ACCT 10001 Accounting Reports & Analysis

Review Questions – Topic 9

Chapter 9: Budgeting

Comprehension questions

9.3

Strategic planning relates to the longer-term planning (such as three to five years) of the
organisation’s activities. It is usually carried out by senior management, and commonly
relates to broader issues such as: business takeovers, expansion plans, deleting business
segments and radical product/service development. Operational Budgeting is a process which
focuses on the short-term, commonly one-year, and results in the production of budgets
which set the financial framework for that period.

9.7

The sales budget is critical for determining the level of activity that can be expected for the
coming year. It will dictate the level of resource and thereby expenditure required by way of
staff salaries, operating expenses, accommodation expenses, inventory purchases and
production levels.

9.14

In an authoritarian style of budgeting, senior management simply sets the targets and the
budget for unit managers. In this case, the unit managers have little say in the targets that are
set and may have an influence over the motivation of the unit manager. Alternatively, in a
participative style of budgeting, the targets and budgets are arrived at by a process of
discussion and negotiation between senior management and unit managers. In this case, the
unit managers are seen to have had a say in the setting of targets and the budget and
consequently managers are more likely to adopt ownership of the targets and the budget.

9.15

The preparation of the cash budget is an important part of the planning process. Once
prepared, the cash budget can be used for monitoring cash performance, commonly referred
to as the control process. A cash budget prepared on a month-by-month basis is much more
useful for this purpose than one prepared on a quarterly or yearly basis.
9.19

While budgetary slack might be explained in a number of different ways, it essentially results
in targets that might be a little more easily achievable than might otherwise be the case. If a
number of managers engage in this practice, then the ultimate target and budget potentially
becomes meaningless. However, it should be noted that managers may not necessarily
intend to deceive, but it may be more a function of human behaviour and nature.

Exercises
9.20

Basic DVD – annual sales budget:

Conveyancing Litigation Family Law

Solicitor
B. Bryon $480 000 $480 000
(1600 x .5 x $600) (1600 x .5 x $600)
W. Smith $1 600 000
(1600 x 1 x $1000)
Y. Dixon $800 000
(1600 x 1 x $500)
C. Yang $1 080 000 $360 000
(1600 x .75 x $900) (1600 x .25x $900)
W. Wong $1 760 000
(1600 x 1 x $1100)
P. Pham $1 600 000
(1600 x 1 x $1000)

$1 280 000 $4 760 000 $ 2 120 000

9.21

Acoustic Sales
Acoustic sales receipts from accounts receivable for three months ending
30 November 2018

September October November

July $110 000 $33 000
(110 000 x 0.3)
August $95 000 $47 500 $28 500
(95 000 x 0.5) (95 000 x 0.3)
September $97 000 $19 400 $48 500 $29 100
(97 000 x 0.2) (97 000 x 0.5) (97 000 x 0.3)
October $111 000 $22 200 $55 500
(111 000 x 0.2) (111 000 x 0.5)
November $92 000 $18 400
(92 000 x 0.2)

$99 900 $99 200 $103 000

9.22

Receipts from accounts receivable for three months ending 31 August 2018:

Credit Sales June July August

April $168 000 $58 800
($168 000 x
.35)
May $176 000 $105 600 $61 600
($176 000 x .6) ($176 000 x
.35)
June $186 000 $111 600 $65 100
($186 000 x ($186 000 x .35)
.6)
July $164 000 $98 400
($164 000 x .6)
August $165 000

$164 400 $173 200 $163 500

9.23

A cash budget for Ski Lifters will help with cash planning. A cash budget prepared on a
monthly basis will enable Ski Lifters to identify those times of expected cash surplus (during
the peak season) and cash shortages (during the low season). The nature of the industry suggests
a review of the estimates during the budget period will further help with planning.

9.28

Vesty Travel Services

Cash budget for quarter ended September 30 2018

July Aug Sept TOTAL

$ $ $ $
ANTICIPATED RECEIPTS
Initial capital 27 750 27 750
Fees received 5 772 7 548 11 322 24 642

Total receipts 33 522 7 548 11 322 52 392

ANTICIPATED PAYMENTS
advertising and marketing 2 775 2 220 1 332 6 327
cash withdrawals 1 332 1 332 1 332 3 996
computer equipment 7 659 7 659
administration 1 221 1 221 1 221 3 663
Rent 1 776 1 776 1 776 5 328
 Total Payments 14 763 6 549 5 661 26 973
Excess (Deficit) receipts over payments 18 759 999 5 661 25 419
Bank balance at beginning of month 0 18 759 19 758 0
Bank Balance at End of Month 18 759 19 758 25 419 25 419

Note: Fees charged not included as this relates to credit sales.

9.30

a. Garden Sculptures – cash budget for quarter ended 31 March 2018:

Jan Feb Mar TOTAL

$ $ $ $
ANTICIPATED RECEIPTS
receipts from debtors 20 000 30 000 5 000 55 000
cash services 1 950 2 250 3 300 7 500
sale of old equipment 2 000 2 000
Total receipts 21 950 34 250 8 300 64 500
ANTICIPATED PAYMENTS
salaries and wages 8 500 8 500 8500 25 500
suppliers 2 600 3 500 2 800 8 900
new equipment 20 000 20 000
administration costs 2 000 2 000 2 000 6 000

Total Payments 33 100 14 000 (13 300 60400

Excess (Deficit) receipts over payments (11 150) 20 250 (5 000)
Bank balance at beginning of month 25 000 13 850 34 100
Bank Balance at End of Month 13 850 34 100 29 100

b. A variance report would enable the owner to compare actual receipts and payments with the
budgeted receipts and payments. Performed on a monthly basis this would help in monitoring
the cash position and determining future budget estimates.
9.34

If the budget is imposed on business unit managers it may lead to dysfunctional behaviour as
the managers may:
• Consider targets set are too difficult to meet.
• Make decisions that might not be in the entity’s best interest e.g. to cut back discretionary
expenditure such as training, maintenance to improve the profit performance of the
division.

If the budget is set in a more participatory environment then:

• Targets are set through discussion and negotiation between senior management and unit
managers.
• Due to the participation unit managers may consider the targets achievable and thereby
motivate the unit managers to achieve the entity’s objectives.

Quarter 1
Production budget 2019 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
2020 ***
Soaps - budgeted sales units 7,000 9,000 10,000 12,000 38,000 9,100
Desired ending inventory * 5,400 6,000 7,200 5,460 5,460
Required units 12,400 15,000 17,200 17,460 43,460
Less beginning inventory ** 4,200 5,400 6,000 7,200 4,200
Production required (units) 8,200 9,600 11,200 10,260 39,260

Candles 3,000 6,000 8,000 11,000 28,000 3,900

Desired ending inventory 3,600 4,800 6,600 2,340 2,340
Required units 6,600 10,800 14,600 13,340 30,340
Less beginning inventory 1,200 3,600 4,800 6,600 1,200
Production required (units) 5,400 7,200 9,800 6,740 29,140

* Ending inventory = 60% of next quarter's unit sales

** Beginning inventory = given
*** Quarter 1 2020 unit sales = Quarter 1 2019 unit sales x 1.30

9.39

The budgets likely to be affected by the 15% increase in sales include:

• Sales budget – increased revenue.
• Cash budget – increased cash flow from customers.
• Expenses budget – increased operating expenses to deal with increased sales; also
higher sales commission.
• Inventory purchases – more inventory to meet higher sales targets (although this will
depend on inventory policy).
9.42

1. Refinanced – nil impact on cash flow as $500,000 will be paid out and $500,000 will
be received (assumption repayments stay the same).
2. Paid out in a lump sum - a cash outflow in the time period paid.
3. Extend loan by reducing repayments – due to a lower cash outflow the overall cash
position will be improved.

9.48

a. Lisa Lin’s style of budgeting would be classified as an authoritarian style, which suggests
Lisa simply sets the targets and the budget for unit managers. In this case, the unit mangers
have little say in the targets that are set.

b. It may be better if departmental managers had at least some input to the setting of the budget
targets. This may result in more reliable estimates and help to overcome the growing
unfavourable variance problem. Presumably the departmental managers would be aware of
customer trends/preferences and competition which all important for determining sales
targets. Some participation by managers in the planning process may contribute to a better
work environment and reduce the employee turnover problem.

9.50

a.
Receipts from Debtors Schedule for 12 months ending 31 December 2018

March June September December

December $690000 310 500*
March $790000 434 500** 355 500***
June $890000 489 500 400 500
September $990000 544 500 445 500
December $1040000 572 000
$745 000 $845 000 $945 000 $1 017 500

Month Receipts ($)

December March $690 000 x 0.45 = $310 500
March March $790 000 x 0.55 = $434 500
March June $790 000 x 0.45 = $355 500
 b.
Rainbow Enterprises
Cash budget
for 12 months ended 31 December 2018
March June September Dec Total
ANTICIPATED RECEIPTS
Receipts from debtors 745 000 845 000 945 000 1 017 500 3 552 500
(refer debtors schedule)
Total receipts 745 000 845 000 945 000 1 017 500 3 552 500
ANTICIPATED PAYMENTS
Payments to creditors 504 000 429 000 409 000 439 000 1 781 000
Marketing and Administration 188 000 188 000 188 000 188 000 752 000
Occupancy 87 000 87 000 87 000 86 300 347 300
IT equipment 27 300 27 300

Total Payments 779 000 704 000 684 000 740 600 2 907 600
Excess (Deficit) receipts over payments (34 000) 141 000 261 000 276 900 644 900
Bank balance at beginning of month 18 450 (15 550) 125 450 386 450 18 450
Bank Balance at End of Month $(15 550) $125 450 $386 450 $663 350 663 350

Note: Cost of sales not included in the budget as this figure only shows the cost of inventory
sold to customers (it involves no cash flow). Also, depreciation is excluded as this is a non-
cash transaction.

c. The cash budget shows that in the first quarter the business will not have sufficient cash to
meets its requirements. It will be necessary for the business to any number of the following:
i. Arrange a bank overdraft
ii. Arrange an injection of capital from the owners
iii. Delay payment to creditors
iv. Speed up payment from debtors
v. Reassess purchasing policy

However, the remaining quarters show sufficient cash to meet requirements. Due to the
higher cash surplus in the latter quarters the business will need to consider investment
strategies as the cash needs to be put to use to increase the wealth of the business.

9.56

a. Cost of sales (June) = Total sales (June) × 0.80

= $3 253 000 × 0.80
= $2 602 400
Check: $2 602 400 × 1.25 = $3 253 000

b. The policy is to have 30% of that month’s forecasted cost of sales.

Cost of sales (July) = $3 363 000 × 0.80
= $2 690 400
Beginning inventory = $2 690 400 × 0.30
(July)
= $807 120
 c. Purchases (July) = (Anticipated cost of sales for July + Ending inventory) – Opening
inventory
Cost of sales (July) = $2 690 400 (from part b)
Ending inventory = $3 473 000 (August sales) × 0.80 × 0.30
= $833 520 (August opening inventory which is July closing inventory)
Purchases (July) = ($2 690 400 + $833 520) – $807 120 (from part b)
= $2 716 800

d. The collection policy is 40% in the month of sale, 50% in the following month and 10% is never
collected.

Cash collections
Credit sales – June ($2 730 000 × 0.50) $1 365 000
Credit sales – July ($2 830 000 × 0.40) 1 132 000
Cash sales – July 533 000
Total cash collections – July $3 030 000

9.57

Online Logistic Solutions

Budgeted statement of profit or loss for
2018
Sales $ 8,756,000.00
Less Operating expenses
General Admin expenses $ 808,000.00
Utilities - Gas $ 10,200.00
Utilities - Electricity $ 30,600.00
Wages $1,456,000.00
Sales commission $ 481,580.00
Loan Interest $ 50000.00
$
Marketing expenses 125,000.00
Vehicle-related expenses
non-fuel $1,000,000.00
Vehicle-related expenses
fuel $1,010,000.00
Depreciation on vehicle
fleet $ 800,000.00
$ 5,771 380.00
Profit $ 2 984 620