1 Budget

Question -1
The budgeted balance sheet data of Kwan Tong Ltd is as follows; (1 March)

Cost ($) Acc; Depreciation ($) Net ($)

Fixed asset -
Land and buildings 500,000 - 500,000
Machinery and equipment 124,000 84,500 39,500
Motor vehicles 42,000 16,400 25,600
666,000 100,900 565,100

Current asset
Stock of raw material (100 units) 4,320
Stock of finished goods (110 units) 10,450
Debtor – January ($7680)
- February ($10400) 18,080
Cash and bank 6790 39,640
Total asset 604740

Ordinary share capital ($1) 500,000

Share premium 60,000
Retain earning 40,840

Current liability
Creditor (raw material) 3,900
Total equity and liability 604,740

The stock of finished goods was valued at marginal cost.

The estimated for the next four- months period are as follows;
March April May June
Sales (units) 80 84 96 94
Production (units) 70 75 90 90
Purchase of raw material units 80 80 85 85
Wages and variable overhead at $ $4550 $4875 $5850 $5850
65 per unit
Fixed overhead $1200 $1200 $1200 $1200

The company intends to sell each unit for $219 and has estimated that it will have to pay $ 45 per unit for raw
materials. One unit of raw material is needed for each unit of finished product.
All sales and purchases of raw materials are on credit. Debtor are allowed two month’s credit and supplier of raw
material are paid after one month’s credit. The wages, variable overheads and fixed overhead are paid in the
month in which they are incurred.
Cash from a loan secured on the land and building of $120,000 at an interest rate of 7.5% is due to be received
on 1 May. Machinery costing $ 112,000 will be received in May and paid for in June.
The loan interest is payable half yearly from September onwards. An interim dividend to 31 March of $12,500 will
be paid in June.
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Depreciation for the four months, including that on the new machinery is:

Machinery and equipment $15733

Motor vehicles $ 3,500

The company use the FIFO method of stock valuation. Ignore taxation.
Required
(a) Calculate and present the raw material budget and finished goods budget in term of units, for each month from
March to June inclusive.
(b) Calculate the corresponding sales budgets, the production cost budgets and the budgeted closing debtor,
creditor and stock in term of value.
(c) Prepare and present a cash budget for each of the four months.
(d) Prepare a master budget, i.e budgeted trading and profit and loss account for the four months to 30 June and
budgeted balance sheet as 30 June.
Question -2
In the near future a company will purchase a manufacturing business for £315 000, this price to include goodwill
(£150 000), equipment and fittings (£120 000), and stock of raw materials and finished goods (£45 000). A delivery
van will be purchased for £15 000 as soon as the business purchase is completed. The delivery van will be paid
for in the second month of operations.

The following forecasts have been made for the business following purchase:
(i) Sales (before discounts) of the business’s single product, at a mark-up of 60% on production cost, will be:
Moth 1 2 3 4 5 6
(£000) 96 96 92 96 100 104

25% of sales will be for cash; the remainder will be on credit, for settlement in the month following that of sale. A
discount of 10% will be given to selected credit customers, who represent 25% of gross sales.

(ii) Production cost will be £5.00 per unit. The production cost will be made up of:
raw materials £2.50
direct labour £1.50
fixed overhead £1.00

(iii) Production will be arranged that closing stock at the end of any month is sufficient to meet sales requirements
in the following month. A value of £30 000 is placed on the stock of finished goods which was acquired on purchase
of the business. This valuation is based on the forecast of production cost per unit given in (ii) above.

(iv) The single raw material will be purchased so that stock at the end of a month is sufficient to meet half of the
following month’s production requirements. Raw material stock acquired on purchase of the business (£15 000)
is valued at the cost per unit which is forecast as given in (ii) above. Raw materials will be purchased on one
month’s credit.

(v) Costs of direct labour will be met as they are incurred in production.
(vi) The fixed production overhead rate of £1.00 per unit is based upon a forecast of the first year’s production of
150 000 units. This rate includes depreciation of equipment and fittings on a straight-line basis over the next five
years.
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(vii) Selling and administration overheads are all fixed, and will be £208 000 in the first year. These overheads
include depreciation of the delivery van at 30% per annum on a reducing balance basis. All fixed overheads will
be incurred on a regular basis, with the exception of rent and rates. £25 000 is payable for the year ahead in
month one for rent and rates.

Required:
(a) Prepare a monthly cash budget. You should include the business purchase and the first four months of
operations following purchase. (17 marks)
(b) Calculate the stock, debtor, and creditor balances at the end of the four- month period. Comment briefly upon
the liquidity situation. (8 marks)
(Total 25 marks)
Question -3
Mc Dreamy is in an industry sector which is recovering from the recent recession. The directors of the company
hope next year to be operating at 85% of capacity, although currently the company is operating at only 65% of
capacity. 65% of capacity represents output of 10,000 units of the single product which is produced and sold. One
hundred direct workers are employed on production for 200,000 hours in the current year.
The flexed budgets for the current year are as follows.
Capacity level 55% 65% 75%
$ $ $
Direct materials 846,200 1,000,000 1,153,800
Direct wages 1,480,850 1,750,000 2,019,150
Production overhead 596,170 650,000 703,830
Selling and distribution overhead 192,310 200,000 207,690
Administration overhead 120,000 120,000 120,000
Total costs 3,235,530 3,720,000 4,204,470

Profit in any year is budgeted to be 162/3% of sales.

The following percentage increases in costs are expected for next year.
Increase
%
Direct materials 6.0
Direct wages 3.0
Variable production overhead 7.0
Variable selling and distribution overhead 7.0
Fixed production overhead 10.0
Fixed selling and distribution overhead 7.5
Administration overhead 10.0

Required
Prepare for next year a flexible budget statement on the assumption that the company operates at 85% of capacity;
your statement should show both contribution and profit.