BUDGETING & BUDGETARY CONTROL

UNIT 5
OUTLINE OF PRESENTATION

1) Discuss with students background to

budgeting
2) Discuss the behavioral aspects of
budgeting
3) Outline the functions / purpose of budget
4) Discuss the various approaches to
budgeting
5) Illustrate the preparation of functional
budgets
OUTLINE OF PRESENTATION CON T’D

6) Analyze the preparation of cash budget

7) Prepare a master budget with students
8) Discuss the concepts in budgetary
control system
9) Discuss the controllability principle
BUDGETING / BUDGET

 Background: Budgeting is vital to the planning

and controlling phases of the management
cycle. For a company that has a December 31st
as its fiscal year end, the budgeting process
can start as early as August.

 Beforeany attempt is made to define budget or

budgeting there is need for us to establish a
link between it and the managerial processes,
else budgeting seldom stands alone, instead
budget flow out of the managerial process -
which include;
BUDGETING CONT’D

1) Setting organizational objectives

2) Mapping out strategies to achieve the
object
3) Building a work plan to achieve object
4) Budget is an integral part of financial
planning process.
BUDGETING CONT’D

 Budgeting: It can be considered as an important

part of the classical management cycles which
entails: planning, implementation, and control.
In short, budgeting can be described as a total
management process / system which includes:
(i) Strategy formulation, (ii)
Implementation ,and (iii) Control.

 Alternatively, budgeting is a process of preparing

a budget, which forms an integral part of the
planning process.
PROCESS OF BUDGETING

1) Identification of objectives
2) Search for an alternative courses of action
3) Gathering data about alternatives
4) Evaluate alternative courses of action
5) Select preferred alternative course of action.
6) Implement the selected alternative.
7) Monitor actual performance against budget
8) Taking correcting measures against
deviations
BUDGET VRS FORCASTING

 Forecasting:
Forecast is a statement of what
is expected to happen. Forecast are not
always financial plan, but can be qualitative.

 Budget: is a statement of what it is

reasonable to believe can be made to
happen. Budget is thus a financial plan of
action, which is used as a tool for control
and measuring managerial performance. In
Sum, budget is a plan quantified in
monetary terms.
FUNCTIONS OF A BUDGET

1) Measurement of management
performance
2) Assist in allocating scarce resource within
a firm
3) Controlling the use of scarce resources
4) Signaling opportunities and threats
5) Early detection of deviations from plan
6) Monitoring and Evaluation
7) Forecasting into the future
FUNCTIONAL BUDGET

1) Sales Budget in Quantity and Value

2) Production Budget in Quantity
3) Direct material Usage and Cost Budget
4) Direct material purchase and Cost Budget
5) Direct Labor Usage and Cost Budget
6) Production Overhead budget
7) Administrative Expense Budget
8) Capital Expenditure Budget
9) Cost of Goods sold budget
MASTER BUDGET

A master budget summarizes and

consolidate the functional budgets into one
complete document and it is made up of the
following:

1) Budgeted Income Statement (P & L)

2) Cash Budget
3) Budgeted Balance Sheet
4) Cash flow budgets
PRINCIPAL BUDGET FACTOR
 The principal budget factor / limiting factor
/ key factor is a factor which, at any given
time, is an overriding planning limitation
on the activities of the organization. The
principal budget factor serves as a
constraint on the organization depriving it
from achieving its objectives.

 Budget factor may be a production

capacity, shortage of labor, material,
finance or commonly the level of demand
for the goods or service. In a typical
SALES BUDGET

 Sales Budget: The preparation of

functional budgets must begin with the
sales budget. Sale is a principal budget
factor which drives other functional
budgets. The sales budget is a plan that
predicts sale in quantities and in value. It
is derived by multiplying the sale unit by
the unit price of an item produced.
IMPORTANCE OF SALES BUDGET

1) Without forecast for expected sales for

the planning period, a firm may easily
produce many units or too few
2) Besides, this may lead to overstocking or
lost of sales
3) Lack of sales budget can lead to costly
mistakes in purchasing materials and
hiring of employees
SALES BUDGET DETERMINANTS

1) Prior year sales broken down by product

lines
2) General economic condition
3) The level of competition in the market
place
4) Disposable income of consumers
5) Substitute products entering the market
APPROACHES TO BUDGETING

1) Fixed budgeting approach

2) Flexible budgeting Approach
3) Incremental budgeting approach
4) Zero Based budgeting approach
5) Kaizan budgeting approach
6) Activity Base Budgeting
7) Rolling Budget (Participants to Research)
FIXED BUDGETING

 This is a budget for a given level of activity

set at the time of developing the budget
(William,2000). For example, the direct
material cost budget for department X is set
to be GH₵100,000 for the planned production
period of 50,000 Units of components to be
produced.

 By this assumption, management of

department X cannot increase the budget
allocated to department, neither can activity
be increased beyond the 50,000 units)
FLEXIBLE BUDGETING

 This process of budgeting allows for an

adjustment to be made to the original budget, to
be flexed to the actual level of activity attained.

 Thus in the above example under fixed budget, if

the actual production is now 55,000 units of
output, the budget of ₵100,000 will not be
realistic ,it must therefore, be adjusted to the
level of production of 55,000 units which have
been attained.
FLEXIBLE BUDGETING CONT’D

The flexible budget approach is based on

cost behavior pattern vis-à-vis activity level.
Therefore, cost can be classified as fixed,
variable and semi -variable cost or semi-
fixed costs.

To flex a budget , only the variable cost and

the semi-variable costs are varied to the
extent of actual activity level attained.
 QUESTION 1- ICAG EXAMS QUESTIONS MAY 2015 ADAPTED

The budgeted and actual results of Monster

Company Limited for September 2015 were as
follows: The company uses marginal costing system.
There were no opening or closing inventories.
Fixed Budget Actual Results
Sales / Production 1,000 Units 700 Units
Sales ₵ ₵ 30,000 ₵ ₵ 21,200
Variable cost of sales
Direct material 10,000 6,600
Direct Labor 5,000 3,800
Variable overheads 3,000 18,000 2,200 12,600
Contribution 12,000 8,600
Less fixed cost 10,000 10,400
Net Profit / Loss 2,000 (1,800)
QUESTION 1 CONT’D

Required :
Prepare a budget that will be useful for
management control purpose and briefly
comment on the company’s performance in
September 2015.
SOLUTION

Fixed Flexible
Budge Budget Actual Varianc
t e
Production/ Sales 1,000 700 700 -
Sales value (30,000 /1000) 30,000 (700 x 30)= 21,200 200 F
= 30 21,000
Production Cost
Direct 10,000 7,000 6,600 400 F
Material)10,000/1000 =10
Direct Labor Cost 5,000 3,500 3,800 300 A
5
Variable production Cost 3,000 2,100 2,200 100 A
3
Total Production Cost (18,00 (12,60
18 0) (12,600) 0)
Contribution 12,000 8,600
8,400
SOLUTION
Commentary on result
1) Sales variance was GH₵200F. This shows that the
actual selling Price must be different from that
budgeted. Budgeted selling price = ₵30,000÷1000 units
= ₵30 Actual Selling Price ₵21,200 ÷700 units = ₵30.3.

2) Despite this, the overall performance is GH₵200 worse

than budgeted, thus flexible budget = ₵1,600
compared with actual loss ₵1,800.

3) Control of direct material cost has been very good as

this has been GH₵ 400F better than expected.
CONMENTARY CONT’D

4) Direct labor cost is overspent as does fixed

overhead by GH₵ 300 and GH₵ 400
respectively.

5) Management need to investigate these

variances by employing management by
exception to see whether corrective actions
is necessary and whether the plan need to
be amended in the light of actual results.
INCREMENTAL BUDGETING

 This is the system of budgeting where the

previous period’s budget is used as basis
for preparing the current periods' budget
by making incremental adjustments as
may be influenced by factors such as
inflation, expansion needs, and growth.
INCREAMENTAL BUDGETING - MERIT

1) It is simple to apply in practice, this is so because

you need not develop a decision package and to
justify the inclusion of a cost item into the budget.

2) It is most suited to such cost as wages and

salaries. Most pay roll accounting systems are
developed based on incremental assumptions
because of its simplicity in current wage
adjustments.

3) It is widely accepted and used. Most firms across

the globe adopt incremental budgeting because it
is simple to use.
INCREMENTAL BUDGETING - DEMERIT

1) The budget perpetuates past inefficiencies. The

budget preparation does not require functional
managers to justify cost items for the financial
year. All cost items are just given a flat
percentage increase say 5%.

2) The budget preparation process is not

sufficiently critical to diagnose the cost behavior
of the enterprise.

3) It does not lead to the optimal and efficient

allocation of budgetary resources.
ZERO BASED BUDGETING

 Lynch (2003) notes: “It is the process of

budgeting whereby all activities contained in
the budget is re-evaluated each time the
budget is being prepared. Discrete levels of
each activity are valued and a combination
chosen to match funds available” (p.372).

 ICAG (2015) notes: “The principle behind Zero

based budgeting (ZBB) is that, the budget for
each cost center should be made by starting
from zero. Every item of expenditure must be
justified in its entirety in order to be included in
the next year’s budget” (p. 453).
STEPS INVOLVED IN ZERO BASED
BUDGETING
1. Define decision packages: They are comprehensive
description of specific organizational activity which
management can perform. The activities are ranked in
order of priority against other activities. There are two
types:

a) Mutually exclusive packages: contains alternative

methods of performing the same task. The best
alternative selected based on cost and benefit analysis.

b) Incremental packages: Divide one aspect of an activity

into different levels of effort. The base package will
describe the minimum work effort to be done to carry
out an activity
 STEPS INVOLVED IN ZERO BASED
BUDGETING
2. Evaluate each activity (decision package) This
must be done on the basis of its incremental
benefits and costs to the organizational.

3. Allocate resources in the budget according to

the funds available and the evaluation and
ranking of the competing packages.

4. Monitor budget performance, investigate

variance and revise the assumptions for the
decision packages in the next year’s budget
preparation.
ZERO BASED BUDGETING - MERIT

1. It is possible to identify and remove

inefficient or obsolete operations.

2. It adds a psychological impetus to

employees to avoid wasteful
expenditure.

3. It concentrates management attention

on the future instead of the past.
ZERO BASED BUDGETING – MERIT
CONT’D

4) It helps management to focus on

company objectives and goals.

5) It provides a frame work to ensure

optimum utilization of resources by
establishing priorities in relation to
operational activities.

6) It can assist in motivating at all levels of

management.
ZERO BASED BUDGETING – DEMERIT

1. It require extra paper work created by

decision packages and the process is
cumbersome.

2. It emphasis on short term benefit to the

detriment of long term benefits.

3. It requires special skill of management in

analyzing decision packages, which in most
instance not readily available in the
company.
ZERO BASED BUDGETING – DEMERIT
CONT’D

4) There is difficulty in ranking the decision

packages, because of volume of
packages.

5) Developing decision units and packages

are time wasting and unproductive.
ROLLING BUDGET
 Lynch (2003), states: “A rolling budget is a
budget continuously updated by adding a
further period, say a month or quarter and
deducting the earliest period. Beneficial
where future costs and /or activities cannot
be forecasted reliably” (p . 370).

ICAG(2015), States: “A rolling budget is a

budget which is continuously updated by
adding a further accounting period (a month or
quarter) when the earlier accounting period
has expired” (p 459).
ROLLING BUDGET CONT’D

A typical rolling budget might be prepared as

follows: A budget is prepared for the coming
year, say January-December broken down
into suitable control periods.

 At the end of the first quarter say March, a

comparison is made between the budget and
the actual result, lessons learnt are used to
revise the budget and one prepared for the
remaining control periods in the year.
ROLLING BUDGET - ADVANTAGES

1) Budgets are more realistic and achievable

2) Avoids annual disruption with budget
preparation
3) Provides more meaningful variance and
feedback
4) It turns to reduce budgetary bias/ slack
5) It makes readily available budget for all
period
ROLLING BUDGET – ADVANTAGES CONT’D

6) It reduces rigidity in the budgeting

process
7) Builds contingency and innovation into
budgeting
8) The assessment of plan and objectives is
continuous
9) Increase management commitment to
budget.
ROLLING BUDGET - DISADVANTAGE

1) It is difficult to plan accurately using

control periods, an ideal control period
should be a one year.
2) It may not allow mangers give attention
to the budget, because sooner the
budget would be reviewed.
3) Some organizations by their nature may
operate annual budgets, which may not
fit well into this budgeting approach.
ROLLING BUDGET -DISADVANTAGE CONT’D

4) Requires additional work load from and

mangers may need additional staff, this
has the tendency to overburden senior
managers in the planning process.

5) There is the danger that the rolling budget

will become the last budget with some
minus or plus, and less meaningful to
attaining the corporate objectives.
ACTIVITY BASED BUDGETING (ABB)

Lynch (2004), notes: “Activity based

budgeting is a method of budgeting based on
activity framework and utilizing cost driver
data in the budget- setting and variance
feedback process” (p.378).

It involves defining activities that drives cost

in each functional area of an organization and
using the level of activity to decide how
much resource should be allocated, how well
is it being managed and to explain variances
from budget (ICAG 2015, p. 456).
 STEPS INVOLVED IN ACTIVITY BASED
BUDGETING

1. Divide the organization into functions/

activities.
2. Create a cost center for each activity.
3. Identify the factors that influence the cost.
4. Trace cost objectively to an activity.
5. Calculate cost driver rate for each activity.
6. Allocate overheads to production based on
cost driver rate.
ADVANTAGES OF ACTIVITY BASED
BUDGETING

1. Identifies the cost of an activity,

facilitating cost reduction.
2. It help determine the amount of
resources consumed by an activity.
3. Help to determine trends in activity cost
and aid planning
4. It is robustly linked to total quality
management (TQM)
5. Aids resources allocation decisions since
this is related to activity cost
information.
BENEFITS OF ACTIVITY BASED BUDGETING
1. Different levels of activity provides
foundation for building decision packages
and incremental packages to be used in ZBB.
2. It is linked directly to the overall business
strategy, since they are related to the sum of
its interrelated parts.
3. Critical successful factors will be identified
and performance measures devised to
monitor progress.
4. It ensures adequate resources are provided
to finance each activity to getting things
done right within the organization for the
first time.
QUESTION 2

Roxaline Limited makes the following forecast

for the financial year ending 31st December,
2014.Material and labor cost should be
quoted in the $ (US-Dollar).
ESTIMATED SALES STOCK IN HANDS
FINISH PRODUCT UNITS PRICE OPENING CLOSING
OM 22,000 150 8,000 11,000
DOM 40,000 160 10,000 22,000
KROM 30,000 220 9,000 8,000
RAW MATERIAL STOCK ON HAND MIX OF FINISH PRODUCT

PRICE OPENING CLOSING OM DOM KROM

X 10 6,000 5,000 1 - 4
Y 8 15,000 12,000 3 2 5
Z 11 8,000 13,000 6 8 1
DIRECT LABOR NUMBER OF HOURS WORKED / PER RATE
Finish Product Hours $ Rate
OM 3 8
DOM 6 4.5
KROM 8 9.5
QUESTION 2 CONT’D

Additional information
Budgeted manufacturing overhead
amounts to 2,362,000.Overheads are
allocated to production on the basis of labor
cost.

You are required to draft the following for

the year ended 31st December, 2014.
QUESTION 2 CONT’D

1. Sales budget
2. Production budget
3. Direct material usage budget
4. Direct material purchase budget
5. Direct labor budget
6. Manufacturing Overhead budget
7. Cost of good sold budget
SOLUTION

(1) Sales budget $

OM (22,000 x 150) =
3,300,000
DOM (40,000 x 160) =
6,400,000
KROM (30,000 x 220) =
6,600,000
Total Sales
16,300,000
SOLUTION CONT’D

(2)Production budget
Unit
OM (22,000 + 11,000 - 8,000) =
25,000
DOM (40,000 + 22,000 - 10,000) =
52,000
KROM (30,000 +8,000 - 9,000) =
29,000
Total Production Units
106,000
SOLUTION

3) Direct Material Usage Budget

Material Mix X Y Z

OM (25,000 (1, 3, 6) 25,000 75,000

150,000
DOM (52,000 (0, 2, 8) - 104,000
416,000
KROM(29,000 (4, 5, 1) 116,000 145,000
29,000
Material Required 141,000 324,000
595,000
SOLUTION

4) Direct Material Purchase budget $

Material X Y Z
Material Required 141,000 324,000 595,000
Add Closing Stock 5,000 12,000 13,000
Less Opening Stock (6,000) (15,000) (8,000)
Material Purchase unit 140,000 321,000 600,000
Unit Price $ 10 $8 $ 11
Material Cost 1,400,000 2,568,000 6,600,000
SOLUTION

5) Direct Labor Budget $

OM (25,000 x 3hrs) = (75,000 x $8) = 600,000

DOM (52,000 x6hrs) = (312,000 x $4.5) =
1,404,000
KROM (29,000 x8hrs) = (232,000x$9.5) = 2,204,000
Total 4,208,000

6) Manufacturing Overheads Budgets $

2,362,000
SOLUTION

7) COST OF GOODS ($) OM ($) DOM ($) KROM

SOLD
Opening Stock 8,000 10,000 9,000
Add production 25,000 52,000 29,000
Less Closing Stock (11,000) (22,000) (8,000)
Cost of sale 22,000 40,000 30,000
Unit Price $137.44 $ 146.12 $ 209.56
Cost of goods Sold 3,023,680 5,844,800 6,286,800
SOLUTION

VOAR = Budgeted Overhead Cost

Direct Labor Cost

= 2,362,000
4,208,000
= $0.56
WORKINGS: COST PER UNIT

(1) RAW MAT. OM DOM KROM

X ($10 x1) = 10 ($10 x 0) = 0 ($10 x 4 )=
40
Y ($8 x 3) = 24 ($8 x 2) = 16 ($ 8 x 5) =
40
Z ($11x6) = ($11x 8) = 88 ($ 11x 1) =
66 11
(2) LABOUR ($8 x 3) = ($4.5 x 6) = ($ 9.5 x 8) =
24 27 76
(3) ($.56 ($.56 x27) = $.56 x 76 =
OVERHEAD x24)=13.44 15.12 42.5
COST /UNIT
$137.44 $146.12 $209.56
QUESTION 3 - ICAG EXAMS QUESTION MAY
2005 ADAPTED

Elvis limited, plans to produce and sell

8,000 sachets of sugar during the year
ended 2003. The selling price is expected to
be GH₵30 per sachet. One (1) unit of sachet
required 4 units of material A, 3 units of
material B and 2 units of material C.

Opening Stock of raw materials are as

follows:
QUESTION CONT’D

Details Units
Amounts ₵
Material A 45,000
270,000
Material B 35,000
70,000
Material C 25,000
5,000
QUESTION CONT’D

Additional Information:

1) The closing stock for each raw material is to

be at a level which would meet the production
requirement for 7,000 sachets of sugar.
Currently, there is no closing stock of sugar.

2) Purchase price for all raw materials during the

year 2003 are expected to be 30% higher
than the prices reflected in the opening stock
values.
QUESTION CONT’D

3) Sales and purchases are on credit and the

opening balances being as follows:
₵

Debtors 350,000
Creditors 270,000

4) The company expects to receive GH₵525,000

from debtors during the period and to pay
GH₵235,000.
QUESTION CONT’D

Required:
1) Prepare the sales budget
2) Prepare production budget
3) Prepare a budget for raw material Usage
4) Prepare a budget for raw material
purchases
5) Calculate the closing balance for debtors
and creditors
SOLUTION CONT’D

1)Sales Budget

= Production & Sales Unit x Selling Price

= (8,000 x GH₵30)
= GH₵ 240,000

2) Production Budget
= Production Requirement 8,000 Units
(Sugar)
SOLUTION CONT’D

3) Raw Material Usage Budget

Materials A Unit B Unit

C Unit
Mat. Required (4 x 8,000) (3 x 8,000)
(2 x 8,000)
Mat. Budgeted 32,000 24,000
16,000
SOLUTION CONT’D

(7000X4) (7000X3) (7000x2)

4) Material Purchase Budget

Material A B C
Usage Requirement 32,000 24,000 16,000
Add Closing Stock 28,000 21,000 14,000
60,000 45,000 30,000
Less Opening Stock (45,000) (35,000) (25,000)
15,000 10,000 5,000
Price Per Unit ₵7,8 ₵2.6 ₵0.26
Cost of material 117,000 26,000 1,300

TMC = (117,000 + 26,000 + 1, 300 ) = 144, 300

SOLUTION CONT’D

Calculation of material unit price:

Price30%↑ New
Price
Mat A (270,000/ 45,000) = (6 x.30) = (1.8+6)
= 7.8
Mat B (70,000/ 35,000) = (2x .30) = (0.6+2)
= 2.6
Mat C (5,000/ 25,000) = (0.2 x .30)= (0.06+0.2)
= 0.26
SOLUTION CONT’D

5) Debtor & Creditor Schedules

Debtor Creditor
Balance @ start 350,000 270,000
Credit sales 240,000 NIL
Credit Purchases NIL 144,300
Balance c/d 590,000 414,300
Cash balances (525,000) (235,000)
Debtor/ Creditors @ Close 65,000 179,300
QUESTION 4

Hash limited makes two products - PS and TG . Sales

for the next year are budgeted at 5,000 units of PS
and 1,000 units of TG. Planned selling prices are $ 65
and $100 respectively. Hash limited has the following
opening and closing stock:
Products (Units) PS TG
Opening stock 100 50
Closing stock 1,100 50
You are also provided the following data about the
materials required to produce PS and TG and the
whittling and fettling processes involved in
production.
QUESTION 4 CONT’D

Material units required/finished products

PS TG
Raw material X / unit of finish products 12
12
Raw material Y / unit of finish products
6 8
Direct labor hours /unit of finished products
8 12

Direct material stocks at the ware house X

QUESTION 4 CONT’D

Standard cost card for material and labor :

Direct labor rate per hour $2.20/ hour
Direct material X $0.72 / kg
Direct material Y $ 1.56 /kg
Production overhead:
Variable $1.54/ hour
Fixed $ 0.54/ hour
$2.08/hour
The marketing and administration expenses is $45,000
QUESTION 4 CONT’D

Required: calculate the following:

1) The sales budget
2) The production budget
3) Direct materials - Usage and purchase
4) Direct labor cost budget
5) Factory overhead budget
6) Cost of goods sold budget
7) Extract the income statement
QUESTION 5

Ebb company limited is mineral company situated at Ejisu.

The company is preparing its budget for the coming year. It
expects to be able to sell 5,000 units of its only product, the
Sparkle, in January 2015. Sales are then expected to rise to
5,500 units in February and 7,000 units in March and then
remain stable for the rest of the year. Ebb company limited
aims to carry a finished goods inventory at the end of each
month equal to 10% of the following months sales. Each
sparkles takes 4 hours labor to make.

Ebb company Limited’s 138 production workers are

employed on contracts that require them to work a
minimum of 160 hours per month and are each paid
GH₵1,280 per month. Production workers are highly skilled
and require a minimum of one year’s training.
QUESTION 5

In the short term it’s not possible to recruit any more

production workers. Any labor hours required in excess
of 160 hours per worker are made up by overtime that is
paid at basic rate plus overtime premium of 50%.

Required
1) Prepare on a monthly basis, for the first three months
of 2015,Production budget in units, showing opening
and closing inventories of finished goods

2) A labour budget showing both hours and labour cost

(Assume that all production workers work at least 160
hours per month
SOLUTION
Production Budget January February March
Budgeted sales 5,000 5,500 7,000
Add closing stock 550 700 700
Less opening stock (500) (550) (700)
Production requirement 5,050 unit 5,650 unit 7,000 unit

Direct Labor Cost Budget January February March

Production Requirement 5,050 5,650 7,000
Labor hrs. (4 hours x prod (Actual) 20,200 22,600 28,000
Standard hrs. available (138 x 160 (Budget) 22,080 22,080 22,080
Over time required (A - B) 0 520 5,920
Basic rate payment (₵1,280 x 138) 176,640 176,640 176,640
520/160 x ₵1,280 x 1.50 0 6,240 0
5,920/160 x 1,280 x 1.50 0 0 71,040
Total labor cost 176,640 182,880 247,680
BUDGETORY CONTROL

 It entails the use of budget to control the

activities of an organization aimed at
achieving the firm’s objective.

 Budgetary control is a key tool used in

assessing management performance via
comparing budget with the actual result,
investigating the variance, taking
corrective measures, to prevent deviation
INTRODUCING BUDGETING FOR THE FIRST TIME

Accountants need to consider:

1) Sound financial accounting system within

the firm

2) Top managers support for the budgeting

process

3) Establish a budget manual specifying:

 INTRODUCING BUDGETING FOR THE FIRST TIME
CONT’D

I. Set the objectives of the budget

II. Define the functional budgets to be
prepared
III. Set out the membership of the budget
committee
IV. Clearly defined Organogram of the firm
V. Se out the procedures for the budget
preparation
STEPS IN THE BUDGETING PROCESS

1) Communicate the budget guideline to

managers
2) Determine the principal budget factor (E.g.
Sales)
3) Prepare the sales budget
4) Initial preparation of the functional budgets.
5) Budget negotiation with senior managers.
6) Coordinating and review of budgets.
7) Distribution of final budget
NECESSARY CONDITIONS FOR BUDGET

1) Top management support

2) Involvement of top managers
3) Appropriate accounting and information
systems
4) Budgeting should be flexibly administered
5) Realistic organizational structure
6) Clearly defined long term corporate objectives
7) Regular review of budget when necessary
STRATEGIC PLANNING PROCESS

1) Scan your environment (using SWOT

Analysis).
2) Formulate the strategic plan.
3) Evaluate the alternatives
4) Select a course of action.
5) Implement the selected strategic option.
6) Monitor and Evaluate results
 BUDGETARY CONTROL PROCESS

1) Establishment of the budget

2) Creation of control periods
3) Keeping records of annual results
4) Comparing the actual result with the
budget
5) Computing variance and reporting on them
6) Investigating the variances
PERIODIC BUDGET

 Thisis budget prepared for a defined time

horizon and is maintained for the said time
period before a new budget is prepared for the
period following the end of this period.

 Example a budget is prepared for the period

January to December of the year and this is
maintained throughout the year, probably, in
December, a new budget is created for the
next year covering January to December.
CONTINUOUS BUDGET

 Thisis also termed a rolling budget . It is a

budget prepared for a set time horizon and is
continuously reviewed to cover the set length of
time at any particular point in time.

 Example a budget that covers six month period

will be reviewed monthly including the months
next following and deleting the previous or past
month, so that the budget will always cover a
six month period.
PROCEDURE FOR BUDGETING

1) Issue time table for budget preparation

2) Communication of the budget guidelines
3) Functional budgets prepared by managers
4) Coordination of functional budget
5) Drafting of the master budget presented
6) Adjustments made by top management
7) Review and approval given to budget
8) Budget becomes operational as an
executive order
KEY CONCEPTS IN BUDGETING

 Budget
aspiration: is the level of the budget a
manager aspires to achieve.

 Budget slacks: this is the situation where

inefficiencies are built into the budget. This is
achieved by overstating the level of cost of a
particular activity.

 Responsibilityaccounting: this is the branch of

accounting where task are assigned to managers
and the divisional managers are held responsible
for the performance of their division.
KEY CONCEPTS IN BUDGETING

 Budget manual: this is a document which outline

the procedures to be followed by functional
managers in the preparation of their annual
budget. It is usually the reference source to
mangers in the budgetary planning and control
process.

 Budget committee: this is the body of persons

responsible for the coordination of the budgetary
planning and control process. They normally issue
the budget manual to functional managers to guide
them in the budgetary planning and control
process.
KEY CONCEPTS IN BUDGETING

 Principle
of controllability: States that manager of
responsibility Centre should only be held
accountable for costs over which they have
control.

 Budget centre: Budgetary control is based around

a system of budget centre. Each budget centre
will have its own budget and a manger will be
responsible for managing the budget centre and
ensuring that the budget is met. The budget
centre is the first step in setting controls system
in an organization.
PURPOSES OF A BUDGET

1) A guide to planning.
2) To coordinate activities.
3) To communicate plans to functional
managers.
4) To control operations/activities.
5) To evaluate performance.
6) Authorizing - set limit for revenue and
expenses.
BEHAVIORAL ASPECTS OF BUDGETING

 Ifbudgetary control is to be successful, attention

must be paid to behavioral aspects- thus the
effect of the budgeting system on people within
the organization and vice-versa.

 Poor performance and results are more often due

to the method of implementing the systems,
coupled with failure to allow people to effectively
participate in the development of the budget.
Budgets are one important ways of influencing
the behavior of mangers within an organization.
 BEHAVIORAL ASPECTS OF BUDGETING
CONT’D
 There are very few - or unknown number of
decisions that managers take in an
organization that does not involve some
financial effects, which will not
subsequently be reflected in a comparism
between budget and actual results -
control. This all embracing nature of
budget is probably the most important
advantage that budget has over most other
systems in a typical organization.


ROLES / ADAVANTAGES OF BUDGET

1) Authorizing mangers to spend to budget limit

2) Planning areas of responsibility and use of
resource
3) Forecasting future sources of revenue and
expense
4) Communicating & coordinating
5) Motivating mangers to achieve budget
objectives
6) Evaluation of performance
7) Control of the use of resources
 BEHAVIOURAL PROBLEMS WITH IMPLEMENTING
BUDGETORY CONTROL SYSTEMS

1) Fear and misunderstanding about the budget

objectives, many at times the budget object are
unequivocal.

2) Employees may get united and kick against the

budget, if they are not involved in the process of
budgeting.

3) Managerial responsibility can lead to dysfunctional

behavior, this tendencies must be minimized to
enhance goal congruence.
BEHAVIOURAL PROBLEMS WITH IMPLEMENTING
BUDGETORY CONTROL SYSTEMS
4) Leadership and motivating supervisors are key in
influencing behavior at the workplace, but most often
are ignored in the budgeting process.

5) The method of budgeting can also have some

behavioral implications - if the budget is prepared using
bottom - up approach, slacks may be built into it. On
the other hand - if the budget is prepared using top -
down approach, targets may be too high.

6) Some activities or programs that are necessary for the

pursuance of the business objectives may not be
carried out, just because they were not budgeted for in
the financial year
 ADDRESSING PROBLEMS WITH
IMPLEMENTING BUDGETARY CONTROL
SYSTEMS
There are five 5 ways to addressing these
problems

1) Ensure participatory budgeting process

2) Build motivations and reward systems into
budgeting
3) Provide basis for managerial performance
evaluation
4) Budgets must be regularly reviewed vis-à-vis
results
5) Increase scope of managers responsibility
CASH BUDGET
 Cash budget is an important cash management
tool, without it a firm would be staffed off the
required cash resources to meet its day-today
operations. Hence cash is deemed as the “Life
Blood” of a business. Lack of cash can lead the
firm to loss of purchase discounts, poor credit
ratings and this may cause loss of business
opportunities (Drury, 2005).

 Inthe days old, when interest rates hovered

around 2% to 4%, little or no attention was
given to cash management. But today as
CASH MANAGEMENT OBJECTIVES

 The goal of cash management is to plan a

firm’s cash position so that cash is available
when it is needed and all available idle cash
is invested to produce maximum return.
IMPORTANCE OF CASH BUDGET

1) Identify cash position of the firm

2) Cash commitments are clearly set out
3) Identify periods of cash shortages
4) Identify cash surpluses for investing
opportunities
5) Make arrangements to finance cash
shortages
DEMERITS OF CASH BUDGET

1) Cash flows are subject to uncertainties

2) Based on estimates and assumptions
not realistic
3) Adverse economic conditions can defeat
the object
QUSTION 6
The following cash balances were extracted from the
books of Roxy Limited. The cash balance on 1st
January was expected to be $30,000.

The sales budgeted were as follows: $

November 80,000
December 90,000
January 75,000
February 75,000
March 80,000
Analysis of the records shows debtors were settled
according to the following patterns; 60% within the
month of sales, 25% the month following, 15% the
month following.
QUSTION 6 CONT’D
Extract from the purchases budget were as follow $

December 60,000
January 55,000
February 45,000
March 55,000
All purchases are on credit and past experience shows that
90% are settled in the month of purchase and the balance
settled the month after. Wage are $15,000 per month and
overheads of $20,000 per month (including$5,000
depreciation) are settled monthly. Taxation of $ 8,000 has to
be settled in February and the company will receive
settlement of an insurance claim of $ 25,000 in March.

Required:
Prepare a cash budget for January, February and March.
SOLUTION

CASH BUDGET FOR JANUARY, FEBUARY & MARCH

Receipts $ Jan $ Feb $ Mar $ Total
Opening Balance 30,000 24,000 17,250 71,250
(b/f)
Receipts from 79,500 77,250 78,000 234,750
sales
Insurance Claim - - 25,000 25,000
Total Inflow 109,500 101,250 120,250 331,000
SOLUTION CONT’D

Total Inflow b/d 109,50 101,250 120,250 331,000

0
Payments:
Purchases 55,500 46,000 54,000 155,500
Wages 15,000 15,000 15,000 45,000
Overheads 15,000 15,000 15,000 45,000
Taxation - 8,000 - 8,000
Total Outflow 85,500 84,000 84,000 253,500
Net Cash inflows 24,000 17,250 36,250 77,500
SOLUTION: RECEIPTS FROM SALES
January: $

November (15% x 80,000) =

12,000
December (25% x90,000) =
22,500
January (60% x 75,000) =
45,000
79, 500
February: $
December (15% x90,000) =
RECEIPTS FROM SALES CONT’D

March: $
January (15% x 75,000) =
11,250
February (25%x 75,000) =
18,750
March (60% x 80,000) =
48,000
78,000
PAYMENT FOR PURCHASES

January: $
December (10% x 60,000) = 6,000
January (90% x 55,000) = 49,500

55,500
February: $
January (10% x 55,000) = 5,500
February ( 90% x 45,000) = 40,500

46,000
March: $
February (10% x 45,000) = 4,500
March (90% x 55,000) = 49,500
QUESTION 7 - ICAG EXAMS QUESTION NOV 2012
ADAPTED
K Limited is an agro processing company situated
in the SADA area. The company is preparing its
budget for the first three months of 2013 and has
approached you for assistance. The following is
available:
(1) Information extracted from sales ledger are as
follows:
GH₵
November 2012
160,000
December 2012
180,000
QUESTION 7 CONT’D

(ii) Debtors settle according to the following

pattern:
70% within the month of sales
20% in the month following
10% in the second month after sales
(iii) Extract from purchase ledger were as follows:
GH₵
December 2012 120,000
January 2013 100,000
February 2013 100,000
March 2013 120,000
QUESTION 7 CONT’D

All purchases are on credit. 90% are settled in the

month following purchases and the balance settled in
the second month after purchase.

(iv) Wages are expected to be as follows GH₵

January 2013 130,000

February 2013 155,000
March 2013 160,000
These are to be paid one month in arrears

(v) Electricity of GH₵2,000 per month is to be paid one month

in advance.
QUESTION 7 CONT’D

(vi) Corporate tax GH₵100,000 is expected to be paid

in march 2013.

(vii) The company will receive settlement of an

insurance claim of GH₵5,000 in march 2013.

(viii) Overheads are expected to be GH₵125,000

every month, this include depreciation of GH₵5,000.

(ix)The company has an overdraft facility with BBG

Bank Limited for the purpose of its day to day
operation up to GH₵500,000.
QUESTION 7 CONT’D

Required:

1) Prepare cash budget for the first quarter

of 2013

2) State briefly two (2) demerits of a cash

budget
SOLUTION
Cash Budget for Jan, Feb and January February March
March
Receipts: GH₵₵ GH₵ GH₵
Receipts for sales 157,000 188,000 195,000
Insurance claim - - 5,000
Total Inflows 157,000 188,000 200,000
Payments:
Purchases 108,000 102,000 100,000
Wages - 130,000 155,000
Electricity 2,000 2,000 2,000
Corporation Tax - - 100,000
Overheads 120,000 120,000 120,000
Total Outflows 230,000 354,000 477,000
Net Cash flows (73,000) (166,000) (277,000)
Opening cash balance - 73,000 239,000
Closing cash balance 73,000 239,000 516,000
WORKINGS - SALES

January: ₵
January (70% x 150,000) =105,000
December (20% x 180,000) = 36,000
November (10% x 160,000) = 16,000
157,000

February: ₵
February (70% x 200,000) =140,000
January (20% x 150,000) = 30,000
December (10% x 180,000) = 8,000
188,000
WORKINGS – SALES CONT’D

March: ₵

March (70% x 200,000) =

140,000
February (20% x 200,000) =
40,000
January (10% x 150,000) =
15,000
195,000
WORKINGS – PAYMENTS

January ₵
December 90% x 120,000 = 108,000
November 10% x NIL = 0
108,000
February ₵
December 10% x 120,000 = 12,000
January 90% x 100,000 = 90,000
102,000
March ₵
January 10% x 100,000 = 10,000
February 90% x 100,000 = 90,000
100,000
MASTER BUDGET

 Master budget brings together the various

functional budgets prepared by the divisional
mangers into a single purpose organizational
financial estimate (budget).

 It integrate the sales budget and the

production cost budgets into a single purpose
financial estimate. In fact, it is a summary
financial estimate showing the firm’s cash
position, financial position and financial
performance.
COMPONENTS OF A MASTER BUDGT

The master budget is made up of the

following:

1) Cash budget
2) Income statement / the profit or Loss
Account
3) Balance sheet
QUESTION 8 - ICAG EXAMS QUESTION NOV
2015 ADAPTED

Dix limited retails fertilizer to farmers in

Ghana. The company has approached its
Bankers to provide funding for the next year’s
operations and three months master budget
has been requested for review by the bankers.

You have been approached by the

management as a consultant to prepare the 1st
quarter budget for the banker’s consideration
QUESTION 8 CONT’D

GH₵
Debtors 23,000
Bank balance 55,000
Fixed Asset at cost 698,000
Provision for depreciation balance 98,000
Creditors balance 48,000
Operating expenses for the month 60,000
December
Sales for the month of December 2014 400,000
December Ending inventory 20,000
Retained earnings 120,000
Owners capital 530,000
QUESTION 8 CONT’D

The following additional information was

provided to assist your work:

1) Depreciation is provided at the rate of 5%

on cost of non- current assets.

2) Closing inventory is expected to increase by

GHS 2,000 in January from December level.
This is expected to increase by the same
figure in February from the projected figure
in January. It is expected that in March
QUESTION 8 CONT’D

3) The company makes a profit of 25% on its sales.

4) Operating expenses is expected to increase by

10% from that of December and this is projected
to increase at the same growth rate to march.

5) Sales is projected to grow by 15% from

December until March.

6) The Debtors figure is desired to be proportional

to the sales values.
QUESTION 8 CONT’D

7) Creditors value for the three months are

expected to be as follows:- January
GH₵50,000, February GH₵ 46,000 and in
March GH₵ 52,000.

8) Owners capital is to remain same in January

as does in December but will increase
proportionately sufficient to cover any
deficiency in capital for the remaining
months.
QUESTION 8 CONT’D

Required:

As the consultant for Dix Limited prepare:

1) Budgeted income statement for the first

quarter
2) Budgeted balance sheet for first quarter

3) Cash budget for the first quarter

SOLUTION
a) Budgeted Income Statement For Jan, Feb and March
2014
Jan. ₵ Feb. ₵ Mar. ₵
Sales (December sale (400,000 460,000 529,000 608,35
x 1.15) 0
Opening inventory 20,000 22,000 24,000
Purchases (COGS - Opening 347,000 398,750 458,26
Stock) 3
Cost of goods available for sale 367,000 420,750 482,26
(COGS) 3
Less Closing Stock (22,000) (24,000) (26,00
0)
Cost of sales 345,000 396,750 456,26
3
Gross Profit (25% on Sales) 115,000 132,250 152,08
SOLUTION CONT’D
(b)Budgeted Financial Position For Jan, Feb and March
2014
January February March
₵ ₵ ₵
Non – current Asset 698,000 698,000 698,000
Depreciation (5% + 98,000) (132,900) (167,800) (202,70
0)
Carrying Amount (Net Book 565,100 530,200 495,300
Value)
Current Assets:
Inventory (increase monthly by 22,000 24,000 26,000
2,000)
Debtors (23,000 - 15% each 26,450 30,418 34,980
month)
Cash balance (55,000 + 45,550 100,550 150,232 * 221,897
* *
149,000 204,651 282,877
SOLUTION CONT’D

(c) Cash Budgeted For Jan, Feb and March 201

Cash Inflows: January February ₵ March ₵
₵
Cash Received from Debtors 456,550 525,032 603,78
8
Cash Outflows:
Payments to creditors 345,000 402,750 452,26
3
Operating expenses 66,000 72,600 79,860
Total Outflows 411,00 475,350 532,12
0 3
Net Cash flows 45,550 49,682 71,665
Balance b f (December 55,000 100,550 150,23
55,000 2
WORKINGS

DEBTORS SCHEDULES January ₵ February March ₵

₵
Balance Brought Forward 23,000 26,450 30,418
Add Sales 460,000 529,000 608,350
Closing Debtors (23,000 x (26,450) (30,418) (34,980)
1.15)
Cash Received 456,550 525,032 603,787

CREDITORS January February ₵ March ₵

SCHEDULES ₵
Balance Brought Forward 48,000 50,000 46,000
Add Purchases 347,000 398,750 458,263
Less Closing Creditors (50,000) (46,000) (52,000)
Cash Paid 345,000 402,750 452,263
QUESTION 9

Amoako Manufactures “ANAGO” Soap. The

following were extracted from his book as at 31st
December 2014. Amoako Limited Balance sheet
as at 31st December 2014.
LIABILITIES $ ASSETS $
Capital 250,000 Sundry Assets 200,000
Net Profit 190,000 Less Depreciation (20,000)
440,000 180,000
Stock : Raw 40,000
Materials
Drawings 50,000 : Finished 20,000
Goods
Creditors 70,000 Debtors 30,000
Cash 50,000
 ADDITIONAL INFORMATION

1) Materials consisted of 16,000kg of material “NA”,

which cost $32,000 and 4,000 kg of material
“GO” which cost$8,000.There were 1,000 units of
finished goods in stores with a sales value of $30.
2) The budget for 2015 has just been prepared,
indicating the following: Unit sold in 2015 are
expected to be 25,000 units at the existing price.
Amoako limited usually collects 80% of sales for
the current year together with any amount
outstanding for the previous sale.
3) All materials are bought on credit. It is expected
that 50% of materials cost would be paid
together with any outstanding amount.
 QUESTION 9 CONT’D

Raw materials NA GO
Kilogram / Unit 3kg 2kg
Price per Unit $2 $2

4) Direct labor with Simi- skilled. It is expected that

4 hours would be used on each unit at wage rate
of $2.2 per hour.
5) It is expected that total hours of production for
the year will be 102,000 hours.
6) Cash drawings for the year will be $ 182,500
QUESTION 9 CONT’D

7) PRODUCTION OVERHEADS $
Indirect labor 6,000
Indirect materials 3,700
Repair Cost 1,750
Rents & Rates 4,450
Depreciation 10,000
Cooking & Heating 2,750
Power 1,950
Total 30,600
QUESTION 9 CONT’D

8) Other production and non- production

overheads will be settled prompting by
cash. Amoako budgeted to introduce an
amount of $31,500 to reduce capital
deficiency in the financial year.

9) Closing stock should be at 150 % of the

previous levels
QUESTION 9 CONT’D

10) GENERAL & ADMINISTRATION $

EXPENSES
Selling Expenses 25,000
Distribution Expenses 17,250
Administration 16,000
Financial Expenses 4,750
Total 63,000
QUESTION 9 CONT’D

Required: Prepare the following budgets

for 2015
1. Sale budget in volume & value.
2. Production budget
3. Direct material usage & value budget
4. Direct material purchase budget in
volume & value
5. Direct labor utilization & wage cost
budget
QUESTION 9 CONT’D

6. Factory overhead budget

7. Cost of goods sold budget
8. General, selling & Administration
expense budget
9. Cash budget
10. Budgeted income statement
11. Budgeted balance sheet
SOLUTION

(1) Budget USD $

Budgeted units of sales 25,000
Selling Price @ $30
Sales Volume 750,000

(2) Production Budget USD $

Sales Units 25,000
Add closing stock (150/100 @1,000) = 1,500
Less Opening Stock (1,000)
Budgeted Production Units 25,500
SOLUTION

(3)Direct Material NA Unit GO Unit TOTAL$

Usage
Production Requirement 25,500 25,500 0
Units required @3 unit @2 unit 0
76,500 51,000 0
Unit Price @$2.00 @$2.00 0
Material Requirement 153,000 102,000 225,000
 SOLUTION

(4) Material Purchase NA Unit GO TOTAL$

Budget Unit
Units Required 76,500 51,000 0
Add Closing (150/100 24,000 * 6,000 * 0
x16,0000)
100,500 57,00 0
Less Opening Stock (Given, (16,000) (4,000) 0
note1)
84,500 53,000 0
Unit Price @$2.00 @$2.00 0
Total Cost 169,000 106,000 275,000
SOLUTION

(5)Direct Labor Utilization Budget $USD

Production Requirement 25,500
Labor Hours Required x 4 hour
102,000
Wage Rate x $2.2
Total Wage Cost 224,400
 SOLUTION

(6) Direct Labor Utilization Budget $USD

Indirect Labor 6,000
Indirect Material 3,700
Repair cost 1,750
Rent & Rates 4,450
Deprecation 10,000
Cooling & Lighting 2,750
Power 1,950
Total Factory Overheads 30,600
 SOLUTION

(7)Cost of Goods Sold Budget NOTES $ USD

Direct Material Use (W4) 275,000
Direct Wages 224,400
(W5)
Production Overheads 30,600
(W6)
Production Cost 530,000
Add Opening Stock (16,000 + 4,000) 20,000
Less Closing Stock (150/100 (30,000)
x20,000)/24,000+4000
Cost of Goods Sold 520,000
SOLUTION

(8)General & Administration Expenses $ USD

Selling Expenses 25,000
Distribution Expenses 17,250
Administration Expenses 16,000
Financial Expenses 4,750
Budgeted General & Administration 63,000
Expenses
SOLUTION

(9) Cash Budget

DR$ CR$
Factory overheads 30,600

Balance B/F 50,000 General Expenses 63,000

Debtors Control 630,00 Creditors control 207,500

0
Drawings 44,000
Wages 244,400
Balance C/D 110,500
680,00 680,000
0
 SOLUTION

(10) Budgeted Income Statement (P&L) $USD

Sales 750,000
(W1)
Less Cost of Sales (520,000)
(W7)
Gross Profit 230,000
General & Administration Expenses (63,000)
(W 8)
Net Income 167,000
SOLUTION

Debtors Control Account

$ $
Balance 30,000 Cash(80/100 @750,000 + 630,000*
b/d 30,000)
Sales 750,000 Balance c/d 150,000

Creditors Control Account

$ $
Cash (80/100@275,000 207,500 Balance 70,000
+70,000) b/d
Balance c/d 137,500 Purchases 275,000
SOLUTION
(11) BALANCE SHEET FOR THE YEAR DECEMBER 2015
Budgeted Balance Sheet Cost$ Depn$ NBV$
Non Current Assets
Sundry Assets 200,000 30,000 170,000
Current Assets
Stock: Raw material (40,000 + 60,000
20,000)
: Finish goods (20,000 + 21,500
1,500)
Debtors 150,000
Cash 110,500
342,000
Less Creditors (137,500) 204,500
374,500
Capital 250,000
Add Net Profit (190,000 + 357,000
167,000)
QUESTION 10 - ICAG EXAMS QUESTION NOV. 2011
ADAPTED

Chobo limited has just employed you as its

Management Accountant. The following forecast
information for the third quarter of the year 2010
has been provided toOctober
you:
Novembe Decembe
r r
Sales expected 10,000 12,000 15,000
units units units
Price per unit ₵20 ₵20 ₵20
Closing stock 20,000 15,000 25,000
Percentage of Gross 40% 40% 40%
Profit
QUESTION 10 CONT’D

Balances shown above are at the end of each

month .In addition the desired balances
projected for the end of September 2010 are
shown below:
GH₵
Fixed Assets 500,000
Depreciation 120,000
Stock 18,000
Cash balances expected 80,000
Unpaid tax at the end of the month 3,000
Debtors 25,000
Creditors 30,000
QUESTION 10 CONT’D
The following information has been provided for
your use:
1) The company rents part of its apartment at
monthly rental of GH₵25,000 and this is
expected to remain the same for the next
two years.

2) Selling and distribution expenses are

expected to be 25% of each month’s sales
value.

3) Administration and general expenses are

QUESTION 10 CONT’D

4) Fixed asset is depreciated at 2% per month on cost.

5) The company has agreed to purchase additional

fixed assets at a cost of GH₵ 100,000 in November.

6) The company has plans to borrow GH₵ 80,000 from

a friend of the director in November which is
payable in a year’s time without interest.

7) The company pays tax at 10% on net profit every

month. This payment is actually done in the month
after the month in which profit was declared.
QUESTION 10 CONT’D

You are required to prepare:

1) The budgeted income statement for the last

quarter-October, November, December, 2010.

2) Budgeted statement of financial position for last

quarter- October, November, December, 2010.

3) The cash budget for the three months for the last
quarter - October, November, December, 2010.
SOLUTION

a) Budgeted Profit & Loss OCT NOV DEC

Accounts
Sales (20 x10,000) 200,00 240,00 300,00
0 0 0
Opening stock (given in question) 18,000 20,000 15,000
Add purchase ( COGAS – O/S) = 122,00 139,00 190,00
Purchases 0 0 0
Cost of goods available (C/S 140,00 159,00 205,00
+COS)=COGAS 0 0 0
Closing stock (given in question) 20,000 15,000 25,000
Cost of sales (GP- Sales value) 120,00 144,00 180,00
0 0 0
Gross profit (40% on sales value) 80,000 96,000 120,00
SOLUTION

a) Budgeted P&L Account OCT NOV DEC

CONT’D
GH₵ GH₵ GH₵
Rent Income b/d 105,0 121,00 145,0
00 0 00
Less : Administration expense (1.2 x 20,00 24,000 30,00
20, 1.25x24 0 0
Selling & distribution expenses (25% 50,00 60,000 75,00
on sale) 0 0
Depreciation 2% on cost + addition 10,00 12,000 12,00
0 0
Total expenses 80,00 96,000 117,0
0 00
Net profit before tax 25,00 25,000 28,00
SOLUTION CONT’D
CREDITORS SCHEDULE OCT NOV DEC
Desired creditors balance 30,000 25,000 20,000
Add purchases 122,000 139,000 190,000
152,000 164,000 210,000
Less desired ending balance (25,000) (20,000) (28,000)
Cash payments 127,000 144,000 182,000

DEBTORS SCHEDULE OCT NOV DEC

Desired debtors balance 25,000 15,000 30,000
Add sales 200,000 240,000 300,000
225,000 255,000 330,000
Less desired closing stocks (15,000) (30,000 (15,000)
)
Cash received 210,000 225,000 315,000
SOLUTION CONT’D

CASH BUDGET OCT NOV DEC

Inflows GH₵ GH₵ GH₵
Cash receipts ( Debtors) 210,0 225,00 315,00
00 0 0
Loan - 80,000 -
Rent income 25,00 25,000 25,000
0
235,0 330,00 340,00
00 0 0
Outflows:
Fixed assets acquisition - 100,00 -
0
Administration expenses 20,00 24,000 30,000
0
SOLUTION CONT’D

CASH BUDGET CONT’D OCT NOV DEC

Total cash flows b/d 200,000 330,500 289,500
Net cash flows 35,000 (500) 50,500
Balance c/d 80,000 115,000 114,500
Cash balance b/d 115,000 114,500 165,000
SOLUTION CONT’D

Budgeted Balance Sheet OCT NOV DEC

GH₵ 10+12+120- 154 -600
600
Non- Current Assets ( 500 x 2% 370,00 458,000 446,000
+120) 0
Current Assets
Stocks 20,000 15,000 25,000
Debtors 15,000 30,000 15,000
Expected cash balance 115,00 114,500 165,000
0
Total Current Liabilities 150,00 159,500 205,000
0
Current Liabilities
Creditors 25,000 20,000 28,000
Taxation 2,500 2,500 2,800
Total Liabilities 27,500 22,500 30,800
SOLUTION

NET ASSET B/D 492,500 595,000 620,200

Capital (introduced or 470,000 492,500 515,000
derived)
Add net profit 22,500 22,500 25,200
Loans - 80,000 80,000
Net Assets 492,500 595,000 620,200
 QUESTION 11 - ICAG EXAMS QUESTION MAY 2000
ADAPTED
Effie is a business woman whose draft balance
sheet as at 31/12/1999 is as follows:
GH₵ (‘000) GH₵ (‘000)
Fixed Assets at cost 89,000
Less depreciation (31,000)
58,000
Current Assets
Stock in trade 64,000
Trade Debtors 35,000
Bank balance 1,000
100,000
Less current liabilities – trade (32,000) 68,000
creditors
Total Assets 126,000
QUESTION 11 CONT’D

Financed by Capital:
Balance at 1/1/1999 120,000
Add Net profit 24,000
Less Drawings (18,000)
Capital at 31/12/1999 126,000

The present economic climate resulted in increased

sales over the years .The following forecasts and
estimates are made for the year ending 31/12/2000.

a) The gross profit margin is expected to be 20% on

sales.
QUESTION 11 CONT’D

b) Forecasts monthly sales are as follows:

₵40 million per month from January to June 2000

₵45 million per month from July to December 2000
₵50 million per month from January to June 2001

c) Effie has a policy to maintain stocks, at the end

of each month, sufficient to cover the expected
sales for the following two months.

d) The credit period allowed to customers and

obtained from suppliers is expected to remain at
QUESTION 11 CONT’D

e) A New vehicle is budgeted to be purchased

and paid for in June 2000 to cope with
increased sales. The cost is ₵20 million.
f) General expenses of ₵5 million per month
including allowance for bank interest are to be
incurred and paid for in the month in which
they are incurred.
g) The depreciation charge for the year is to be
₵12 million and a monthly withdrawal of ₵2
million for personal use is to be made.
h) Effie’s bank has agreed to provide any
overdraft facilities required during the year
QUESTION 11 CONT’D

Required :

1) Prepare a forecast cash statement for

the year ending 31st December 2000.
2) Forecast profit and loss account for the
year ending 31 December 2000.
3) Forecast balance sheet as at 31,
December 2000.