BUDGETING

The following data were extracted from the books of Kay Limited as at 1st March.

i) Budgeted Sales:
Units
March 180,000
April 240,000
May 250,000
June 230,000

The selling price is GH2 per unit.

Sales are invoiced twice per month, in the middle of the month and on the last day of the
month. Terms are 2% for 10 days and net 30 days. Sales are made evenly through the
month and 50% of sales are paid within the discount period. The remaining amounts are
paid within the 30-day period except for bad debts which average % of gross sales.

ii) Stocks of finished goods were 36,000 units on 1st March. The companys rule is that
stocks of finished goods at the end of each month should represent 20% of their budgeted
sales for the following month. No work-in-progress is held.
iii) Stocks of raw materials were 45,600 kilogrammes on 1st March. The companys rule is
that, at the end of each month, a minimum of 40% of the following months production
requirements of raw materials should be in stock. Payments for raw materials are to be
made in the month following purchase, and materials can only be bought in lots of 40,000
kilogrammes or multiples thereof.
iv) The standard production cost of the product, based on normal monthly production of
230,000 units is:
Cost per unit
GH
Direct Materials (1/2 kilogramme per unit) 0.50
Direct Wages 0.40
Variable Overheads 0.20
Fixed Overheads 0.10
Total 1.20

Fixed overhead includes GH8,000 per month depreciation on production plant and
machinery. Any volume variance is included in cost of sales.
v) Production salaries and wages are paid during the month in which they are incurred.
vi) Selling expenses are estimated at 10% of gross sales. Administrative expenses are
GH60,000 per month of which GH800 per month relates to depreciation of office
 equipment. Selling and administrative expenses and all production overheads are paid in
the month following that in which they are incurred.
vii) The cash balance is expected to be GH12,000 on 1st April.

You are required to prepare:

(a) the budgeted production requirements (in units) for each of the months of March, April
and May.
(b) the budgeted purchase requirement of raw materials (in units) for each of the months of
March and April.
(c) the Cash Forecast for April.
(20
marks)
ASEM ABA Ltd manufactures two products, Asem and Beba, using one basic raw material and
one grade of labour. The actual operating results achieved for eleven months ended June 2006
are shown below.
GHC000
Sales: Asem (GHC 12,000 each) 48,000
Beba (GHC 20,000 each) 40,000
88,000
Actual cost of sales:
Direct material 44,000
Direct labour 14,000
Variable overheads 6,000
Fixed overheads 10,000
74,000

Profit 14,000

Standard costing system is operated by the company.

During the above period, the actual material consumption was as specified in the standard, which
for Asem is 3 kilos per unit, and for Beba, 4 kilos per unit.

The standard wage rate is GHC 3,000 per hour. The standard labour cost of Asem is GHC 1,500
and Beba, GHC 3,000 per unit. Labour achieved standard efficiency but, throughout the above
period, the actual wage rate paid was higher than standard and consequently an adverse rate
variance of GHC 2,000,000 was incurred.
Overheads were as stated in the standard. Variable overheads vary directly with labour hours
worked. There was no change in any stock levels during the period.

Budgeted production for 2007 is 6,000 units of Asem and 4000 units of Beba. Material stocks
are budgeted to decrease by 2,000 kilos; there will be no change in any other stocks. The
standard material consumption per unit will be as specified in 2006 and, after careful
consideration, it has been agreed that 2007 standard material price will be the actual average
price paid during 2006.

The actual wage rate for 2006 will be increased by GHC 700 per hour for 2007, GHC 500 per
hour of which is the result of a productivity agreement which will enable the company to reduce
its standard time for each product by 20%.

Budgeted overheads will be at the same rate as shown for 2006 and it may be assumed there are
no wages included in overheads.

Required:

(a) Calculate the material purchases budget and the wages budget, showing both quantities
and values for the year ended July 2007
(14 marks)

(b) Calculate the net cost-savings which Asem Aba Ltd should achieve during 2007 as a
result of the productivity agreement, assuming that there is no restriction on the number
of labour hours which could be made available, if required.
(6 marks)
(Total: 20
marks)

(a) RASCUS Ltd is a manufacturing company in the Volta Region that has specialized in the
manufacturing of various types of footwear ranging from bathroom slippers to executive
shoes. The company for which you are a management accountant is considering
reviewing its current budgeting and budgetary control models.
Required:
You are required to write a report to the Head of Finance and Administration enumerating and
evaluating the strengths and weakness of Zero Based and Incremental budgeting approaches.

(10marks)

(b) Traditional budgeting systems are incremental in nature and tend to focus on cost centres.
Activity-based budgeting links strategic planning to overall performance measurement
aiming at continuous improvement.

Required:

(i) What benefits can be derived from the use of an activity-based system?
(4marks)

(ii) What are the conditions necessary for successful and effective budgeting?

(6marks)
(Total: 20marks)
(a) At a workshop for accountants, the chairperson observed that trainers of management
accountants are concerned with cost control, whereas the major emphasis should be on
cost reduction.

You are required to:

(i) Distinguish between cost control and cost reduction.

(4marks)

(ii) Explain four (4) techniques and principles used in cost control.
(4marks)

(iii) Explain the following techniques:

a. Value Analysis
 b. Work Study

(4marks)

(b) Budgeting is an effective management tool in business decisions. Explain four (4)
reasons why budgeting is important and state four (4) conditions necessary for effective
budgeting.

(8marks)
(Total: 20marks)

(a) Albe Limited was incorporated some five years ago. The financial position as at 31st
December, 2010 was as follows:

EQUITY AND LIABILITIES GHC GHC

Stated capital:
Ordinary share [40,000 at GHC12.50 each] 500,000
Preference shares [20,000 at GHC8.00 each] 160,000
660,000
Long term capital 140,000
800,000
NON-CURRENT ASSETS
Building and Land 400,000
Equipment 182,000
Motor Vehicles 48,000
630,000
CURRENT ASSETS
Inventory 40,000
Accounts Receivables 20,000
Cash at bank 124,000
184,000
CURRENT LIABILITIES
Accounts payable (14,000) 170,000
TOTAL ASSETS 800,000

The Company has produced the following estimates:

1) The accounts payable figure of GHC14,000 stated in the financial statement

would be paid in January, 2011.

The following credit purchases are settled a month after the month of purchase,
after deducting two percent (2%) discount.
GHC
January 28,000
February 42,000
March 36,000
 April 45,000
May 41,000
June 37,000

2) Sales for January will be GHC51,300 and will increase at the rate of 20% per
month until March. In April, sales will rise to GHC80,000 and this will rise
by10% per month thereafter.

Sales will be divided equally between cash and credit sales. Credit customers are
expected to pay two months after the sales.70% of sales will be generated by sales
agents who will receive 10% commission on sales.

The commission is payable one month after the sales.

3) The company intends to purchase further equipment in August for GHC45,000.

However, a deposit of 20% is supposed to be made in June.

4) Accounts receivable as at 31/12/2010 will be settled in January, 2011.

5) Other overheads will be GHC6,500 per month for the first three months and
GHC8,400 thereafter. Wages and salaries will be GHC16,000 per month. Both
types of expense will be payable when incurred.

6) Depreciation is to be provided at the rate of 10% per annum on land and building
and 20% per annum on equipment (depreciation has not been included in the
overheads mentioned above).
Required:
Prepare a monthly Cash Budget for Albe Ltd for January 2011 to June 2011. (15 marks)
(Total: 20 marks)