides them with the opportunity to assess the past performance of the business and consider new or revised plans for the future. Once a formal plan of the future course of action is determined then managers can set the financial parameters for achieving their plans. The budget expresses the plans for the business in the form of financial and operating targets. These allow managers to take suitable action to ensure that the appropriate resources are available for the business when required. Budgets also enable managers to constantly monitor and check actual performance against planned performance. Where significant variances are discovered managers can take corrective action to remedy the issues. 2. ‘The best way to conduct performance evaluation is to determine broad business goals and prepare a financial plan in which senior management is responsible for the whole business.’ Discuss. Successful performance evaluation requires that appropriate linkages between authority and responsibility are clearly defined. For most businesses this means structuring the organisation into well-defined segments or divisions. These divisions may be based on geographic location or function. Once segments are determined managers are appointed to each area and given authority to make decisions and take action to achieve departmental goals. Each department has its own budget and managers can be held responsible for achieving budget targets. Performance evaluation can then be used to measure how well the department manager has performed. It is important that the budget reflects the authority and responsibility of each department. 3. You are newly employed by Surat Global Ltd to promote their environmental approach to mining for minerals. In their annual report and promotional material, Surat Global Ltd states that protecting the environment while mining is one of its most important goals. This is what attracted you to your new position. Having completed an accounting subject during your marketing degree, rather than simply accepting the budget at face value, you decide to scrutinise it to see what you can learn about your new employer. You find no resources budgeted for revegetating and regenerating old mine sites, and mining practices appear to be based on minimising costs rather than minimising damage to the environment. However, you do find budgeted expenditure for lobbying politicians to grant mining rights in national parks and you are pleased to see a large amount of resources allocated to marketing the company’s positive environment image. Discuss whether what the budget communicates is consistent with the stated position on environmental issues of Surat Global and how this might affect on your continuing employment with the company. The company’s budget is not consistent with its publicly stated objective of protecting the environment while mining. The budget shows no resources, or money, will be used for revegetating or regenerating old mine sites. Mining appears to be done on a cost minimisation basis rather than being prepared to incur some extra costs to protect the environment surrounding the mines. The company has set aside resources to lobby politicians to grant mining rights in national parks. If the company was serious about its environmental objectives then it would focus on mining opportunities that did not impinge on national parks. The fact that a large amount of resources are allocated to marketing the company’s positive environmental image, together with the points noted above, would suggest that the company wants to appear to be doing the ‘right’ thing from an environmental perspective while actually focussing on maximising profits. You can speculate as to why a company may do this such as increasing demand for its product or improving its lobbying position via a positive image. Whether as a new employee you remain in the employment of Surat Global Ltd depends on how seriously they take their own commitment to the environment. Alternatively, you can argue that more can be done to change the corporate attitude by remaining an employee and working from the inside. 4. You have recently been elected to the position of Treasurer for your daughter’s regional netball club. The committee informs you that as they do not aim to make a profit there is no need to prepare a budget for the forthcoming year. The committee is currently trying to decide what fund raising activities they should undertake this year. You think that budgeting could help the netball club with these types of decisions. What points would you make to the other committee members to change their view? Clubs like most organisations need to manage their financial position and cash flow. The netball club will have incur expenses such as insurance, training costs, competition fees and travel which need to be paid for throughout the year. It is important that the club ensures that it has sufficient funds to meet these costs when they fall due. A budget with a focus on cash flow will ensure that the club has sufficient cash at the appropriate time. Fund raising activities for clubs are an important source of financial support. By planning for future expenditure clubs can maximize fund raising opportunities by targeting these events for specific times and customers (e.g. sausage sizzle in Winter, chocolate sales in Autumn). This means that the fund raising is likely to be more successful and that the cash generated is available when it is needed most. Fund raising activities often require the club to outlay funds initially and recover this cash through the event. A cash flow budget prepared in advance will help the club plan for this and manage its cash more efficiently. 5. The cornerstone of any budgetary system is the sales or income forecast. The level of sales is extremely difficult to forecast with any degree of accuracy, and in that case it could be argued that the master budget which is based on this forecast is fundamentally flawed. Discuss. For budgetary systems for most entities, the sales forecast is the cornerstone of the budgetary system. Estimating future sales is extremely difficult because of uncertainties, unless there is a large number of unfilled orders that guarantee future sales. Many factors can affect the level of sales in the future, including economic conditions, industry conditions, advertising and marketing, changes in the marketplace, changes in consumer buying patterns, population changes, and technological developments. Sales forecasting requires the efforts of a team, including sales staff, particularly field staff who are able to report on developments in the market and consumer trends. Various statistical and mathematical techniques are available to make sales forecasting more reliable. Market research can also play a valuable role in refining sales forecasts. The more methods that are used to estimate sales, the more realistic the final sales figures can be. While sales do represent the cornerstone of the total master budget, the fact that the sales figure is not perfectly reliable is no argument for not using a budgetary system. All future estimates are, because of their very nature, uncertain. Any budgetary system should not be fixed over a long period of time and should be responsive to changes in key figures. The master budget can, particularly in these days of computer technology, be readily amended as sales forecasts are realised or not. 6. The manager of a medium-sized business was heard to remark: ‘My business is one which involves too many uncertainties for a budget to be of any use to me.’ Is the stance taken by the manager reasonable? Discuss. It can be argued that in a business involving many uncertainties, a budget would be very useful, rather than the opposite. The benefits of budgeting are applicable in all circumstances and include forcing management to plan ahead, establishing realistic performance targets, and coordinating all aspects of the business. It is also an effective communication device within any business organisation, and can be used by management to motivate staff to work towards achieving business goals. Uncertainties in a business make budgeting necessary. Sound budgeting enables management to anticipate the future rather than simply react to actual circumstances once the uncertainty is removed. Budgets should be continuously reviewed in response to uncertainty as circumstances change. The degree of budgeting is a question which can be debated. Cost versus benefits of a comprehensive budgetary system can be analysed as well. In summary, some form of budgeting will be of some benefit and the manager’s attitude seems to reflect that he or she does not understand the benefits of budgeting. 7. Because master budgets for service organisations are more straightforward than those for manufacturing entities, it is not as important to budget for service organisations. Discuss. Although service organisations do not have to budget for cost sales, purchases, direct labour, direct material or overheads like manufacturing organisations, a budget is just as important. A service organisation still needs a budget for planning, organising, directing and controlling the organisation. The benefits of budgeting listed under Learning Objective 6 apply just as much to service organisations as to any other type of organisation. 8. The manager of HighTech Industries Ltd made the following comment: ‘In my business everything is computerised. Everything is on-line and I have at my disposal at all times up-to-date information. I know how we are going at any one time, therefore there is no need for a budgetary system.’ Discuss. In summary, it would seem that HiTech Industries has a very effective computerised system for recording past events. The up-to-date information being provided is, unfortunately, past information. It is difficult to know where a business is going at any one time if there is no budget or goal to compare actual performance against. The past information which is available serves only as a starting point for future plans. To know where a business is going requires a reasonably comprehensive budgetary system, against which actual performance can be evaluated. 9. ‘A complete budgetary system can be costly. One solution to this problem is to prepare only a cash budget.’ Would you agree? Explain your answer. A budgetary system is, of course, costly but one could argue the benefits far exceed the costs, if budgeting is used correctly. If a business is operating on a cash flow basis only, the preparation of a cash budget would generally be adequate. Cash budgeting offers many advantages in terms of planning, particularly for cash flows which are so essential for the continued existence of any business. It allows planning of cash flows and financing accommodation and also ensures that accounts or debts are paid on time. The preparation of a cash budget itself would require some budgeting of items which go to make up the cash budget. While the cash budget would be one budget prepared, a number of other budgets would need to be at least considered before completing a cash budget. A cash budget would certainly be better than no budget at all. In businesses using an accrual basis of accounting, some budgeting of profits and capital investment also seems to be necessary. 10. ‘As I see it, budgeting boils down to taking the results of the last reporting period and adjusting the data for the new reporting period. Budgets based on past performance are of little value. Therefore I cannot justify the setting up of a budgetary system because costs would appear to exceed benefits.’ Discuss. The person making the quote obviously does not fully understand the basis of the budgetary process. While in practice, many budgets do adjust the previous year’s reports to form a budget, this is not the prevalent practice. Past results only serve as a guide to the future, and should only be used for this purpose. Budgets should not be based solely on past performance, but should reflect management’s future plans and strategies for a business. A budgetary system produces a business plan of operations for the future. A budgetary system, properly based on future plans and strategies of management, can offer many benefits and the costs can usually be justified. 11. ‘The problem with budgets is if you achieve the budget targets in one year, top management then increases its expectations of you in the subsequent years.’ In this context it is sometimes argued that budgets can act as a motivator or demotivator of management. Discuss the above comment. The manager’s remark, of course, could be justified. If this were the case, however, one could argue that top management is not using the budgetary process correctly. In preparing subsequent budgets, management will only take into account past performances as a necessary starting point. Future plans should be realistic and reflect where management intends the business to go in the future. All managers should participate in the development of the budget. If future planning would indicate that the achievement of the past year will not be achieved in the coming year, then a lower expectation is appropriate. It can be argued that the manager’s attitude to budgeting was quite negative and there needs to be counselling as to his or her correct role in the budgetary process. If used properly, the budgetary process should be a motivator, not a demotivator. 12. Participation in the budget process is often viewed as way to improve the accuracy of the targets as well as encouraging managers to take responsibility for achieving the targets. Can you see any potential negative effects that may accrue from this process? A participative approach to budgeting is more time consuming and therefore costly. Parties must discuss their positions and come to a negotiated agreement about appropriate targets. Budgeting is a political process and as more parties become involved they will bring their own agendas to the negotiation. This can cause controversy and conflict which can damage organisational culture. Managers may attempt to manipulate the process by building slack into the budget targets. This means that the targets will be easier to achieve and makes the manager look good in the future. However, this embeds systematic inefficiencies into the budgeted financial statements which may provide costly for the business in the long term. Exercises Exercise 23.1 Income budget for a public relations firm Selcombe, Selcombe and Selcombe Media are three generations of the one family involved in providing public relations services for nearly 50 years. The firm is preparing its fees budget for the year ending 30 June 2020. It budgets on a quarterly basis in a manner similar to figure 23.5. Craig Selcombe is the most senior member of the family and estimates that he will bill clients for 40 hours per week and have 2 weeks annual leave during January. Alexander Selcombe is Craig’s son and intends to take 4 weeks leave during June and to bill clients for 38 hours per week. Craig’s grandson, Samuel, is new to the firm and enjoys fishing on Friday afternoons and so usually bills clients for only 36 hours per week. Samuel intends to take 2 weeks leave beginning in July. The charge-out rates per hour for each of the Selcombes are as follows. Required (a) Prepare the income budget for Selcombe, Selcombe and Selcombe Media for the year ending 30 June 2020, showing projected dollar service revenues by quarter as per the income statement. Assume there are 13 weeks in each of the four quarters of the year ending 30 June 2020. (LO7) (a) SELCOMBE, SELCOMBE AND SELCOMBE Media Services Revenue Budget for the year ending 30 June 2020 Quarter Annual Sept. Dec. Mar. June Total Craig Selcombe Budgeted chargeable hours 520 520 440 520 2 000 Budgeted charge rate 375 375 375 375 375 BUDGETED SERVICE FEES 195 000 195 000 165 000 195 000 750 000 Alexander Selcombe Budgeted chargeable hours 494 494 494 342 1 824 Budgeted charge rate 285 285 285 285 285 BUDGETED SERVICE FEES 140 790 140 790 140 790 97 470 519 840 Samuel Selcombe Budgeted chargeable hours 396 468 468 468 1 800 Budgeted charge rate 185 185 185 185 185 BUDGETED SERVICE FEES 73 260 86 580 86 580 86 580 333 000 TOTAL SERVICE REVENUE 409 050 422 370 392 370 379 050 1 602 840 Exercise 23.2 Budgeted revenue Fly Fast Ltd operates a small charter plane operation in South West Queensland. The airline provides a fly in fly out service to mining operations in this area. Currently Fly Fast operates one plane which provides a return service once per day to a large coal mine about two hours flying time away. On arrival at the mine the plane remains on the ground only long enough to pick up passengers for the return journey before flying back to its base. The small plane operated by Fly Fast has a maximum seat capacity of 48. Fly Fast charges $135 one way for all flights. Due to annual holidays during January occupancy loads on the flights are lower during this month and gradually improve over the remaining months. Fly Fast has estimated the following occupancy rates for the first quarter of 2020:January 55%; February 70%; March 85%. Fly Fast has scheduled flights on 15 days during January, 20 days during February and 25 days during March. Required (a) Prepare a budget for sales revenue for the first quarter of 2020 (round up where necessary). (LO7) (a) Exercise 23.3 Budgeted cash collections Bounce Athletics Ltd, which develops and runs athletics training programs for primary schools, has budgeted revenue for the first 6 months of 2020 as follows. All revenue is provided on account and Bounce Athletics Ltd posts out the account statements on the last day of each month for that month’s services. Schools are given 14 days to pay and 70% of schools pay within the month. The other 30% usually pay the following month. In December 2019 Bounce Athletics Ltd provided no training programs as the schools were preparing for the end-of-year break. The company also made sure that all outstanding balances owed by schools from November were paid before the end of December 2019. Required (a) Prepare a schedule of estimated cash collections from revenue for the first 6 months of 2020 for Bounce Athletics Ltd. (LO7) (a) Month Budgeted Revenue 70% collected in first month 30% collected following month Total collection for the month January $10 000 February 50 000 $7 000 $7 000 March 80 000 35 000 $3 000 38 000 April 25 000 56 000 15 000 71 000 May 80 000 17 500 24 000 41 500 June 60 000 56 000 7 500 63 500 $305 000 $221 000 Exercise 23.4 Estimated cash payments The following expenses budget has been prepared for Abacus Services for the year ending 30 June 2020. Professional salaries, secretarial wages and training are paid in the quarter in which they are incurred. Office supplies, electricity and travel are paid in the quarter after they are incurred and in the June 2019 quarter were $5000, $1500 and $42 000 respectively. Rent is paid in the quarter before it is incurred and for the September 2020 quarter is budgeted at $26 000. Insurance is paid annually at the beginning of January and is expected to remain at the same level for the next year. Required (a) Prepare a schedule of estimated cash payments for expenses for Abacus Services for the year ending 30 June 2020. (LO7) (a) Abacus Services Cash Payments Budget for the year ending 30 June 2020 _______________Quarter____________________ Annual Sept Dec. Mar. June total Salaries $60 000 $80 000 $80 000 $100 000 $320 000 Secretarial wages 30 000 30 000 30 000 30 000 120 000 Training Office Supplies 5 000 5 000 6 000 8 000 3 000 8 000 5 000 8 000 19 000 29 000 Electricity 1 500 1 200 1 800 1 600 6 100 Insurance 16 000 16 000 Rent 24 000 26 000 26 000 26 000 102 000 Travel 42 000 42 000 28 000 56 000 168 000 TOTAL EXPENSES $167 500 $193 200 $192 800 $226 600 $780 100 Exercise 23.5 Sales budget Space Cadet Pty Ltd produces three toy space people, which are sold to local retail stores. The marketing department expects the following sales performance for the next year. The budgeted annual sales are distributed by month in the following percentages. The cash from sales is collected, 70% in the month of sale and the remainder in the following month. Required (a) Prepare a monthly sales budget in units and dollars for all three-space people combined for the months July to December. Show the receivables in the balance sheet at the end of July to December and the budgeted cash collections from sales for July to December. (LO8) (a) Exercise 23.6 Sales budget Suzy’s Boutique sells high end fashion accessories for smart phones imported directly from Italy. She is currently selling products to fit four popular devices; iPhone 4, iPhone 5, Galaxy and Xperia. For each device Suzy offers a choice of two cases; costume or jewel-encrusted. It is Suzy’s first year of operation and while sales have been steady she is concerned about the impact of a potential interest rate increase in the lead up to Christmas. Suzy has heard that luxury items are the first things that consumers forego when interest rates increase. Therefore, Suzy anticipates that a modest increase (from the latest quarter) for sales units of 5% for the iPhone models and a 2% increase in the other lines is a realistic target for the last quarter of the year. In addition Suzy has decided to decrease the price on the Xperia models due to slow sales. She estimates that a 20% decrease in the sales price of each model may stimulate demand for this product. Suzy does not plan to change the pricing of the other products. Actual financial data for the first three quarters is shown below. Required (a) Prepare a sales budget for Suzy’s Boutique for the fourth quarter (round all calculations to the nearest unit). (LO8) (a) Exercise 23.7 Sales budget V. Zarb, the marketing manager for Maltese Treasures Ltd, is preparing a sales budget for the year ended 30 June 2020. In reviewing the actual sales data for the previous year, the sales and marketing managers involved agree that the number of units of Valletta pictures sold in the year ended 30 June 2020 should represent a 20% increase over the previous year’s sales, Gozo print unit sales should increase 10%, and Maltese cross unit sales should decrease 8%. The managers’ projections took into consideration the general economic conditions and expected changes in consumer preferences. The selling prices of Valletta and Gozo artwork will increase 15% and the selling price of Maltese crosses will decline 5%. The percentages of each product’s sales occurring in each quarter are as shown below. The actual product sales data for the year ended 30 June 2019 were as follows. Required (a) Prepare the marketing manager’s sales budget for the year ended 30 June 2020, showing projected dollar sales by quarter. Round all calculations to the nearest dollar. (LO8) (a) Product Unit SP Unit Sales Valletta Pictures $63.25 28 200 Gozo Prints $97.75 19 800 Maltese Cross $21.85 19 320 Percentage of sales per quarter Sept Dec March June Valletta Pictures 25% 30% 15% 30% Gozo Prints 20% 25% 35% 20% Maltese Cross 30% 20% 25% 25% MALTESE TREASURES LTD Sales Budget for the year ending 30 June 2020 Quarter Annual Sept Dec Mar June Total Valletta Pictures Budgeted sales units 7 050 8 460 4 230 8 460 28 200 Budgeted price per unit $63.25 $63.25 $63.25 $63.25 $63.25 BUDGETED SALES $445 912.50 $535 095.00 $267 547.50 $535 095.00 $1 783 650.00 Gozo Prints Budgeted sales units 3 960 4 950 6 930 3 960 19 800 Budgeted price per unit $97.75 $97.75 $97.75 $97.75 $97.75 BUDGETED SALES $387 090.00 $483 862.50 $677 407.50 $387 090.00 $1 935 450.00 Maltese Cross Budgeted sales units 5 796 3 864 4 830 4 830 19 320 Budgeted price per unit $21.85 $21.85 $21.85 $21.85 $21.85 BUDGETED SALES $126 642.60 $84 428.40 $105 535.50 $105 535.50 $422 142.00 TOTAL BUD. SALES $959 645.10 $1 103 385.90 $1 050 490.50 $1 027 720.50 $4 141 242.00 Exercise 23.8 Production budget Gordon’s Gardening World supplies two varieties of citrus trees, Grapefruit and Lime. The projected operating data for the month of September are as follows. Required (a) Prepare a production budget for September (LO8) (a) Plants Grapefruit Lime Sales forecast 54 600 68 000 Desired ending inventory 22 800 21 600 Total plants needed 77 400 89 600 Less: Beginning inventory 20 700 23 200 Production required (plants) 56 700 66 400 Exercise 23.9 Production budget Florida Motors Ltd produces two models of cars, Reliable and Luxury. The projected financial data for the month of January are as follows. Required (a) Prepare a production budget for January. (LO8) (a) Cars Reliable Luxury Sales forecast 8 550 4 320 Desired ending inventory 2 500 550 Total units needed 11 050 4 870 Less: Beginning inventory 2 300 510 Production required (units) 8 750 4 360 Exercise 23.10 Budgeted purchases and cash payments (retailer) The purchasing officer for The Majestic Emporium has prepared a purchases budget for the financial year ending 31 March 2020, based on the following data. The cost of sales is 65% of sales, and the store’s policy is to maintain a month-end inventory balance sufficient to meet the projected sales requirement for the following month. The store pays for 60% of its purchases in the month of purchase, 30% in the following month, and 10% in the second month following. Required (a) Calculate the amount of purchases required for April and May of 2020. (b) Calculate the estimated cash payments in April and May for inventory purchased. (LO8) (a) THE MAJESTIC EMPORIUM Purchases Budget for the months of April and May 2020 April May June Sales $676 000 $618 000 $714 000 COGS 65% Sales $439 400 $401 700 $464 100 Desired ending inventory 401 700 464 100 Inventory needed 841 100 865 800 Beginning inventory 438 900 401 700 Purchases $402 200 $464 100 (b) Cash Payments for the months of April and May 2020 April May Cash payments: Current month (1) $241 320 $278 460 Last month (2) 134 700 120 660 2 months prior (3) 38 000 44 900 Cash payments: $414 020 $444 020 [1] ($402 200  0.6) = $241 320; ($464 100  0.6) = $278 460 [2] ($449 000  0.3) = $134 700; ($402 200  0.3) = $120 660 [3] ($380 000  0.1) = $32 000; ($449 000  0.1) = $44 900 Exercise 23.11 Direct labour budget Expert Electronics Ltd has a policy of maintaining a finished goods inventory balance at the end of a month equal to 30% of the sales requirements of the following month. The ending inventory balance on 31 August was 840 units, and the projected unit sales for September, October and November were 4800, 5200 and 5400 units respectively. The labour requirements per unit produced are as follows. Required (a) Prepare a direct labour budget for September and October. (LO8) (a) EXPERT ELECTRONICS LTD Direct Labour Budget for the months of September and October Sept Oct Nov Sales (units) 4 800 5 200 5 400 Desired ending inventory 1 560 1 620 Inventory needed 6 360 6 820 Beginning inventory 840 1 560 Production (units) 5 520 5 260 Labour category Sept Oct Total Machining (1) $228 528 $217 764 $446 292 Sorting (2) 89 424 85 212 174 636 Assembly (3) 267 168 254 584 521 752 $585 120 $557 560 $1 142 680 (1) Monthly production  1.8  $23 (2) Monthly production .9  $18 (3) Monthly production  2.2  $22 Exercise 23.12 Direct materials budget Durham Manufacturing Pty Ltd has a policy of maintaining a finished goods inventory balance at the end of a month equal to 50% of the sales requirements of the following month. The ending inventory balance on 31 July included 2700 units, and the projected sales for August, September and October were 10 800, 11 600 and 13 550 units respectively. The raw material requirements per unit produced are as follows. Required (a) Prepare a direct materials budget for August and September. (LO8) (a) DURHAM MANUFACTURING PTY LTD Direct Materials Budget for the months of August and September August September October Sales (units) 10 800 11 600 13 550 Desired ending inventory 5 800 6 775 Inventory needed 16 600 18 375 Beginning inventory 2 700 5 800 Production (units) 13 900 12 575 Material category August September Total Plastic (1) $233 520 $211 260 $444 780 Motor (2) 250 200 226 350 476 550 Keyboard (3) 139 000 125 750 264 750 $622 720 $563 360 $1 186 080 (1) Monthly production  2.8  $6 (2) Monthly production  1.5  $12 (3) Monthly production  2  $5 Exercise 23.13 Production budget and budgeted purchases Greyt Dog Beds Ltd manufactures dog beds specifically designed for greyhounds and whippets. The company purchases all the required materials from external suppliers and designs and assembles the product in house. The greyhound bed is much larger than the whippet bed and requires 4 metres of canvas material for the mattress and 2 metres of powder-coated steel for the framework. The whippet bed requires 2 metres of canvas material for the mattress and 1 metre of powder-coated steel for the framework. The beds are filled with a custom fitted high quality wool insert to provide maximum comfort for the animal. The company anticipates the following sales for June 2020; greyhound 230 beds and whippet 150 beds. The budgeted cost for the canvas material is currently $12 per metre and the powder coated steel is $21 per metre. The cushion inserts are expected to cost $25 and $20 respectively. Currently, the business has 13 greyhound beds on hand and 1 whippet bed. Greyt Dog Beds Ltd plan to have a finished goods inventory of 20 greyhound beds and 15 whippet beds at the end of June. On hand the company currently has 538 metres of canvas, 189 metres of steel and 23 inserts for greyhound beds and 15 inserts for the smaller bed. It does not have a policy of keeping raw materials on hand at the end of the month. Required (a) Prepare the production budget for June 2020. (b) Prepare the purchases budget for June 2020. (LO8) (a) and (b) Exercise 23.14 Factory overhead budget Precision Polishing specializes in cutting and preparing granite panels for customized kitchen cabinetry. This requires highly specialized laser cutting and polishing equipment. Consequently, Precision Polishing allocates variable factory overhead to inventory on the basis of machine hours at a rate of $20 per hour. Total overhead budgeted for the year is $838 500. Of this, $500 000 is considered to be fixed overhead. Machine hours for each quarter are anticipated to be 3800, 2825, 5600 and 4700 respectively. Required (a) Prepare a factory overhead budget for the year. (LO8) (a) Exercise 23.15 Direct labour and factory overhead budget Ketton Ltd is in the process of preparing direct labour and factory overhead budgets for the year ending 30 June 2020. Relevant data are set out below. Required (a) Prepare the direct labour budget by quarter for the year ending 30 June 2020. (b) Prepare the factory overhead budget by quarter for the year ended 30 June 2020. (LO8) (a) KETTON LTD Direct Labour Budget for the year ending 30 June 2020 Sep Qtr Dec Qtr Mar Qtr Jun Qtr Total Production 21 000 41 000 41 500 51 000 154 500 Direct Labour Hours 52 500 102 500 103 750 127 500 386 250 Hourly Rate $18 $18 $18 $18 $18 Direct Labour Budget $945 000 $1 845 000 $1 867 500 $2 295 000 $6 952 500 (b) KETTON LTD Factory Overhead Budget for the year ending 30 June 2020 Sep Qtr Dec Qtr Mar Qtr Jun Qtr Total Variable Overhead DLH 52 500 102 500 103 750 127 500 386 250 Variable OH/DLH $6.40 $6.40 $6.40 $6.40 $6.40 $336 000 $656 000 $664 000 $816 000 $2 472 000 Fixed Overhead $162 500 $162 500 $162 500 $162 500 $650 000 Total Factory Overhead $498 500 $818 500 $826 500 $978 500 $3 122 000 Variable OH/DLH = $3.50 + $2.60 + $0.30 = $6.40 Fixed Overhead = $71 500 + $31 000 + $60 000 = $650 000 Exercise 23.16 Estimated cash receipts The budgeted monthly service revenues for Causeway Contractors for January to June are presented below. The entity’s experience is that 80% of monthly invoicing for services is on a credit basis. All cash sales receive an 8% discount. Of the credit sales, 40% are collected in the month following the service, 35% are collected in the second month following, and 22% are collected in the third month after invoicing; 3% are never collected. Total actual revenue invoiced during December was $23 000 and for November was $33 000. Ignore GST. The projected service revenues by month are as follows. Required (a) Calculate the forecast cash receipts from clients for March, April and May. (LO7) (a) CAUSEWAY CONTRACTORS Cash Receipts Forecast For the months of March, April and May Jan Feb March April May Total Service revenue forecasts $8 000 $18 000 $32 000 $52 000 $36 000 Cash sales 20% $1 600 $3 600 $6 400 $10 400 $7 200 Credit sales 80% $6 400 $14 400 $25 600 $41 600 $28 800 Cash receipts: Cash sales  92% $5 888 $9 568 $6 624 $22 080 Month following.  40% $5 760 $10 240 $16 640 $32 640 Second Mth following 35% $2 240 $5 040 $8 960 $16 240 Third Mth following 22% $5060 $1 408 3168 $9636 Total receipts $18948 $26 256 $35 392 $80596 Exercise 23.17 Estimated cash receipts The budgeted monthly service revenues for China Transport Solutions Ltd for January to June are as follows. All of the firm’s invoicing for services is on a credit basis. All payments received from clients on time receive a 5% discount. All fees are due the month after the services are performed. Approximately 75% of the credit billings are collected in the month following the service, 15% are collected in the second month following, and 10% are collected in the third month after invoicing. Ignore GST. Required (a) Calculate the forecast cash receipts from clients for April, May and June. (LO7) (a) CHINA TRANSPORT SOLUTIONS LTD Cash Receipts Forecast For the months of April, May and June Jan Feb Mar Apr May Jun Totals Service revenue forecasts $840 000 $760 000 $820 000 $860 000 $900 000 $960 000 $5 140 000 Cash receipts: Month following.  75%  95 % $584 250 $612 750 $641 250 $1 838 250 Second Mth following 15 % 114 000 123 000 129 000 366 000 Third Mth following 10% 84 000 76 000 82 000 242 000 Total receipts $782 250 $811 750 $852 250 $2 446 250 Exercise 23.18 Budget performance report Avon Technical Institute has used the following budgeted amounts for its controllable costs during 2020. The actual enrolment for the institute for the year was 1500 students. The actual costs incurred for the year were as follows. Required (a) Prepare a budget performance report for 2020 by preparing a budget for each cost item based on its fixed cost plus the variable cost per student multiplied by the actual number of students enrolled. Compare this budget for 1500 students with the actual costs incurred. (a) AVON TECHNICAL INSTITUTE Budget Performance Report for the year ended 31 December 2020 Controllable expenses Budgeted Actual Variance Administration salaries (1) $123 600 $125 800 $2 200 U Electricity (2) 43 280 41 380 1 900 F Maintenance (3) 41 200 41 400 200 U Supplies (4) 41 400 43 200 1 800 U Copying (5) 42 000 45 200 3 200 U Government charges 52 000 48 000 4 000 F $343 480 $344 980 $1 500 U (1) 120 000 + 2.40 (1 500) (2) 42 200 + 0.72 (1 500) (3) 40 000 + 0.80 (1 500) (4) 36 600 + 3.20 (1 500) (5) 12 000 + 20.00 (1 500) Exercise 23.19 Budget performance report Hua Chang Resort has prepared the following budgeted amounts for its costs for 2020. Hua Chang has 32 luxury rooms available in the resort. It operates 365 days of the year. The actual occupancy rate for the year was 75%. The actual costs incurred for the year were as follows. Required (a) Prepare a fixed budget performance report for 2020 by preparing a budget for each cost item based on its fixed costs plus the variable cost per room night multiplied by the actual number of room nights occupied. Compare this budget with the actual costs incurred. (LO9) (a) Expense Fixed Budget (1) Actual Costs Variance Wages $180 560 $174 000 $6 560 F Electricity 59 040 49 000 10 040 F Cleaning 84 560 88 000 3 440 U Supplies 21 540 18 000 3 540 F Water 17 352 22 800 5 448 U Maintenance 15 312 16 200 888 U $378 364 $368 000 $10 364 F (1) The actual number of room nights available = 32  365 = 11 680. At 75% occupancy = 11 680  0.75 = 8760 room nights occupied. Problems Problem 23.20 Income forecast The Cloudlands Spa Resort has 100 residential villas to accommodate guests. The accountant for the resort has asked you, the marketing manager, to prepare a budget for expected relaxation treatment receipts for the month of September 2020. The facilities are provided exclusively for the use of resort guests. The resort caters only for adults. Past records indicate that for the month of September the average adult occupancy for each of the villas is two persons, who stay an average of 5 days. The occupancy rate for the villas in the resort for September is approximately 90%. The resort provides three types of relaxation treatments — a therapeutic massage for $135, a massage and facial treatment for $200, and a straight facial for $85. Past records for September indicate that 50% of guests have a therapeutic massage, 25% have a massage and facial, and 25% have just a facial treatment. Required (a) Prepare a budget for relaxation treatment receipts for the month of September 2020. (LO7) (a) CLOUDLANDS SPA RESORT Relaxation Treatments Receipts Budget for the month of September 2020 (all calculations rounded to nearest unit) Massage Budgeted massages (1) 540 Average charge $135 Budgeted massages receipts $72 900 Massage and facial Budgeted massage and facials (2) 270 Average charge $200 Budgeted massage and facial receipts 54 000 Facial Budgeted facials (3) 270 Average charge $85 Budgeted facial receipts 22 950 Budgeted relaxation treatments receipts $149 850 Average occupancy: Room nights available (100  30) = 3 000  0.90 @90% occupancy = 2 700/5 Average stay = 5 nights = 540  2 Total guests = 1080 (1) Budgeted massages 0.5 (1080) = 540 (2) Budgeted massage and facials 0.25 (1080) = 270 (3) Budgeted facials 0.25 (1080) = 270 Exercise 23.21 Preparing a sales forecast Contex Cables manufactures digital fibre optic cables designed for telecommunications use. The company markets this product to commercial contractors engaged in government projects. Contex Cables has been successful in its bids for two existing projects. The first one requires supplying the cabling required for a new school being constructed in the local area. The second project requires Contex Cables to supply the product to replace the cable in a local hospital. For new cabling situations Contex Cables requires 1 metre of cable per square metre while for replacement situations Contex Cables requires 1.5 metres of cable per square metre. The company sells the cable in two types of casing — polymer and polyethylene — depending on the environmental conditions that the cable will be placed in. For new constructions the contractors will use the polymer in internal applications (30%) and polyethylene in exterior environments (70%). When an existing premises requires replacement cable they will use polymer in 25% of the area and the polyethylene in the remainder. The other information available is as follows. Required (a) Prepare a sales forecast for Contex Cables. (LO8) (a) Problems 23.22 Preparing a sales forecast Cooler Rooms Ltd manufactures air-conditioning units designed for apartment use. The company markets this line in two geographic areas, one with a humid climate and the other with a dry climate. Approximately 60% of all new apartment blocks in the two areas will have an individual air-conditioner installed in each apartment. It has also projected that 5% of the existing apartments will install new individual air-conditioners to improve existing systems or replace old ones that cannot be repaired. Based on past experience, Cooler Rooms Ltd expects to capture 30% of the new apartment block construction market and 10% of the replacement market. The company sells two models of air conditioners — the standard and the deluxe, a more energy-efficient unit. Builders will use the standard model in 60% of the apartments they construct and the deluxe model in 40%. When an existing block installs new air conditioners, it will use the standard model in 55% of the apartments and the deluxe model in 45%. The other information available is below. Required (a) Prepare a sales forecast for Cooler Rooms Ltd by market area. (LO8) (a) Humid Climate Sales Budget Constructed Apartments: 4 200  60%  30% = 756 will buy Cooler Rooms Ltd’s aircon units Standard aircon units 756  60%  $1250 = $567 000 Deluxe aircon units 756  40%  $1630 = 492 912 Existing Apartments: 50 000  5%  10% = 250 will buy Cooler Rooms Ltd’s aircon units Standard aircon units 250  55%  $1250 = 171 875 Deluxe aircon units 250  45%  $1630 = 183 375 Total Humid Climate Sales Budget $1 415 162 Dry Climate Sales Budget Constructed Apartments: 5 100  60%  30% = 918 will buy Cooler Rooms Ltd’s aircon units Standard aircon units 918  60%  $850 = $468 180 Deluxe aircon units 918  40%  $1 200 = 440 640 Existing Apartments: 40 000  5%  10% = 200 will buy Cooler Rooms Ltd’s aircon units Standard aircon units 200  55%  $850 = 93 500 Deluxe aircon units 200  45%  $1 200 = 108 000 Total Dry Climate Sales Budget $1 110 320 Problem 23.23 Budgeted financial statements for a quarter EBZ Fashion is preparing a quarterly budget covering the 3 months ending 30 September 2020. The information available for the budget is as follows: 1. Cash sales represent 80% of all monthly sales; credit sales are collected in the month after sale. 2. Inventory purchases that are made on account equal 60% of the sales forecast for that month; 30% of the purchases are paid for in the month of purchase, and 70% are paid for in the following month. 3. Ending inventory on 30 September 2020 is projected to be $57 800. 4. Equipment purchases at the end of September are budgeted at $95 000. 5. Other quarterly expenses are budgeted as follows: administration expenses, $14 700; utilities $55 000; salaries, $154 000; stationery $4800. These expenses are paid when incurred. 6. Depreciation for the quarter is $18 000. 7. The balance sheet as at 1 July 2020 will have the following account balances. 8. Budgeted sales are: July, $255 000; August, $272 000; September, $330 000. Required (a) Prepare a budgeted income statement and balance sheet for the quarter ending 30 September 2020. Ignore income tax. (LO8) (a) EBZ FASHION Budgeted Income Statement for the quarter ending 30 September 2020 Sales ($255 000 + 272 000 + 330 000) $857 000 Cost of sales: Beginning inventory $60 400 Purchases 0.6 (857 000) 514 200 574 600 Less: Ending inventory 57 800 516 800 Gross profit 340 200 Expenses: Administration 14 700 Utilities 55 000 Salaries 154 000 Stationery 4 800 Depreciation 18 000 246 500 Profit $93 700 Cash flow information Beginning cash at bank balance $39 760 Cash collections (1): 803 800 Total cash available $843 560 Cash payments for purchases (2) 460 970 Other cash payments: Administration $14 700 Utilities 55 000 Salaries 154 000 Stationery 4 800 Equipment purchase 95 000 323 500 Cash at bank September 2020 $59 090 (1) SCHEDULE OF CASH RECEIPTS (2) SCHEDULE OF CASH PAYMENTS EBZ FASHION Budgeted Statement of Changes in Equity for the quarter ending 30 September 2020 Share Capital $100 000 Retained Earnings: Opening Retained Earnings $123 590 Add: Profit 93 700 217 290 Total Equity as at 30 September 2020 $317 290 EBZ FASHION Budgeted Balance Sheet as at 30 September 2020 ASSETS Cash at Bank $59 090 Accounts Receivable 66 000 Inventory 57 800 Equipment 95 000 Building $290 000 Less: Accumulated Depreciation 112 000 178 000 TOTAL ASSETS 455 890 LIABILITIES Accounts Payable 138 600 TOTAL LIABILITIES 138 600 NET ASSETS $317 290 EQUITY $317 290 (1) Accounts receivable September sales $330 000  20% = $66 000 (2) Accounts payable = $330 000  60%  70 % = $138 600 Problem 23.24 Budgeted financial statements for a quarter Stanmore Stationery is preparing a quarterly budget covering the 3 months ending 30 June 2020. The information available for the budget is as follows: 1. Cash sales represent 30% of all monthly sales; 50% of all credit sales are collected in the month of sale and the remainder are collected in the month following the sale. 2. Inventory purchases that are made on account equal 60% of the sales forecast for that month; 40% of the purchases are paid for in the month of purchase, and 60% are paid for in the following month. 3. Ending inventory on 30 June 2020 is projected to be $34 600. 4. Equipment purchases at the end of June are budgeted at $57 000. 5. Other quarterly expenses are budgeted as follows: electricity, $8800; rent, $33 000; salaries, $92 000. These expenses are paid when incurred. 6. Depreciation for the quarter is $8400. 7. The balance sheet as at 1 April 2020 will have the following account balances: 8. Budgeted sales are: April, $142 000; May, $136 000; June, $132 000. Required (a) Prepare a budgeted income statement and balance sheet for the quarter ending 30 June 2020. Ignore income tax. (LO8) (a) STANMORE STATIONERY Budgeted Income Statement for the quarter ending 30 June 2020 Sales ($142 000 + 136 000 + 132 000) $410 000 Cost of sales: Beginning inventory $36 200 Purchases 0.6 (410 000) 246 000 282 200 Less: Ending inventory 34 600 247 600 Gross profit 162 400 Expenses: Electricity 8 800 Rent 33 000 Salaries 92 000 Depreciation 8 400 142 200 Profit $20 200 Cash flow information Beginning cash at bank balance $17 820 Cash collections: Beginning accounts receivable $58 960 April sales 142 000 May sales 136 000 June cash sales 30% (132 000) 39 600 June credit sales 50% (70%  132 000) 46 200 Total cash available $440 580 Cash payments for purchases: Beginning accounts payable $51 120 April purchases 60% (142 000) 85 200 May purchases 60% (136 000) 81 600 June purchases 40% (60% of 132 000) 31 680 249 600 Other cash payments: Electricity $8 800 Rent 33 000 Salaries 92 000 Equipment purchase 57 000 190 800 Cash at bank 30 June 2020 $ 180 STANMORE STATIONERY Budgeted Statement of Changes in Equity for the quarter ending 30 June 2020 Share Capital $100 000 Retained Earnings: Opening Retained Earnings $78 060 Add: Profit 20 200 98 260 Total Equity as at 30 June 2020 $198 260 STANMORE STATIONERY Budgeted Balance Sheet as at 30 June 2020 ASSETS Cash at Bank $ 180 Accounts Receivable 46 200 Inventory 34 600 Equipment $229 500 Less: Accumulated Depreciation 64 700 164 800 TOTAL ASSETS 245 780 LIABILITIES Accounts Payable 47 520 TOTAL LIABILITIES 47 520 NET ASSETS $198 260 EQUITY $198 260 (1) Accounts receivable 132 000 (0.7) (0.5) = $46 200 (2) Accounts payable 132 000 (0.6) (0.6) = $47 520 Problem 23.25 Production and related budgets Sheds Ahead Ltd produces outdoor sheds for domestic use. The manager in charge of production has been asked to prepare a production budget, a direct materials budget and a direct labour budget for part of 2020 based on the company’s sales forecast. The materials and labour requirements per shed are as follows. The business requires a finished goods ending inventory for each quarter that equals 30% of expected sales for the next quarter. Also, the ending inventory balance of direct materials should equal 25% of the next quarter’s production requirements. The inventory balances on 1 January 2020 are forecast as shown below. The forecast quarterly sales in units are below. Required (a) Prepare a quarterly production, in units only, for the first three quarters of 2020. (b) Prepare a direct materials budget for the first two quarters of 2020 in both units and dollars. (c) Prepare a direct labour budget for the first two quarters of 2020. (LO8) (a) SHEDS AHEAD Production Budget for the first three quarters of the year ending 31 December 2020 First Quarter Second Quarter Third Quarter Total Forecast sales unit 8 400 6 200 8 800 23 400 Desired ending finished goods (1) 1 860 2 640 4 260 4 260 Total units needed 10 260 8 840 13 060 27660 Less: Beginning finished goods 240 1 860 2 640 240 Production units required 10 020 6 980 10 420 27 420 (1) Required ending inventory finished goods 30% next quarter sales. (b) Direct Materials Budget for the first two quarters of the year ending 31 December 2020 First Quarter Second Quarter Total Sheet metal (square metres) Production units required 10 020 6 980 17 000 Square Metres of sheet metal per unit 25 25 25 Production square metres required 250 500 174 500 425 000 Desired ending square metres (1) 43 625 65 125 65 125 Square metres of sheet metal needed 294 125 239 625 533 750 Less: Beginning inventory 6 200 43 625 6 200 Purchases square metres 287 925 196 000 483 925 Cost per square metre $24 $24 $24 Cost of sheet metal purchases $6 910 200 $4 704 000 $11 614 200 (1) 25%  6 980  25; 25%  10 420  25 First Quarter Second Quarter Total Enamel Paint (litres) Production units required 10 020 6 980 17 000 Litres of paint per unit 10 10 10 Production litres required 100 200 69 800 170 000 Desired ending litres (1) 17 450 26 050 26 050 Litres of paint needed 117 650 95 850 196 050 Less: Beginning inventory 1 200 17 450 1 200 Purchases litres 116 450 78 400 194 850 Cost per litre $12 $12 $12 Cost of paint purchases $1 397 400 $940 800 $2 338 200 (1) 25%  6980  10; 25%  10420  10 (c) Direct Labour Budget for the first two quarters of the year ending 31 December 2020 First Quarter Second Quarter Total Cutting & Welding Labour Production units required 10 020 6 980 17 000 Cutting & welding labour hours per unit 3 3 3 Total hours required 30 060 20 940 51 000 Labour rate per hour $18 $18 $18 (a) Cutting & welding labour cost $541 080 $376 920 $918 000 Assembly Labour Production units required 10 020 6 980 17 000 Finishing labour hours per unit 1 1 1 Total hours required 10 020 6 980 17 000 Labour rate per hour $21 $21 $21 (b) Finishing labour cost $210 420 $146 580 $357 000 Total labour cost (a + b) $751 500 $523 500 $1 275 000 Problem 23.26 Production and related budgets Gasmania Pty Ltd produces patio heaters for household use. The following information has been gathered so that a production budget, a direct materials budget and a direct labour budget for part of 2020 can be prepared. The materials and labour requirements per tank are as follows. Management prefers a finished goods ending inventory for each quarter that equals 25% of expected sales for the next quarter. Also, the ending inventory balance of direct materials should equal 25% of the next quarter’s production requirements. The inventory balances on 1 January 2020 are forecast as shown. The forecast quarterly sales in units are as follows. Required (a) Prepare a quarterly production budget, in units only, for the March, June and September quarters of 2020. (b) Prepare a direct materials budget for the March and June quarters of 2020 in both units and dollars. (c) Prepare a direct labour budget for the March and June quarters of 2020. (LO8) (a) GASMANIA PTY LTD Production Budget in Units for the 9 months ending 30 September 2020 Quarter March June September ¾ Total Patio Heaters Forecast sales units 950 1 120 480 2 550 Desired ending inventory (1) 280 120 53 53 Total units needed 1 230 1 240 533 2 603 Beginning inventory 500 280 120 500 PRODUCTION – UNITS 730 960 413 2 103 (1) 1120  25% = 280 (b) GASMANIA PTY LTD Direct Materials Budget for the 6 months ending 30 June 2020 Quarter March June Half year total Stainless Steel Production units required 730 960 1 690 Steel per heater 5 5 5 Steel required 3 650 4 800 8 450 Desired ending material (1) 1 200 (2) 516 516 Steel needed 4 850 5 316 8 966 Beginning materials 250 1200 250 Purchases required – steel 4 600 4 116 8 716 Cost per kilogram $12 $12 $12 COST OF PURCHASES $55 200 $49 392 $104 592 Gas Cylinder Production units required 730 960 1 690 Cylinder per tank 1 1 1 Cylinders required 730 960 1 690 Desired ending material (3) 240 (4) 103 103 Cylinders needed 970 1 063 1 793 Beginning materials 103 240 103 Purchases required – cylinders 867 823 1 690 Cost per cylinder $18 $18 $18 COST OF PURCHASES $15 606 $14 814 $30 420 TOTAL PURCHASES $70 806 $64 206 $135 012 (1) 960  25%  5 = 1200 (2) 413  25%  5 = 516 (3) 960  25%  1 = 240 (4) 413  25%  1 = 103 (c) GASMANIA PTY LTD Direct Labour Budget for the 6 months ending 30 June 2020 Quarter March June Half year total Moulding and welding Production units required 730 960 1 690 Direct labour hours per unit 2 2 2 Total hours required 1 460 1 920 3 380 Labour rate per hour $22 $22 $22 DIRECT LABOUR COST $32 120 $42 240 $74 360 Powder Coating Production units required 730 960 1 690 Direct labour hours per unit 0.5 0.5 0.5 Total hours required 365 480 845 Labour rate per hour $18 $18 $18 DIRECT LABOUR COST $6 570 $8 640 $15 210 TOTAL DIRECT LABOUR COST $38 690 $50 880 $89 570 TOTAL DIRECT LABOUR HOURS 1 825 2 400 4 225 Problem 23.27 Factory overhead budget and overhead application rate Sami Stitches Ltd produces two types of sewing machines, a standard model and a deluxe model. The budgeted factory overhead costs for the production operation during 2020 are as follows. Production of 18 000 standard sewing machines and 12 000 sewing machines is budgeted for 2020. Each standard machine requires 2.4 machine hours, and each deluxe machine requires only 2 machine hour because of the use of component parts. The company expects to sell all machines produced. Required (a) Prepare a factory overhead budget for 2020 based on the estimated production level. (b) Calculate the predetermined overhead rate based on machine hours. (LO8) (a) Note: Production = Sales SAMI STITCHES LTD Factory Overhead Budget for the year ending 31 December 2020 Variable costs Indirect materials (1) $537 600 Indirect labour (2) 40 320 Electricity (3) 13 440 Other (4) 13 440 Total budgeted variable overhead $604 800 Fixed costs Production manager’s salary $100 000 Depreciation 45 000 Insurance 30 000 Miscellaneous 13 160 Total budgeted fixed overhead 188 160 Total budgeted factory overhead $792 960 (1) Direct machine hours: (18 000  2.4) + (12 000  2) = 67 200 Indirect materials cost per DM $8 Indirect materials cost $537 600 (2) Indirect labour: 67 200  $0.60 $40 320 (3) Electricity: 67 200  $0.20 $13 440 (4) Other VOH: 67 200  $0.20 $13 440 (b) Factory overhead rate per machine hour: $792 960  67 200 = $11.80 per machine hour. Problem 23.28 Factory overhead budget and overhead application rate Perfect Printers Ltd provides high volume offset colour and black and white printing for newspapers. It applies factory overhead to jobs on the basis of machine hours. The budgeted fixed overhead consists of $54 000 managers salary, depreciation of $27 464 and rent of $45 000. The remainder is variable overhead made up of the following items. This year Perfect Printers is printing two weekly papers — The Barrington Press and Hanmer Herald. The Barrington Press is printed in full colour while the Hanmer Herald is a black and white publication. Consequently, the Barrington Press requires additional time on the printing press. Perfect Printers has two industrial offset printing machines. Each machine operates 64 hours per week and there are 52 weeks in the year. All the machines hours are utilised to produce the two newspapers. Required (a) Prepare a factory overhead budget for 2020 based on the estimated production level. (b) Calculate the predetermined overhead rate based on machine hours. (LO3, LO4 and LO5) (a) PERFECT PRINTERS LTD Factory Overhead Budget for the year ending 31 December 2020 Variable costs (1) Indirect materials $18 304 Indirect labour 33 280 Electricity 9 984 Other 4 992 Total budgeted variable overhead $66 560 Fixed costs Production manager’s salary $54 000 Depreciation 27 464 Rent 45 000 Total budgeted fixed overhead 126 464 Total budgeted factory overhead $193 024 (1) Total machine hours = 2  (64  52) = 6656 (b) Factory overhead rate per machine hour: $193 024  6 656 = $29 per machine hour. Problem 23.29 Preparing production budgets under alternative strategies KK Pty Ltd is a small manufacturing business. For the year ending 30 June 2019, the company achieved sales of $2 772 000 and a gross profit margin of 30%. Although satisfied with this result, management was, however, keen to increase the company’s performance in the following year. Management was considering adjusting the unit price of its product, currently $6, to achieve a better outcome. It is considering two alternative strategies. Under Strategy One, the selling price would be increased by 50 cents, but it is expected that this increase would result in a decrease of 15% in sales volume (units) for the year, and inventory at 30 June 2020 would be equal to 4% of the units sold during the year. Strategy Two is to decrease the selling price by 50 cents, which is expected to lead to an increase in sales of 30 000 units, and result in 20 000 units being on hand at 30 June 2020. Inventory on hand at 1 July 2019 was 15 000 units. Projected cost data for the year ended 30 June 2020 are as follows. Required (a) Prepare a sales budget and a production budget for the year ending 30 June 2020 under both strategies. (b) Which strategy should management adopt? Why? (LO8) (a) KK PTY LTD Sales Budget for the year ending 30 June 2020 Strategy 1 Strategy 2 Budgeted sales units 392 700 492 000 Budgeted price per unit $6.50 $5.50 Budgeted sales $’s $2 552 550 $2 706 000 Sales units for year ended 30 June 2019 = $2 772 000/$6.00 = 462 000 units KK PTY LTD Production Budgets for the year ending 30 June 2020 Strategy 1 Strategy 2 Forecast unit sales 392 700 492 000 Required units in ending inventory 15 708 20 000 Total units needed 408 408 512 000 Beginning units in inventory 15 000 15 000 Production required 393 408 497 000 (b) Management should adopt Strategy 1 because it returns a significantly higher profit result as shown below. KK PTY LTD Cost Budgets for the year ending 30 June 2020 Strategy 1 Strategy 2 Direct Materials ($1.20 per unit) $472 089.60 $596 400 Direct Labour ($0.80 per unit) 314 726.40 397 600 Factory overheads: Variable ($0.80 per unit) 314 726.40 397 600 Fixed 600 000.00 600 000 Total Costs $1 701 542.40 $1 991 600 Profits: Strategy 1 $2 552 550 – $1 701 542.40 = $851 007.60 Strategy 2 $2 706 000 – $1 991 600 = $714 400 Problem 23.30 Preparing master budgets for a retailer The following actual balance sheet was prepared for Colombo Clocks Ltd as at 31 March 2020. At 31 March you are also provided with the following information. 1. Sales forecasts available for 2020: April $25 000; May $27 000; June $20 000. 2. Cash sales account for 50% of sales. Credit sales are collected 40% in the month of sale and 60% in the following month. 3. Purchases are expected to be made at the rate of 55% of expected sales for each month and are purchased on credit. 4. Creditors are paid 20% in the month of purchase and 80% in the next month. 5. Dividends are paid by the business at the rate of $4000 per quarter. 6. Rent on premises is $3000 per quarter, paid on the last day of the first month of each quarter. 7. Wages are normally paid as incurred and this will occur in the quarter ended 30 June. In the quarter ended 31 March, pay day fell on 25 March so 6 days wages were outstanding at 31 March and are yet to be paid. Wages are normally incurred at the rate of $5000 per month. 8. The following are paid as incurred: electricity $400 per month, interest on loan $180 per month and cleaning contractor $200 per month. The loan principal is paid at the rate of $2000 per quarter. 9. Depreciation is charged at 10% p.a. on the cost of the furniture and equipment and 15% p.a. on the cost of the plant and machinery. 10. New machinery will be purchased for cash on 30 June 2020 for $10 000. 11. Inventory is projected to be $23 200 at 30 June 2020. Required (a) Prepare a budgeted income statement, a cash budget and a budgeted balance sheet for Colombo Clocks Ltd for the quarter ended 30 June 2020. (LO8) (a) Colombo Clocks Ltd Budgeted Income Statement for the quarter ending 30 June 2020 Sales (25 000+27 000+ 20 000) $72 000 Less Cost of sales Beginning inventory $21 800 Purchases 0.55(72 000) 39 600 61 400 Less ending inventory 23 200 38 200 Gross profit 33 800 Less expenses: Rent $ 3 000 Wages ($5 000  3) 15 000 Electricity ($400  3) 1 200 Interest ($180  3) 540 Cleaning ($200  3) 600 Deprn – furniture and equip ($27 000  10%/4) 675 Deprn – plant and machinery ($54 000  15%/4) 2 025 23 040 PROFIT $10 760 Colombo Clocks Ltd Cash Budget for the quarter ending 30 June 2020 Opening cash balance $6 000 Add: Receipts Opening A/C’s Rec $12 000 April Sales 25 000 May Sales 27 000 June Cash Sales ($20 000  50%) 10 000 June Credit Sales ($20 000  50%  40%) 4 000 78 000 84 000 Less: Payments Opening A/C’s Pay $7 000 Accrued Wages 1 200 Purchases (April)(55%  $25 000) 13 750 Purchases (May)(55%  $27 000) 14 850 Purchases (June =$20 000  55%  20% ) 2 200 Dividends 4 000 Rent 3 000 Wages ($5000  3) 15 000 Electricity 1 200 Interest 540 Cleaning 600 Loan Principal 2 000 New motor vehicle 10 000 75 340 Expected closing cash $8 660 Colombo Clocks Ltd Budgeted Balance Sheet as at 30 June 2020 ASSETS Cash at bank $8 660 Accounts receivable($20 000  50%  60%) 6 000 Inventory 23 200 Prepaid rent 1 000 Furniture and equipment 27 000 Less: Acc Dep ($4600 + $675) (5 275) 21 725 Plant and Machinery ($54 000 + $10 000) 64 000 Less: Acc Depn ($22 400 + $2025) (24 425) 39 575 TOTAL ASSETS 100 160 LIABILITIES Accounts Payable ($20 000  55%  80%) 8 800 Bank loan ($48 000 – $2000) 46 000 54 800 NET ASSETS $45 360 EQUITY Share capital $30 000 Retained earnings ($8600 + 10 760 – 4000) 15 360 $45 360 Problem 23.31 Cash budget and budgeted profit Fab and Fast Ltd buys and sells motor vehicle accessories. The firm’s estimated sales and expenses for the first 4 months of 2020 are shown below. Actual sales for December 2019 were $900 000 and actual expenses were $258 000. All sales are on credit, and the firm estimates that 40% of the accounts receivable will be collected in the month of sale with the other 60% collected the following month. The average selling price for the products sold is $300. The cash balance as at 1 January 2020 is expected to be $70 000. The firm pays for 30% of its purchases in the month of the purchase and the balance is paid in the following month. Average gross profit margin is 40%. The firm plans to continue maintaining an end-of-month inventory equal to 10% of the next month’s projected cost of sales. Depreciation amounting to $24 000 per month and wages of $104 000 are included in the monthly expenses of $258 000. Other expenses are paid during the month they are incurred. Required (a) Prepare a monthly schedule of expected cash receipts for the first quarter of 2020. (b) Prepare a monthly purchases budget for the first quarter of 2020. (c) Prepare a monthly schedule of expected cash payments for the first quarter of 2020. (d) Prepare a monthly cash budget for the first quarter of 2020. (e) Prepare a monthly budgeted income statement for the first quarter of 2020. (f) Calculate the difference between the expected increase in cash and the expected profit or loss for the first quarter. Explain why the two amounts are different. (LO8) (a) FAB AND FAST LTD Monthly Schedule of Expected Cash Receipts for the quarter ending 31 March 2020 Month Receivables & Sales Jan Feb Mar December 2019 $900 000 (1) $540 000 January 1 000 000 (2) 400 000 $600 000 February 1 300 000 (3) 520 000 780 000 March 900 000 (4) — — 360 000 Cash Receipts $940 000 $1 120 000 $1 140 000 (1) $900 000  60% = $540 000 (2) $1 000 000  40% = $400 000 (3) $1 300 000  40% = $520 000 (4) $900 000  40% = $360 000 (b) Monthly Purchases Budget for the quarter ending 31 March 2020 Jan Feb Mar Total Cost of Sales (60%) (1) $600 000 $780 000 $540 000 $1 920 000 Desired end inventory (2) 78 000 54 000 48 000 48 000 Total needed 678 000 834 000 588 000 1 968 000 Less: Beginning inventory 60 000 78 000 54 000 60 000 Cost of purchases $618 000 $756 000 $534 000 $1 908 000 (1) Gross profit margin in 40% of sales therefore cost of sales is 60% of sales. (2) 10%  $780 000 (next month’s cost of sales). (c) Monthly Schedule of Cash Payments for the quarter ending 31 March 2020 Jan Feb Mar Total Expected cash payments: Purchases: Current month (30%) (1) $185 400 $226 800 $160 200 $572 400 Previous month (70%) (2) 382 200 432 600 529 200 1 344 000 Total cash for purchases 567 600 659 400 689 400 1 916 400 Operating expenses: (3) 234 000 234 000 234 000 702 000 Total cash payments $801 600 $893 400 $923 400 $2 618 400 (1) $618 000  30% (2) Assumed December beginning inventory (0.1) (0.6) (900 000) = $54 000 December purchases 540 000 + 60 000 – 54 000 = $546 000 (0.70) (546 000) = $382 200 (3) $258 000 – 24 000 (depn.) = $234 000 (d) Monthly Cash Budget for the quarter ending 31 March 2020 Jan Feb Mar Total Cash at bank beginning $70 000 $208 400 $435 000 $70 000 Cash receipts $940 000 $1 120 000 $1 140 000 3 200 000 Cash available 1 010 000 1 328 400 1 575 000 3 270 000 Cash payments 801 600 $893 400 $923 400 2 618 400 Cash at bank ending $208 400 $435 000 $651 600 $651 600 (e) Monthly Budgeted Income Statement for the quarter ending 31 March 2020 Jan Feb Mar Total Sales $1 000 000 $1 300 000 $900 000 $3 200 000 Cost of sales (60%) 600 000 780 000 540 000 1 920 000 Gross profit 400 000 520 000 360 000 1 280 000 Expenses 258 000 258 000 258 000 774 000 Profit $142 000 $262 000 $102 000 $506 000 (f) Expected increase in cash March quarter ($651 600 – 70 000) $581 600 Expected profit for March quarter 506 000 Difference $75 600 Reconciliation: Profit for the March quarter $506 000 Add: Receipt of December sales $540 000 March Purchases to be paid in April 373 800 913 800 $1 419 800 Less: Payment of December purchases 382 200 March sales to be received in April 540 000 $922 200 497 600 Add: Non-cash expenses Decrease in inventory (from B) 12 000 Depreciation 72 000 Increase in cash for March quarter $581 600 Problem 23.32 Cash budget and budgeted profit Bristol Brights purchases and installs sky lights. The entity’s estimated sales and expenses for the first 4 months of 2020 are below. Actual sales for November and December 2019 were $825 000 and $975 000 respectively and actual expenses were $285 000 for each month. All sales are on credit, and the firm estimates that 40% of the accounts receivable will be collected in the month after sale with the other 60% collected the second month following sale. The average selling price for the products sold is $5000. The cash balance as at 1 January 2020 is expected to be $100 000. The firm pays for 30% of its purchases in the month after purchase and the balance is paid in the second month following purchase. Average gross profit margin is 50%. The firm plans to continue maintaining an end-of-month inventory equal to 20% of the next month’s projected cost of sales. Depreciation amounting to $24 000 per month and wages of $123 000 are included in the monthly expenses of $285 000. Other expenses are paid during the month they are incurred. Required (a) Prepare a monthly schedule of expected cash receipts for the first quarter of 2020. (b) Prepare a monthly purchases budget for the first quarter of 2020. (c) Prepare a monthly schedule of expected cash payments for the first quarter of 2020. (d) Prepare a monthly cash budget for the first quarter of 2020. (e) Prepare a monthly budgeted income statement for the first quarter of 2020. (f) Calculate the difference between the expected increase in cash and the expected profit or loss for the first quarter. Explain why the two amounts are different. (LO8) (a) BRISTOL BRIGHTS Monthly Schedule of Expected Cash Receipts for the quarter ending 31 March 2020 Month Receivables & Sales Jan Feb Mar November 2019 $825 000 (1) $495 000 December 2019 975 000 (2) 390 000 $585 000 January 1 087 500 (3) 435 000 $652 500 February 1 410 000 (4) 564 000 March 975 000 Cash Receipts $885 000 $1 020 000 $1 216 500 (1) $825 000  60% = $495 000 (2) $975 000  40% = $390 000 (3) $1 087 500  40% = $435 000 (4) $1 410 000  40% = $564 000 (b) Monthly Purchases Budget for the quarter ending 31 March 2020 Jan Feb Mar Total Cost of Sales (50%) $543 750 $705 000 $487 500 1 736 250 Desired end inventory (1) 141 000 97 500 87 000 87 000 Total needed 684 750 802 500 574 500 1 823 250 Less: Beginning inventory 108 750 141 000 97 500 108 750 Cost of purchases 576 000 661 500 477 000 1 714 500 (1) 20%  $705 000 (next month’s cost of sales) (c) Monthly Schedule of Cash Payments for the quarter ending 31 March 2020 Jan Feb Mar Total Expected cash payments: Purchases: Previous month (30%) (1) $149 625 $172 800 $198 450 $520 875 2 mths previous (70%) (2) 299 250 349 125 403 200 1 051 575 Total cash for purchases 448 875 521 925 601 650 1 572 450 Operating expenses: (3) 261 000 261 000 261 000 783 000 Total cash payments $709 875 $782 925 $862 650 $2 355 450 (1) Assumed December beginning inventory (0.2)(0.5)(975 000) = 97 500 December purchases 487 500 + 108 750 – 97 500 = 498 750 (0.30) (498 750) = 149 625 (2) Assumed November beginning inventory (0.2) (0.5) (825 000) = $82 500 November purchases 412 500 000 + 97 500 – 82 500 = $427 500 (0.70) (427 500) = $299 250 (3) $285 000 – 24 000 (depn.) = $261 000 (d) Monthly Cash Budget for the quarter ending 31 March 2020 Jan Feb Mar Total Cash at bank beginning $100 000 $275 125 $512 200 $100 000 Cash receipts 885 000 1 020 000 1 216 500 3 121 500 Cash available 985 000 1 295 125 1 728 700 3 221 500 Cash payments 709 875 782 925 862 650 2 355 450 Cash at bank ending $275 125 $512 200 $866 050 $866 050 (e) Monthly Budgeted Income Statement for the quarter ending 31 March 2020 Jan Feb Mar Total Sales $1 087 500 $1 410 000 $975 000 $3 472 500 Cost of sales (50%) $543 750 $705 000 $487 500 1 736 250 Gross profit 543 750 705 000 487 500 1 736 250 Expenses 285 000 285 000 285 000 855 000 Profit $258 750 $420 000 $202 500 $881 250 (f) Expected profit for March quarter $881 250 Expected increase in cash March quarter ($866 050 – 100 000) 766 050 Difference $115 200 Reconciliation: Profit for the March quarter $881 250 Add: Receipt of November sales $495 000 Receipt of December sales 975 000 February Purchases to be paid in April 463 050 March Purchases to be paid in April and May 477 000 2 410 050 3 291 300 Less: Payment of November purchases 299 250 Payment of December purchases 498 750 February sales to be received in April 846 000 March sales to be received in April 975 000 2 619 000 672 300 Non-cash expenses Add Decrease in inventory (from B) 21 750 Add Depreciation 72 000 Increase in cash for March quarter $766 050 Problem 23.33 Comprehensive problem Prue Williamson Marketing Services is preparing a budget for the quarter year ended 31 December 2020. The information available for the budget is as follows. 1. Prue’s hourly charge-out rate for the year ended 30 September 2020 was $160 but she intends to increase this by 5% for the budget period. Prue also employs Win Kee, a newly graduated marketing student, and charges his work out at $80 per hour and does not intend to increase this for the next year. 2. Prue estimates that the following hours will be billed to clients for the quarter: 3. The services are all provided on credit and are collected 60% in the same quarter and 40% in the following quarter. 4. The monthly expenses for the year ended 30 September 2020 are provided with Prue’s estimates of how they will change for the budget period. 5. Insurance is paid annually in October. Rent is paid 1 month in advance and electricity and telephone expenses are paid in the month after they are incurred. All other expenses are paid in the month they occur. 6. Prue intends to buy new office furniture at the end of December for $5200. 7. The balance sheet as at 1 October 2020 has the following account balances: Required (a) Prepare a budgeted income statement, a cash budget and a budgeted balance sheet for the quarter ending 31 December 2020. (LO7) (a) PRUE WILLIAMSON MARKETING SERVICES Service Revenues Budget for the quarter ending 31 December 2020 Pru Win Kee Total Budgeted chargeable hours 500 400 Budgeted charge rate* $ 168 $ 80 TOTAL SERVICE REVENUES $84 000 $32 000 $116 000 * $160  1.05 = $168 PRUE WILLIAMSON MARKETING SERVICES Expenses Budget for the quarter ending 31 December 2020 Expenses Depreciation ($400  3 mths) $ 1 200 Electricity ($500  3 mths  1.1) 1 650 Insurance ($2000  3 mths  1.2) 7 200 Salaries ($15 000  3 mths  1.05) 47 250 LSL Provision ($47 250  2%) 945 Rent ($2000  3 mths  1.05) 6 300 Stationery ($500  3 mths) 1 500 Telephone ($1 000  3 mths  1.03) 3 090 TOTAL EXPENSES $69 135 PRUE WILLIAMSON MARKETING SERVICES Budgeted Income Statement for the quarter ending 31 December 2020 SERVICE REVENUE $116 000 Less: EXPENSES 69 135 PROFIT $ 46 865 PRUE WILLIAMSON MARKETING SERVICES Capital Expenditure Budget for the quarter ending 31 December 2020 Office Furniture $5 200 PRUE WILLIAMSON MARKETING SERVICES Schedule of Estimated Cash Collections from Service Revenues for the quarter ending 31 December 2020 Opening accounts receivable $75 600 September quarter receivables ($116 000  60%) 69 600 CASH COLLECTIONS FROM SERVICE REVENUES $145 200 PRUE WILLIAMSON MARKETING SERVICES Schedule of Estimated Cash Payments for Expenses for the quarter ending 31 December 2020 Total expenses $69 135 Less: Depreciation (non-cash expense) (1 200) Less: LSL Provision (non-cash expense) (945) Add: Insurance for other 9 mths ($2000  1.2  9) 21 600 Less: Electricity, due to 1 mth delay (2) (50) Less: Telephone, due to 1 mth delay (3) (30) BUDGETED EXPENSE PAYMENTS $88 510 (1) No adjustment is required for Rent because if we deduct for October paid in September we have to add on January paid in December and the net result is the same. (2) ($500)(from trial balance) – ($550 December) = $50 (3) ($1 000)(from trial balance) – ($1 030 December) = $30 PRUE WILLIAMSON MARKETING SERVICES Cash Budget for the quarter ending 31 December 2020 Cash at bank, beginning balance $52 000 Collections from service revenues 145 200 Total cash available 197 200 Estimated cash payments Budgeted expense payments 88 510 Capital expenditure 5 200 Total expected payments 93 710 CASH AT BANK, ENDING BALANCE $103 490 PRUE WILLIAMSON MARKETING SERVICES Budgeted Balance Sheet as at 31 December 2020 (with balances as at 1 October 2020 shown) 1 October 31 December CURRENT ASSETS Cash at bank $52 000 $103 490 Accounts receivable 75 600 (a) 46 400 Prepaid insurance — 21 600 Prepaid rent 2 100 2 100 TOTAL CURRENT ASSETS $129 700 $173 590 NON-CURRENT ASSETS Furniture and equipment 24 000 (b) 29 200 Accumulated depreciation (14 400) (c) (15 600) TOTAL NON-CURRENT ASSETS 9 600 13 600 TOTAL ASSETS $139 300 $187 190 CURRENT LIABILITIES Electricity payable (d) 500 550 Telephone payable (d) 1 000 1 030 Provision for LSL 7 200 (e)8 145 TOTAL CURRENT LIABILITIES 8 700 9 725 NET ASSETS $130 600 $177 465 SHAREHOLDERS’ EQUITY Pru Williamson Capital $130 600 (f) $177 465 (a) $116 000  40% = $46 400 (b) $24 000 + $5 200 purchased = $29 200 (c) $14 400 + $1 200 expense = $15 600 (d) Refer to schedule of estimated cash payments for expenses (e) $7 200 + $945 expense = $ 8 145 (f) $130 600 + $46 865 profit = $177 465 Problem 23.34 Comprehensive problem Ruthven Manufacturing Ltd is preparing a master budget for the first quarter of the year ending 31 March 2021, and has compiled the following data. 1. The firm sells a single product at a price of $24 per unit. The sales forecast (in units) prepared by the marketing department for the quarter ending 31 March 2020 and the first 7 months of the next financial year is as follows. 2. 40% of the sales are collected in the month of sale, 40% are collected in the following month, and 20% are collected in the second month following the sale. 3. The beginning inventories on 1 April 2020 will be 4200 units of finished goods and no raw materials. The ending finished goods inventory should equal 20% of the sales requirements for the next 3 months, and the raw materials ending inventory should equal 40% of the next month’s production. 4. 80% of the material purchases are paid in the quarter of purchase and 20% are paid in the following quarter. The amount owing for purchases at 1 April 2020 is $82 000. 5. Variable selling expenses are 5% of sales. Administrative expenses are $52 500 per quarter, of which $8200 represents depreciation expense and $40 000 is wages. Fixed selling expenses are $15 200 each quarter. All selling and administrative expenses are paid in the quarter in which they are incurred. 6. The production requirements are below. The direct materials are purchased for $4 a kilogram. The direct labour wage rate is $16 an hour. The factory overhead cost is $64 000 per month, and is paid in the month incurred (except for depreciation of $12 000). 7. The 1 April 2020 cash balance is expected to be $16 800. Required (a) Prepare a sales budget by month for the period February to June 2020. (b) Determine estimated cash collections from receivables for the first quarter of the financial year ending 31 March 2021. (c) Calculate the number of units to be produced in the first quarter of the financial year ending 31 March 2021. (d) Prepare a direct materials budget for the first quarter of the financial year ending 31 March 2021. (e) Prepare a cash budget for the first quarter of the financial year ending 31 March 2021 including any necessary schedules. (f) Prepare a budgeted income statement for the first quarter of the financial year ending 31 March 2021. (g) Calculate the difference between the expected increase in cash and the profit or loss for the first quarter. Explain why the two amounts are different. (LO8) Note: All calculations rounded to the nearest digit. (a) Sales Budget for the five months ending 30 June 2020 Sales in units Unit selling price Sales in dollars February 12 000 $24 $288 000 March 12 500 $24 300 000 April 13 000 $24 312 000 May 14 000 $24 336 000 June 14 000 $24 336 000 Total sales 65 500 $1 572 000 (b) Cash Collections Budget for the quarter ending 30 June 2020 April May June Quarter Current month 40% 124 800 134 400 134 400 393 600 Previous month 40% 120 000 124 800 134 400 379 200 2nd previous month 20% 57 600 60 000 62 400 180 000 302 400 319 200 331 200 952 800 (c) Production Budget – Units for the quarter ending 30 June 2020 Sales (13 000 + 14 000 + 14 000) 41 000 Desired end inventory 20% (15 500 + 16 000 + 18 000) 9 900 Total units needed 50 900 Beginning inventory 4 200 Required production finished goods units 46 700 (d) Direct Materials Budget for the quarter ending 30 June 2020 Production units required (C) 46 700 Kilograms per unit 1 Kilograms material required 46 700 Desired ending materials 40% (17 200)* 6 880 Kilograms needed 53 580 Beginning materials inventory 0 Purchases required – kilograms 53 580 Cost per kilogram $4.00 Cost of purchases $214 320 * July’s production 15 500 + 0.2 (16 000 + 18 000 + 24 000) – 9 900 = 17 200 (e) Cash Budget for the quarter ending 30 June 2020 Expected beginning cash at bank balance $16 800 Budgeted cash collections (B) 952 800 Total cash available $969 600 Expected payments: Accounts payable 1 April 82 000 Purchases June quarter (80%) $214 320 171 456 (d) Selling expenses: Variable 0.05 (984 000) 49 200 Fixed 15 200 Administration expenses ($52 500 – $8 200) 44 300 Factory overhead (($64 000 – $12 000)  3) 156 000 Direct labour (46 700  0.4  $16) 298 880 Total payments 817 036 Expected cash at bank balance as at 30 June 2020 $152 564 (f) RUTHVEN MANUFACTURING Budgeted Income Statement for the quarter ending 30 June 2020 Sales (1) $984 000 Cost of sales (2) 482 570 Gross profit 501 430 Expenses: Selling (3) $64 400 Administrative 52 500 116 900 Profit $384 530 (1) A $312 000 + 336 000 + 336 000 = $984 000 (2) FOH allocation rate 64 000  46 700 = $1.37 DL rate 0.4 (16) = 6.40 41 000 (DM $4.00 + DL $6.40 + OH $1.37) = $482 570 (3) $49 200 + $15 200 = $64 400 (g) Reconciliation of expected increase in cash with expected profit. Profit per income statement (F) $384 530 Add: Cash receipts from February and March (B) 237 600 Less: Accounts receivable at the end of June ($336 000  20% + $336 000  60%) (268 800) Add: Cost of sales 482 570 Less: Cash paid for inventory related expenses Accounts payable 1 April (82 000) Purchases June quarter (171 456) Factory overhead (156 000) Direct labour (298 880) Add: Depreciation administrative expenses 8 200 Increase in Cash ($152 564 – $16 800) $135 764 The difference is attributed to: 1. timing differences between cash flows and accrual accounting transactions. 2. the exclusion of depreciation from cash flows. 3. increments in inventory accounts. Problem 23.35 Comprehensive problem The following actual balance sheet was prepared for Martin’s Musical Supplies Ltd as at 30 September 2020. At 30 September, you are also provided with the following information. 1. Sales forecasts available: October $39 000, November $44 000, December $48 000. 2. Cash sales account for 40% of sales. Credit sales are collected 30% in the month of sale, 50% in the following month and 20% in the second month following the sale. 3. Purchases are expected to be made at the rate of 60% of expected sales for each month and are purchased on credit. 4. Creditors are paid 40% in the month of purchase and 60% in the next month. 5. Inventory is projected to be $37 600 at 31 December 2020. 6. Rent on premises increased to $4950 per quarter from 1 August 2020. This is paid on the last day of the first month of each quarter. 7. Wages of $12 000 per month are normally paid as incurred, although December wages of $2000 are expected be outstanding at 31 December 2020 as a result of the normal payday being a week after the end of the year. 8. The following are paid as incurred: electricity $600 per month, interest on loan $220 per month and cleaning contractor $400 per month. The loan principal is paid at the rate of $2000 per quarter. 9. Depreciation is charged at 10% per annum on the cost of the furniture and equipment and 15% per annum on the cost of the plant and machinery. 10. A new machine will be purchased for cash on 31 December 2020 for $16 000. Required (a) Prepare a budgeted income statement for the quarter ended 31 December 2020. (b) Prepare a cash budget for the quarter ended 31 December 2020. (c) Prepare a budgeted balance sheet as at 31 December 2020. (LO8) (a) MARTIN’S MUSICAL SUPPLIES LTD Budgeted Income Statement for the quarter ended 31 December 2020 Sales (39 000 + 44 000 + 48 000) $131 000 Less: Cost of sales: Beginning inventory $32 000 Purchases 0.6 ($131 000) 78 600 110 600 Less ending inventory 37 600 73 000 Gross profit 58 000 Less: Expenses: Rent $4 900 Wages ($12 000  3) 36 000 Electricity ($600  3) 1 800 Interest ($220  3) 660 Cleaning ($400  3) 1 200 Depreciation – furn. & equip. ($40 000  10%/4) 1 000 Depreciation – plant & mach. ($64 000  15%/4) 2 400 47 960 Profit $10 040 MARTIN’S MUSICAL SUPPLIES LTD Cash Budget for the quarter ended 31 December 2020 Opening cash balance $11 000 Add: Receipts Opening Accounts Receivable $20 000 October Cash Sales 39 000 November Cash Sales ($44000  40%) 17 600 November Credit Sales ($44000  60%  80%) 21 120 December Cash Sales ($48000  40%) 19 200 Dec Credit Sales ($48000  60%  30%) 8 640 125 560 136 560 Less: Payments Opening Accounts Payable $12 000 Accrued Wages 1 600 Purchases (October)(60%  39 000) 23 400 Purchases (November)(60%  44 000) 26 400 Purchases (December)($48 000  60%  40% ) 11 520 Rent 4 950 Wages ($36 000 – $2000) 34 000 Electricity 1 800 Interest 660 Cleaning 1 200 Loan Principal 2 000 New Machine 16 000 135 530 Expected closing cash $ 1 030 MARTIN’S MUSICAL SUPPLIES LTD Budgeted Balance Sheet as at 31 December 2020 ASSETS Cash at Bank $ 1 030 Accounts Receivable($44 000  60%  20%+$48 000  60%  70%) 25 440 Inventory 37 600 Prepaid Rent ($4950/3) 1 650 Furniture and Equipment $40 000 Less Accumulated Depreciation ($20 000 + $1 000) (21 000) 19 000 Plant and Machinery ($64 000 + $16 000) 80 000 Less Accumulated Depreciation ($48 000 + $2 400) (50 400) 29 600 TOTAL ASSETS 114 320 LIABILITIES Accounts Payable ($48 000  60%  60%) $17 280 Accrued Wages 2 000 Bank Loan ($34 000 – $2000) 32 000 51 280 NET ASSETS $63 040 EQUITY Share Capital $40 000 Retained Earnings ($13 000 + $10 040) 23 040 $63 040 Problem 23.36 Comprehensive problem Advantage Manufacturing is preparing a master budget for the quarter ending 30 September 2020, and has compiled the data shown below. 1. The firm sells a single product at a price of $60 per unit. The sales forecast (in units) prepared by the marketing department for the quarter ending 30 June 2020 and the first 7 months of the next financial year is as follows. 2. 40% of the sales are collected in the month of sale, 40% are collected in the following month, and 20% are collected in the second month following the sale. 3. The beginning inventories on 1 July 2020 will be 10 800 units of finished goods and no raw materials. The ending finished goods inventory should equal 20% of the sales requirements for the next 3 months, and the raw materials ending inventory should equal 40% of the next month’s production. 4. 80% of the materials purchases are paid in the quarter of purchase and 20% are paid in the following quarter. The amount owing for purchases at 1 July 2020 is $196 800. 5. Variable selling expenses are 5% of sales. Administrative expenses are $126 000 per quarter, of which $20 000 represents depreciation expense and $96 000 is wages. Fixed selling expenses are $36 000 each quarter. All selling and administrative expenses are paid in the quarter in which they are incurred. 6. The production requirements are below. The direct materials are purchased for $8.00 a kilogram. The direct labour wage rate is $24 an hour. The factory overhead cost is $154 000 per month, and is paid in the month incurred (except for depreciation of $28 000). 7. The 1 July 2020 cash balance is expected to be $40 320. Required (a) Prepare a sales budget by month for the period May to September 2020. (b) Determine estimated cash collections from receivables for the first quarter of the financial year starting 1 July 2020. (c) Calculate the number of units to be produced in the first quarter of the financial year starting 1 July 2020. (d) Prepare a direct materials budget for the first quarter of the financial year starting 1 July 2020. (e) Prepare a cash budget for the first quarter of the financial year starting 1 July 2020 including any necessary schedules. (f) Prepare a budgeted income statement for the first quarter of the financial year starting 1 July 2020. (LO8) Note: All calculations rounded to the nearest digit. (a) Sales Budget for the five months ending 30 September 2020 Sales in units Unit selling price Sales in dollars May 28 800 $60 $1 728 000 June 30 000 $60 1 800 000 July 31 200 $60 1 872 000 August 33 600 $60 2 016 000 September 33 600 $60 2 016 000 Total sales 157 200 $9 432 000 (b) Cash Collections Budget for the quarter ending 30 September 2020 July August September Quarter Current month 20% 374 400 403 200 403 200 1 180 800 Previous month 60% 1 080 000 1 123 200 1 209 600 3 412 800 2nd previous month 20% 345 600 360 000 374 400 1 080 000 1 800 000 1 886 400 1 987 200 5 673 600 (c) Production Budget – Units for the quarter ending 30 September 2020 Sales (31 200 + 33 600 + 33 600) 98 400 Desired end inventory 20% (37 200 + 38 400 + 43 200) 23 760 Total units needed 122 160 Beginning inventory 10 800 Required production finished goods units 111 360 (d) Direct Materials Budget for the quarter ending 30 September 2020 Production units required (C) 111 360 Kilograms per unit 1.1 Kilograms material required 122 496 Desired ending materials 40% ($41 280)* 16 512 Kilograms needed 139 008 Beginning materials inventory 0 Purchases required – kilograms 139 008 Cost per kilogram $8.00 Cost of purchases $1 112 064 * October’s production 37 200 + 0.2 (38 400 + 43 200 + 57 600) – 23 760 = 41 280 (e) Cash Budget for the quarter ending 30 September 2020 Expected beginning cash at bank balance $40 320 Budgeted cash collections (B) 5 673 600 Total cash available $5 713 920 Expected payments: Accounts payable 1 July 196 800 Purchases September quarter (80%) $1 112 064 899 651 (d) Selling expenses: Variable 0.05 ($5 904 000) 295 200 Fixed 36 000 Administration expenses ($126 000 – $20 000) 106 000 Factory overhead (($154 000 – $28 000)  3) 378 000 Direct labour (111 360  0.5  $24) 1 336 320 Total payments 3 237 971 Expected cash at bank balance as at 30 September 2020 $2 475 949 (f) ADVANTAGE MANUFACTURING Budgeted Income Statement for the quarter ending 30 September 2020 Sales (1) $5 904 000 Cost of sales (2) 2 182 512 Gross profit 3 721 488 Expenses: Selling (3) $331 200 Administrative 126 000 457 200 Profit $3 264 288 (1) A $1 872 000 + 2 016 000 + 2 016 000 = $5 904 000 (2) FOH allocation rate 154 000  111 360 = $1.38 DL rate 0.5 (24) = 12 98 400 (DM $8.80 + DL $12 + OH $1.38) = $2 182 512 (3) $295 200 + $36 000 = $331 200 Case studies Decision analysis Budget for a tourist adventure Deep Dive Adventures operates a boat taking tourists to an area off the south coast of Australia to watch the annual mating season of the cuttlefish from May to July. During this time, male cuttlefish, a large squid-like fish, change colour to trick other larger male cuttlefish so that they can sneak up on the female cuttlefish. This provides a spectacular colour display for divers. The breeding period is limited and the adult cuttlefish die soon after laying their eggs. The number of tourists gradually builds up from May and dwindles by the end of July. You have been asked by the operator of Deep Dive Adventures to prepare a budget for the 3-month period from May to July. You have determined from the previous years financial information and discussions with the owner of the business that the following are reasonable projections for the 3 months operations. Salaries: Three people are employed to run the boat and help passengers with their diving gear. The monthly salary is $12 000. Expenses: Monthly fixed expenses for the business are expected to be $42 000, including $3000 depreciation on the boat. For each customer, food is provided at a cost of $10 and insurance of $24 is paid. Collections: All customers book their cuttlefish tour in advance and pay a $20 deposit; the balance of the $200 fee is paid when the tour is taken. About 5% of customers who book a tour cannot take it and so lose their deposit. Approximately 20% of customers book 2 months in advance of their tour, 50% book a month in advance and 30% book in the actual month of their tour. No sales are made on account and all tours are paid in full before a customer is allowed on the boat. Payments: All salaries are paid in the month in which the service is performed; 60% of the monthly cash operating expenses, food costs and insurance costs are paid in the same month, and 40% of them are paid in the next month. Customers: The boat can take twenty passengers at a time and does two tours a day, seven days a week from May to July. From past experience it is estimated that the following percentage of capacity is booked for each month: Cash balance: Deep Dive Adventures expects to have a cash balance at the beginning of May of $20 000 including deposits paid in advance. The owner of the business takes out drawings of $40 000 for each of the 3 months as her income for the year. At the end of July, Deep Dive Adventures has to pay back a loan of $200 000. Required Prepare a budgeted income statement for each month during the May to July period. (Assume no expenses owing from previous period.) Prepare a cash budget for each month during the May to July period. Based on the information in requirements A and B, can Deep Dive Adventures meet its loan repayment of $200 000 at the end of July, or will the owner need to reduce her drawings during the period? Explain your conclusion. (a) DEEP DIVE ADVENTURES Budgeted Income Statement for the months of May, June and July May June July Customers (a) 868 (b) 1 080 (c) 992 Revenues (@ $200) $173 600 $216 000 $198 400 Expenses: Salaries 12 000 12 000 12 000 Operating 42 000 42 000 42 000 Food (d) 8 680 10 800 9 920 Insurance (e) 20 832 25 920 23 808 Total 83 512 90 720 87 728 Profit (loss) $90 088 $125 280 $110 672 (a) 31 days  2  20 passengers  70% = 868 (b) 30 days  2  20 passengers  90% = 1 080 (c) 31 days  2  20 passengers  80% = 992 (d) 868  $10 (e) 868  $24 (b) DEEP DIVE ADVENTURES Cash Budget for the months of May, June and July May June July Beginning cash at bank $20 000 $67 892 $141 252 Expected collection: Deposit 2 mths in advance 3 968 Deposit 1 mth in advance 10 800 9 920 Deposit in mth of tour 5 208 6 480 5 952 Balance of fee (#  95%  $180) 148 428 184 680 169 632 Total cash available 188 404 268 972 316 836 Expected payments: Salaries 12 000 12 000 12 000 Operating expenses 39 000 39 000 39 000 Food 8 680 10 800 9 920 Insurance 20 832 25 920 23 808 Drawings 40 000 40 000 40 000 120 512 127 720 124 728 Balance $67 892 $141 252 $192 108 (c) No. Deep Dive Adventures will be $7892 short of being able to pay the $200 000 so the owner will need to reduce the drawings accordingly. Critical thinking Read the following article and answer the questions below. Required From the paragraph above it is evident that there is a generally accepted expectation that cities hosting Olympic games will run over budget. (a) Discuss the forecasting issues that might explain why this is the norm. Why is it so difficult to accurately budget for these events? What types of items need to be included in the budget? (b) In your opinion, are the financial losses associated with the Olympic games outweighed by the perceived social benefits? (a) Discussion should include issues such as long term nature of plan for Olympic games. Cities typically start construction of facilities and venues many years before the actual event. There are many factors that can affect the financial predictions because of uncertainty. These factors include economic conditions, changes in industrial relations, world events such as terrorism or financial crisis’s, inflation. Other points that may be included; difficulty in predicting revenues, changes in government regulations, contingencies, taxation, credit conditions, climatic conditions, political change, inaccurate financial modelling etc. Items to be included in the budget should include infrastructure such as hotels and accommodation for athletes, transportation facilities, specialised sports infrastructure, catering, operations and event management, security etc. (b) Any well considered argument should be accepted. Students should discuss whether social benefits actually exist and accrue to the community. Ethics and governance Production budget for a car manufacturer William Bill is the production manager for Cheetah Motors Ltd and is responsible for preparing the production budget for the Cheetah car that the company manufactures. During the previous year, new robots were installed on the production line that significantly increased fixed factory overheads but reduced the amount of labour involved in production and the amount of material wasted due to improved efficiency. In preparing the production budget for the next year, William decided to ‘cut himself a bit of slack’. Because the cost structure of the production line had changed so much as a result of the new robots, William decided that in the first year of their introduction he would set a production budget that was easy to meet and management would not be able to recognise this as they couldn’t compare it with previous production budgets. William received a bonus if positive production variances were greater than 10%. By not reducing the amount of labour or materials costs in the budget by the amount that the new robots should save, William believed he was in for an easy year with a guaranteed bonus at the end. Required (a) Who are the stakeholders affected by William’s budget? (b) What are the ethical issues involved, if any? (c) How could the company stop its managers padding their budgets? (a) The stakeholders are William Bill who is setting things up so that he will receive a bonus even though he may not deserve one and the management of Cheetah Motors Ltd who William is attempting to deceive by using the fact that the production methods have changed and management may not be aware of the full implications of costs for the budget. (b) The ethical issue is William is attempting to use managements’ ignorance of the new cost structure arising from the new robots to make it easier for him to meet the budgets set and to almost guarantee a bonus for himself without having to work hard to achieve it. William is acting in a dishonest way and showing himself to be untrustworthy. (c) The company could ask William to base his cost estimates on those provided by the engineers of the firm that supplied and installed the new robots. Presumably budgets were prepared prior to the installation of the new robots to justify their purchase. William’s budget could be compared with these previous planning budgets. Alternatively managers could be rewarded for the accuracy of their budgets rather than for how much they beat them by. Financial analysis JB Hi-Fi Ltd Refer to the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, and answer the following questions. Required 1. After examining the report, is it possible to conclude that there is a budgetary system in operation within JB Hi-Fi Ltd? 2. What would be the key element driving a budgetary system for JB Hi-Fi Ltd? What budgets might the company prepare? 3. Is there any evidence in the report that there is a performance evaluation system linked to a budgetary system? Explain your conclusion. 1. There is some evidence in the report to conclude that there is a budgetary system in operation within JB Hi-Fi Ltd. Mention of future planned activities and changes in the nature of the business would suggest planning and budgeting take place. 2. The key element driving a budgetary system for JB Hi-Fi Ltd would be retail sales. JB Hi-Fi Ltd is likely to prepare the following budgets. • Operating budgets: sales, purchases, cost of sales, selling/administrative/financial expenses, profit or loss. • Financial budgets: capital expenditure, cash, statement of cash flows, balance sheet. 3. There is no direct evidence in the report that there is a performance evaluation system linked to a budgetary system. However, the projections for future years are more than likely going to be compared with actual results and those responsible for the refurbishments and restructures are likely to be held accountable for the actual outcomes relative to the budgets as these involve tens of millions of dollars investments. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568