FA1334 Management Accounting

TUTORIAL 8: BUDGETARY CONTROL

Question 1
“Gromix” plant food, No.1, No.2 and No.3 is made by mixing two chemical ingredients.
Ingredient “A”, costing RM0.10 per kg and “B”, costing RM0.40 per kg. The product is sold
to farmers and market gardeners in returnable sacks containing 50kgs. Current stock level of
ingredients and finished products are known by management to be excessive and it has been
decided to aim at lower levels in future. Expected stock level are as follows:

A B No.1 No.2 No.3

(kgs) (kgs) (sacks) (sacks) (sacks)
As at 1 January 2019 36,000 30,000 150 160 130
As at 31 December 2019 24,000 17,000 50 60 30

No.1 No.2 No.3

Standard mixes (kgs):
Ingredient “A” 40 30 10
Ingredient “B” 10 20 40
Selling prices per sack (RM) 22 26 32
Estimated sales, 2019 (sacks) 5,000 6,000 3,000

Required:
Prepare the following budgets:
(a) Sales budget
(b) Production budget
(c) Material usage budget
(d) Material purchase budget

Answer
(a) Sales budget
No. 1 No. 2 No. 3 Total
Sales units (sacks) 5,000 6,000 3,000 14,000
× Selling price (RM) 22 26 32 25.86
Budgeted sales (RM) 110,000 156,000 96,000 362,000

(b) Production budget

No. 1 No. 2 No. 3 Total
(sacks) (sacks) (sacks) (sacks)
Sales units 5,000 6,000 3,000 14,000
(+) Closing stock 50 60 30 140
5,050 6,060 3,030 14,140
(-) Opening stock (150) (160) (130) (440)
Production budget 4,900 5,900 2,900 13,700

(c) Material usage budget

A B Total
(kgs) (kgs) (kgs)
No. 1 (4,900 sacks) 196,000 49,000 245,000
No. 2 (5,900 sacks) 177,000 118,000 295,000

T12 - 1
FA1334 Management Accounting

No. 3 (2,900 sacks) 29,000 116,000 145,000

Material usage budget 402,000 283,000 685,000

(d) Material purchase budget

A B Total
Material usage budget 402,000 283,000 685,000
(+) Closing stock 24,000 17,000 41,000
426,000 300,000 726,000
(-) Opening stock (36,000) (30,000) (66,000)
Material purchase budget (kgs) 390,000 270,000 660,000
Material purchase budget (RM) 39,000 108,000 147,000

Question 2
The following information related to Sinare Sdn. Bhd:

Month Wages Materials Overhead Sales

incurred purchases
(RM’000) (RM’000) (RM’000) (RM’000)
Feb 6 20 10 30
Mar 8 30 12 40
Apr 10 25 16 60
May 9 35 14 50
June 12 30 18 70
July 10 25 16 60
Aug 9 25 14 50
Sep 9 30 14 50

• It is expected that the cash balance on 31 May will be RM22,000

• The wages may be assumed to be paid within the month they are incurred.
• It is company policy to pay creditors for materials three months after receipt.
• Debtors are expected to pay two months after delivery.
• Included in the overhead figures is RM2,000 per month which represents depreciation
on two cars and one delivery van.
• There is a one-month delay in paying the overhead expenses.
• 10% of the monthly sales are for cash and 90% are sold on credit
• A commission of 5% is paid to agents on all the sales on credit but this is not paid until
the month following the sales to which it relates. This expense is not included in the
overhead figures shown.
• It is intended to repay a loan of RM25,000 on June.
• Delivery is expected in July of a new machine costing RM45,000 of which RM15,000
will be on delivery and RM15,000 in each of the following two months.

T12 - 2
FA1334 Management Accounting

• Assume that the overdraft facilities are available if required.

Required:
(a) Prepare a cash budget for each of the three months of June, July and August.
(b) Define cash budget
(c) Give three benefits of cash budget.

Answer
(a)
(W1) Sales
April May June July August
(RM) (RM) (RM) (RM) (RM)
Sales 60,000 50,000 70,000 60,000 50,000
Cash sales (10%) 6,000 5,000 7,000 6,000 5,000
Credit sales (90%) 54,000 45,000 63,000 54,000 45,000

Cash budget for June, July and August

June July August
(RM) (RM) (RM)
Receipts:
Cash sales 7,000 6,000 5,000
Credit sales 54,000 45,000 63,000
61,000 51,000 68,000
Payments:
Wages incurred 12,000 10,000 9,000
Materials purchases 30,000 25,000 35,000
Overhead 12,000 16,000 14,000
Commission paid 2,250 3,150 2,700
Loan repayment 25,000 - -
New machine - 15,000 15,000
81,250 69,150 75,700
Net cash (receipts – payments) (20,250) (18,150) (7,700)
Opening cash balance 22,000 1,750 (16,400)
Closing cash balance 1,750 (16,400) (24,100)

T12 - 3
FA1334 Management Accounting

(b) The cash budget will show the cash will be needed to finance all the budgeted activities. A
cash budget is prepared to show the expected receipts of cash and payments of cash during a
budget period. It is normally prepared on a monthly basis to show the cash position.

(c) Benefits of preparing cash budgets are as follows:

• Cash budgets are essential for the proper management of funds (e.g. to prevent
overspending)
• They indicate likely requirements for additional finance (e.g. indicate cash shortage and
the need to borrow money)
• They show additional funds are required temporarily or long term (e.g. cash
requirements for both short term & long term)
• They indicate possible future surpluses of funds so that suitable arrangements may be
made in advance for investing (e.g. indicate cash surplus for investment)
• Cash budgets play an important part in coordinating the operational budgets of a
business (e.g. business will need sufficient cash to operate)

Question 3
Below is a factory overhead cost budget for one cost centre for January. Since it is expected
that 1,000 units will be produced, each requiring two machine hours, costs are estimated at that
level.
Budget
Machine hour 2,000
RM
Variable costs:
Indirect materials 4,000
Indirect labour 3,500
Supplies 6,000

Fixed costs:
Depreciation (buildings and equipment) 1,000
Insurance 500

Semi-variable costs:
The budgeted overheads at two specified level of activity are:
1,000 2,000
Machine Machine
Hours Hours
Maintenance RM3,200 RM3,400
Electricity RM1,500 RM2,000
RM4,700 RM5,400

At the end of the month, the company found that because of a material shortage, only 900 units
were produced. The actual overhead costs and direct labour hours incurred to produce 900 units
were as follows:
Actual

T12 - 4
FA1334 Management Accounting

Machine hour 1,800

RM
Variable costs:
Indirect materials 3,900
Indirect labour 3,300
Supplies 5,600

Fixed costs:
Depreciation-buildings and equipment 1,050
Insurance 480

Semi-variable costs: 5,000

Required:
(a) Prepare flexible budgets at activity levels of 1,500, 1,800 and 2,500 machine hours.
(b) Determine the variances for January using the appropriate flexible budget and indicate
whether the variances are favourable or adverse.

Answer
(a)
Original Flexible budget
budget

Machine hours 2,000 1,500 1,800 2,500

RM RM RM RM
Variable costs:
Indirect materials 4,000 3,000 3,600 5,000
Indirect labour 3,500 2,625 3,150 4,375
Supplies 6,000 4,500 5,400 7,500

Fixed costs:
Depreciation 1,000 1,000 1,000 1,000
Insurance 500 500 500 500

Semi-variable costs:
Maintenance 3,400 3,300 3,360 3,500
Electricity 2,000 1,750 1,900 2,250

Total overheads 20,400 16,675 18,910 24,125

(W1) High – Low Method (Maintenance)

Step 1
Variable cost per hour = Changes in cost / Changes in hours
= RM3,400 – RM3,200 / 2,000 – 1,000
= RM0.20 per hour

T12 - 5
FA1334 Management Accounting

Step 2
Total cost = Fixed cost + Variable cost

Let say at 1,000 hours…...

RM3,200 = Fixed cost + (RM0.20 × 1,000 hours)

Fixed cost = RM3,000

(W2) High – Low Method (Electricity)

Step 1
Variable cost per hour = Changes in cost / Changes in hours
= RM2,000 – RM1,500 / 2,000 – 1,000
= RM0.50 per hour

Total cost = Fixed cost + Variable cost

Let say at 1,000 hours…...

RM1,500 = Fixed cost + (RM0.50 × 1,000 hours)

Fixed cost = RM1,000

(b)
Flexible budget Actual results Variance
Activity level
Machine hours 1,800 1,800

RM RM RM
Variable costs:
Indirect materials 3,600 3,900 300 (A)
Indirect labour 3,150 3,300 150 (A)
Supplies 5,400 5,600 200 (A)

Fixed costs:
Depreciation 1,000 1,050 50 (A)
Insurance 500 480 20 (F)

Semi-variable costs 5,260 5,000 260 (F)

Total overheads 18,910 19,330 420 (A)

T12 - 6
FA1334 Management Accounting

T12 - 7