USA: +1-585-535-1023

UK: +44-208-133-5697

AUS: +61-280-07-5697

Test Questions-Budget and Budgetary Control

TEST QUESTIONS 

  1. What is meant by budget ?
  2. Define budget.
  3. Compare budget, budgeting and budgetary control.
  4. What is budget period.
  5. Define budgetary control.
  6. What is budget manual ?
  7. What are operating budgets ?
  8. What do you understand by flexible budgeting ?
  9. List out the importance of budgetary control.
  10. What is meant by cash budget ?
  11. Write short note on performance budgeting ?
  12. What is zero base budgeting ?
  13. Programme Budgeting Vs Performance Budgeting.
  14. Explain the advantages and limitations of Budgetary Control System.
  15. Describe the essential steps of a Budgetary Control System.
  16. “Budgetary control means worrying before work rather than after. Its keynotes are planning co-ordination and control.” Explain this statement.
  17. What is meant by the term Budgeting ? Mention the type of budgets normally prepared by a big industrial undertakings.
  18. What are the steps involved in zero base Budgeting ?

PROBLEMS AND SOLUTIONS

1. Production Budget

Problem 1. Prepare a production budget for three months ending on March 31, 2001 for a factory producing four products on the basis of the following information.

Type of                        Estimated                   Estimated sales                       Desired closing

Product                       Stock on                      during Jan                               Stock on

1.1.2001 (units)           March 2001 (units)     March 31, (2001 units)

A                                 2,000                          10,000                                     3,000

B                                 3,000                           15,000                                     5,000

c                                  4,000                           13,000                                     3,000

D                                 3,000                           12,000                                     2,000

Solution:

Formula for production Budget : Sales + closing stock – Opening stock

Production Budget for three months from Jan to March

$

Product A       : Estimated sales                     10,000

Add     : Closing stock                        3,000

13,000

Less                 : Estimated opening stock      2,000

11,000

Product B        : Estimated sales                     15,000

Add     : Closing stock                        5,000

20,000

Less                 : Estimated Opening stock      3,000

17,000

Product C        : Estimated sales                    13,000

Add     : Closing stock                        3,000

16,000

Less                 : Estimated Opening stock     4,000

12,000

Product D       : Estimated sales                    12,000

Add     : Closing stock                        2,000

14,000

Less : Estimated opening stock                      3,000

11,000

Total Production units                                    51,000

Problem 2. RSP Ltd., manufactures two products A and B. A forecast of the number of units to be sold in first seven months of the year is given below. (units)

Month                        Product MP                 Product ST                  Product B

January                        2,000                          1,000                           2,800

February                      2,400                           1,200                           2,800

MarchAprilMay

June

July

3,200                          1,6004,000                          2,0004,800                          2,400

4,800                          2,400

4,000                         2,000

2,4002,0001,600

1,600

1,800

It is anticipated that (1) there will be no work in progress at the end of any month (2) finished units equal to half the sales for the next month will be in stock at the end of each month (including the previous December). Prepare production budget.

Solution:

Production Budget [for six months ending 30th June] (units)

Product -MP Jan Feb March April May June

Sales 1,000 1,200 1,600 2,000 2,400 2,400

Add closing stock 600 800 1,000 1,200 1,200 1,000

(half the Sales

for next Month) 1,600 2,000 2,600 3,200 3,600 3,400

Less : Opening stock

(half the sales for

current Month) 500 600 800 1,000 1,200 1,200

Budgeted production 1,100 1,400 1,800 2,200 2,400 2,200

Total Budgeted production for Six Months

1,100 + 1,400 + 1,800 + 2,200 + 2,400 + 2,200 = 11,100 units

Product- ST Jan Feb March April May June

(units)

Product : Sales 2,800 2,800 2,400 2,000 1,600 1,600

Add closing stock 1,400 1,200 1,000 800 800 900

4,200 4,000 3,400 2,800 2,400 2,500

Less : Opening stock 1,400 1,400 1,200 1,000 800 800

Budgeted production 2,800 2,600 2,200 1,800 1,600 1,700

Total Budgeted production for Six Months

2,800 + 2,600 + 2,200 + 1,800 + 1,600 + 1,700 = 12,700 units

Summarised  Production cost Budget

Product MP                                                     Product ST

Output 11,100 (Units)                                    Output 12,700 (Units)

Per unit            Amt ($)          Per unit           Amt ($)           Total

Direct material            10.00              1,11,000          15.00              1,90,000          3,01,500

Direct Labour              5.00                 55,500             10.00               1,27,000         1,82,500

Prime Cost                  15.00               1,66,500         25.00               3,17,500         4,48,500

Factory overheads       4.00                 44,400             3.00                 38,100             82,500

19.00               2,10,900         28.00              3,55,600          5,66,500

NOTE:

Factory overheads per unit = Annual overhead/Annual output

Product MP = 88,000/22,000 = $ 4.00

ST = 72,000/24,000 = $ 3.00

 

Problem 3. The sales director of a Narmadha Manufacturing Company reports that next year he expects to sell 50,000 units of a particular product.

The production manager consults the storekeeper and casts his figures as follow.

Two kinds of raw materials A and B are required for manufacturing the product. Each unit of the product requires 2 units of A and 3 units of B. The estimated opening balances at the commencement of the next year are Finished products 10,000 units Raw materials A : 12,000 units; B 15,000 units.

The desirable closing balances at the end of the next are finished products: 14, 000units; A : 13,000 units; B 16,000 units.

Draw up a quantitative chart showing materials purchase budget for the next year.

Solution :

Formula : The units to be produced

Formula = Sales + Desired closing stock – opening stock

50,000 + 14,000 – 10,000 = 54,000 units

Material Procurement Budget

Finished                      Material

Products          A  units           B units

Units

As per the production budget

Requirement                                        54,000             108000            1,62,000

Estimated opening Balance                 10,000            -12,000            -15,000

Closing Balance                                  -14,000           13,000             16,000

Estimated sales of Product                 50.000                –                         –

Estimated purchase of materials              –                  1,09,000            1,63,000

 

Problem 4. Draw a materials procurement (Quantitative) Budget from the following information. Estimated sales of a product 40,000 units. Each unit of the product requires 3 units of materials A and 5 units of B.

Estimated opening balances at the commencement of the next year.

Finished product                     5,000 units

Materials A                             12,000 units

Materials B                              20,000 units

Materials on order

Materials A                             7,000units

Materials B                              11,000 units

The desirable closing balances at the end of the next year.

Finished product

Material A                               7,000 units

Material B                               15,000units

Materials on order

Material A                               8,000units

Material B                               10,00 units

Solution :

Production Budget (in units)

Estimated sales                                   40,000

Add : Desired Closing stock              7,000

47,000

Less : Opening Stock                          5,000

Estimated production                         42,000

Material Procurement Budget (in units)

Material A                               Material B

Estimated Consumption

42,000 X 3                                                   1,26,000

Add : 42,000 X 5                                                                                            2,10,000

Desired Closing Stock                                                15,000                                     25,000

Material on order (closing)                              8,000                                       10,000

Less : Opening Stock              12,000                                     20,000

Materials on order                   7,000                                       11,000

(Opening)                                            19,000                         31,000

Estimated Purchases                           1,30,000                      2,14,000

Total purchase                         3,44,000 units

Sales Budget

 

Problem 5. Ram Lal & co sells two products A and B which are manufactured in one plant. During the year 1985, it plans to sell the following quantities of each product.

1st Quarter                l1nd Quarter                111rd Quarter                         1Vth Quarter

 

Product A       90,000                          2,50,000                     3,00,000                     80,000

Product B        80,000                         75,000                         60,000                        90,000

Each of these two products is sold on a seasonal basis. Ram Lal plans to sell product A throughout the year at a price of $ 10 a unit and product B at a price of $ 20 a unit.

A study of the past experience reveals that Ram Lal has lost about 3% of its billed revenue each year because of returns (constituting 2% of Loss of revenue) allowances and bad debts (1% loss)

Prepare a Sales budget incorporating the above information.

Solution:                        Sales Budget of Ram Lal and Co

First                 Second             Third                Fourth

Quarter            Quarter            Quarter            Quarter            Total

$                      $                       $                     $                     $

Product A         9,00,000         25,00,000        30,00,000       8,00,000          72,00,000

Product B        16,00,000        15,00,000       12,00,000       18,00,000       61,00,000

Total                25,00,000       40,00,000       42,00,000       26,00,000       1,33,00,000

Less : Deductions :

(i) Returns         50,000                       80,000            84,000             52,000              2,66,000

(ii) Allowances and  Bad debts             25,000                    40,000            42,000             26,000            1,33,000

Total Deduction     75,000               1,20,000            1,26,000         78,000              3,99,000

Net sales            24,25,000            38,80,000         40,74,000        25,22,000         1,29 01 000

(Sales – Total Deductions)

Problem 6. Jayam & Co manufactures two products A and B and sells them through two divisions East and West. For the purpose of submission of sales budget to the budget committee, the following information has been made available.

Budgeted sales for the current year were

Product                      East                             West

X                                 400@ $ 9                    600 @ $ .9

y                                  300@ $ 21                  500@ $ .21

Actual sales for the current year were

Product                       East                            West

X                                 500@ $ 9                    700 @ $.9

y                                  200@ $ 21                  400@ $.21

Adequate market studies reveal that product X is popular but under priced. It is observed that if price of X is increased by Re. 1 it will find a ready market. On the other hand, Y is  over  priced to customers and market could absorb more if sales price of Y be reduced by $ 1. The management had agreed to give effect to the above price changes.

From the information based on these, price changes and reports from salesman, the following estimates have been prepared by divisional managers.

Percentage increase in sales over current budget is

Product                       East                            West

X                                 +10%                           +5%

Y                                 +20%                           +10%

With the help of an intensive advertisement campaign the following additional sales above the estimated sales of divisional managers are possible.

Product                       East                             West

X                                 60                                70

y                                  40                                50

You are required to prepare Budget for sales incorporating the above estimates and also

show the budgeted and actual sales of the current year. 

Solution:                       Sales Budget of Jayam & Co.

Factory Overhead Budget

Problem 7. Rexin Ltd supplies you the following average figures of previous quarters. Prepare a manufacturing overhead budget for the quarter ending on March 31,2002. The budgeted output during this quarter is 5,000 units.

Fixed overheads                      $ 40,000

Variable overheads                 $ 20,000 (varying @ $ 5 per unit)

Semi-variable overheads         $ 20,000 (40% fixed and 60% varying@ 3 per unit)

Solution : Manufacturing Overhead Budget

Fixed overheads                                                                                  $ 40,000

Variable overheads                                                                             $ 25000

Semi Variable overheads

FixedVariable @ $ 3 per unit

Total overhead costs

8,00015,000. 23,00088,000

 

Selling and Distribution Overhead Budget

Problem 8. You are requested to prepare sales overhead budget from the estimation given below.

 

AdvertisementSalaries of Sales Department

Expenses of sales Department

Counter Salesman’s salaries and dearness allowance

Commission to counter salesman at 1% on their sales

$2,500

5,000

1,500

6,000

 

Travelling salesmen’s commission at 10% on their sales and expenses at 5% on their sales. The sales during the period were estimated as follow.

 

Counter sales                                                               Travelling Salesman’s

$                                                                                  $

80,000                                                                         10,000

1,20,000                                                                      15,000

1,40,000                                                                      20,000

Solution:

Sales overhead Budget

Estimated Sales

 

Fixed Overheads                                 $ 90,000                      $ 1,35,000                   $ 1,60,000

Advertisement                                    2,500                           2,500                           2,500

Expenses of Sales department                        1,500                           1,500                           1,500

Salaries of sales department                5,000                           5,000                           5,000

Counter salesmen’s salaries

and dearness allowance                      6,000                          6,000                           6,000

Total Fixed cost                                  15,000                        15,000                         15,000

Variable Cost

Counter salesman’s Commission

@1% on their sales                             800                              1,200                           1,400

Travelling salesman’s Commission

@ 10% on their Sales                          1,000                           1,500                           2,000

Expenses on Travelling

Salesmen’s sales @ 5%                       500                              750                              1,000

Total variable cost                               2,300                           3,450                           4,400

 

Total Sales overheads leads (FC + VC) 17,300                      18,450                         19,400

Problem 9. From the following particulars prepare a production budget of a company for the year ended on 30th June 2002.

Product                       Sales in units               Estimated stock                     Stock (units)

Xy

z

18000                                   168012000                                    600

8400                                      960

18601740

960

 

Solution :Sales (units)

Add : Closing stock

Production Budget (Units)Product X

18,000

1,860

Product Y           Product Z

12,000                   8,400

1,740                     960

 

                                                       19,860Less : Estimated opening stock :    1,860

Production                                    18,000

13,740                      9,3601,740                        960

12,000                    8,400

 

Total Units to be produced 18,000 + 12,000 + 8,400 = 38,400 units

 

Problem 10. From the following figures prepare a raw material purchase budget for January.

 

 

 

Estimated stock on 1st Jan

Estimated stock on 31st Jan

Estimated consumption

                          MaterialsA

(Units)

16,000

20,000

1,20,000

B

(Units)

6,000

8,000

44,000

 

Solution : 

Estimated Consumption (units)

Add : Estimated stock on 31st Jan

 

Less : Estimated stock on 1st Jan

Estimated Purchase (units)

Raw materialA

1,20,000

20,000

1,40,000

16,000

1,24,000

Raw materialB

44,000

8,000

52,000

6,000

46,000

 

II Cash Budget

Problem 1. A company expects to have $ 37,500 cash in hand on 1. 4.1995. And requires you to prepare an estimate of cash position during the three months April to June 1995. The following information is supplied to you.

 

Months 

Feb.

March

April

May

June

Sales 

$

75,000

84,000

90,000

1,20,000

1.35,000

Purchases 

$

45,000

48,000

52,500

60,000

60,000

Wages               FactoryExpenses          Expenses

$                              $

9,000                7,500

9,750                8,250

10,500               9,000

13,500                  11,250

14,250                14,000

Office              SellingExpenses           Expenses

$                             $

6,000                   4,500

6,000                   4,500

6,000                  5,250

6,000                  6,570

7,000                     7,000

 

Other Information:

  1. The period of credit allowed by suppliers-2 months
  2. 20% sales is for cash and period of credit allowed to customers for credit sale is one month.
  3. Delay in payment of all expenses – I month.
  4. Income Tax of $ 57,500 is due to be paid on June 15, 1995.
  5. The company is to pay dividends to shareholders and bonus to workers which is $ 15,000 and $ 22,500 respectively in the month of April.
  6. Plant has been ordered and is expected to be received and paid in May. It will cost $ 1,20,000.

 

Solution :                                                        Cash Budget

 

Particulars                                           April                            May                            June

$                                   $                                 $

Opening cash balance                                     37,500                         11,700             (-) 91,050

Receipts:

Amount received from cash sales (20%)        18,000                         24,000                         27,000

Amount received from credit Sales                67,200                         72,000                         96,000

[80% of previous months sales]

Total Receipts                                                 1,22,700                      1,07,700                      31950

 

Payments:

 

Amount paid to creditors                                45,000                         48,000                         52,500

[2 months previous month purchase]

Wages [previous month]                                 9,750                           10,500                         13,500

Factory expenses [previous month]                8,250                           9,000                           11,250

Office expenses [previous month]                  6,000                           6,000                           6,000

Selling expenses [previous month]                  4,500                           5,250                           6,570

Income Tax paid                                             –                                   –                                  57,500

Dividend to shareholders                                15,000

Bonus to workers                                            22,500

Amount paid for purchase of plant                 –                                   1,20,000

Total Payment                                                 1,11,000                      1,98,750                    1,47,320

Closing balance [TR – TP]                               11,700                         – 91,050                   -1,15,370

NOTE:

In order to meet the cash deficiency of $ 91,050 and 1,15,370 in the month of May and June the company will arrange the overdraft facilities over and above the cash deficiency.

 

If direction is given in the problem only, we arrange the overdraft facilities, otherwise no need to arrange the overdraft facilities.

 

Problem 2. Prepare cash Budget for 3 months ended on 30th Sep. 1999 :

Cash at Bank on 1.7.1999 $ 25,000

Salaries and wages monthly $ 10,000

Interest payable $ 5,000 (August)

Particulars                               June$

Cash sales

Credit sales                          1,00,000

Purchases ($)                        1,60,000

Other expenses

July$

1,40,000

80,000

1, 70,000

20,000

Aug.$

1,52,000

1,40,000

2,40,000

22,000

Sep.$

1,21,000

1,20,000

1,80,000

21,000

 

Credit sales are collected 50% in the month in which sales are made, and 50% in the month following. Collection from credit sales are subject to 5% discount if payment is received during the month of sales and 2 1h% if payment is received in the month following.

 

Creditors are paid either on a prompt category or 30 days basis. It is estimated that

10% of creditors are in the prompt category.

 

Solution :

Cash Budget for three months ended 30.9.1994

 

Particulars                                           July $               August $                     September $

Opening Cash                                                 25,000             60,750                         1,04,250

ReceiptsCash Sales

Amount received from credit sales

Total Receipts

Payments

Amount paid to creditors

(10% prompt category)

Amount paid to creditor

(90% on 30 day basis)

Other expenses

Salaries and wages

Interest payable

Total payment

Closing balance [TR – TP]

1,40,000          1,52,000

86,750            1,05,500

2,51,750           3,18,250

 

17,000             24,000

 

1,44,000          1,53,000

 

20,000             22,000

10,000              10,000

5,000

1,91,000            2,14,000

60,750                1,04,250

1,21,000

1,25,250

3,50,500

 

18,000

 

2,16,000

 

21,000

10,000

 

2,65,000

85,500

 

Workings: 

Collection of credit sales

(i) 50% in the month of sales

are made

Less : Discount 5%

(ii) 50% in the month

following months Sales

Less : Discount 2lh%

July

$

40,000

2,000

38,000

50,000

1,250

48,750

August

$

70,000

3,500

66,500

40,000

1,000

39,000

Sep

$

60,000

3,000

57,000

70,000

1,750

68,250

 

July = 38,000 + 48,750 = 86,750

August = 66,500 + 39,000 = 1,05,500

Sep = 57,000 + 68,250 = 1,25,250.

 

Problem 3. Sarathi & Co wishes to arrange overdraft facilities with its bankers during period April to June, when it will be manufacturing mostly for stock. Prepare cash budget for the above period from the following data. Including the extent of bank facilities the company will require at the end of each month.

 

(a) MonthsFeb.

March

April

May

June

Sales$

1,80,000

1,92,000

1,08,000

1, 74,000

1,26,000

PurchasesRs.

1,24,800

1,44,000

2,43,000

2,46,000

2,68,000

WagesRs.

12,000

14,000

11,000

10,000

5,000

 

(b) 50% of credit sales is realised in the month following the sale and the remaining 50% in the second month following. Creditors are paid in the month following the month of purchase.

 

(c) Cash at Bank on 1st April (estimated) $ 25000.

 

Solution :                                                        Cash budget

Particulars                                           April                May                June

Opening Cash balance                                   25,000             56,000             3,000

Receipts

Amount collected from credit sales    1,86,000          1,50,000          1,41,000

Total Receipts                                     2,11,000          2,06,000          1,44,000

Payments

Amount paid to creditors                    1,44,000          2,43,000          2,46,000

 

Wages paid                                                11,000Total Payments                                         1,55,000

Balance                                                       56,000

Bank Overdraft

Closing balance                                       56,000

10,000                             5,0002,53,000                          2,51,000

-47,000                             -1,07,000

OD + 50,000                   1,20,000

3,000                                 13,000

 

Workings :

Credit sales Collection :

April = 50% of March + 50% of Feb

96,000 + 90,000 = 1,80,000

May = 50% April + 50% March

54,000 + 96,000 = 1,50,000

June = 50% of May + 50% April

87,000 + 54,000 = 1,41,000

NOTE:

(i) Wages are assumed to be paid in the same month.

(ii) Overdraft facilities are arranged to meet out the cash deficiency in the month of May and June.

 

Problem 4. Prepare cash Budget for the month of May, June and July 1989 on the basis of the following information.

I.

Months 

 

March

April

May

June

July

August

Credit      Credit             Wages          ManufacturingSales         Purchases                               Expenses

$                  $                      $                        $

60,000       36,000             9,000                4,000

62,000       38,000             8,000                3,000

64,000       33,000            10,000               4,500

58,000        35,000           8,500                  3,500

56,000       39,000            9,500                  4,000

60000       – 34,000           8,000                  3,000

Office              SellingExpenses         Expenses

$                             $

2,000                 4,000

1,500                 5,000

2,500                 4,500

2,000                 3,500

1,000                 4,500

1,500                  4,500

 

II. Cash Balance on Ist May 1989 is $ 8,000.

Ill. Plant costing $ 16,000 is due for delivery in July. Payable 10% on delivery and the balance after 3 months.

 

IV. Advance Tax of $ 8,000 each is payable in March and June.

 

V. Period of credit allowed (I) by suppliers – 2 months and (II) to customers one month.

 

VI. Lag in payment of manufacturing expenses – 1 / 2month

 

VII. Lag in payment of office and selling expenses- one month.

Solution:                                                         Cash budget

ParticularsMay ($)Opening Cash balance

Receipts

Amount received from credit sales

Total Receipts

 June($)8,000

62,000

70,000

July ($)13,750              12,250

64,000              58,000

77,750              70,250

 

PaymentsWages paid

Amount paid to purchase of plant

Advance Tax

Amount paid to creditors

Manufacturing expenses paid

Office expenses

Selling expenses

Total Payments

Closing Balance

10,000

36,000

3,750

1,500

5,000

56,250

13,750

8,500                   9,500

–                            1,600

8,000

38,000                33,000

4,000                   3,750

2,500                   2,000

4,500                     3,500

65,500                   53,350

12,250                16,900

 

Workings:

Manufacturing expenses

(i) May = 1/2 of May + 1/2 of April

2250 + 1500 = 3750

 

(ii) June = 1 /2  of June + 1/2 of May

1750 + 2250 = 4000

 

(iii) July = 1/2 of July + 1/2 of June

2000 + 1750 = 3750

Problem 5. Prepare cash Budget for the three months ending on 30.6.1998 from the information given below.

 

I.

Month                         Sales               Material                       Wages                        Overheads

$                      $                                   $                                 $

Feb.                             14,000             9,600                           3,000                           1,700

March                          15,000             9,000                           3,000                           1,900

April                            16,000                         9,200               3,200                          2,000

May                             17,000                         10,000             3,600                           2,200

June                             18,000                         10,400             4,000                           2,300

II. Credit terms

 

Sales / Debtors – 10% sales are on cash, 50 % of the credit sales are collected next month, and the balance in the following month.

Creditors :       Materials 2 Months

Wages 1/2 Month

Overheads 1/2 Month

 

III. Cash and Bank Balance on 1.4.1998 is expected to $ 6,000.

 

IV Other relevant information are :

(a) Plant and machinery will be installed in Feb. 1998 at a cost of $ 96,000. The monthly installment of $ 2,000 is payable from April onwards.

 

(b) Dividend @ 5% on preference share capital of $ 2,00,000 will be paid on 1st June.

 

(c) Advance to be received for sale of vehicles $ 9,000 in June.

 

(d) Dividend from investments amounting to $, 1,000 are expected to be in June.

 

(e) Income Tax (advance) to be paid in June is $ 2,000.

 

Solution :

Cash Budget for the period of three months ending on 30.6.1998

 

April                May                June

$                      $                      $

Opening balance (Cash)                                  6,000               3,950              3,000

ReceiptsAmount received from cash sales

Credit sales

Dividend

Advance received for sale of vehicles

Total Receipts

1,600

13,050

 

 

20,650

1,700

13,950

 

 

19,600

1,800

14,850

1,000

9,000

29,650

 

PaymentsDividend paid on preference shares

Income tax paid

Capital expenditure

Amount paid to creditors

[previous 2 months purchase]

Wages

Overheads

Total payments

closing Balance

 

 

2,000

 

9,600

3,150

1,950

16,700

3,950

 

 

2,000

 

9,000

3,500

2,100

16,600

3,000

10,000

2,000

2,000

 

9,200

3,900

2,250

29,350

300

 

Workings:

(i) Collection of credit sales

April = 50% of March + 50% of Feb

6,750 + 6,300 = 13,050

May = 50% of April + 50% of March

7,200 + 6,750 = 13,950

June = 50% of May + 50% April

7,650 + 7,200 = 14,850

(ii) Wages

April = 1/2 of March + 1/2 of April

750 + 2,400 = 3,150

May =1/4 of April + 1/4 of May

3,200 * 4 + 3,600 * 4

800 + 2,700 = 3,500

June = 1/4 of May + 1/4 of June

3,600 * 4 + 4,000 * 4

900 + 3,000 = 3,900

(iii) Overheads

April = 1/2 of April + 1/2 of March

1,000 + 950 = 1950

May = 1/2 of May + 1/2 of April

1,100 + 1,000 = 2,100

June = 1/2 of June + 1/2 of May

1,150 + 1,100 = 2,250

 

 

Problem 6. From the following forecasts of income and expenditure prepare a cash budget for three months commencing Ist June when the bank balance was $ 1,00,0001-

 

Months   Sales

 

$

 Purchases

 

$

Wages

 

$

Factory

Expenses

$

Ad. Sell

Expenses

$

April

May

June

July

August

 

80,000

76,500

78,500

90,000

95,000

 

41,000

40,500

38,500

37,000

35,000

5,600

5,400

5,400

4,800

4,700

 

3,900

4,200

5,100

5,100

6,000

 

10,000

14,000

15,000

17,000

13,000

 

           
           
           
           

A sales commission of 5% on sales, due two months after sales, is payable in addition to selling expenses, plant valued at $ 65,000 will be purchased and paid for in August and the dividend for the last financial year of $ 15,000 will be paid in July. There is 2 months credit period allowed to customers and received from suppliers.

 

 

   Solution :                 Cash Budget for the period of three months

 

Opening balance

Receipts:

Amount received from credit sales

Total Receipts

Payments:

Amount paid to creditors

Wages paid

Factory expenses

Adms Selling expenses

Sales commission

Payment of dividend

Purchase of Plant

Total Payments

Closing Balance [TR – TP]

    June                   july            August

$                        $                  $

1,00,000      1,11,400      1,03,075

 

80,000        76,500           78,500

1,80,800      1,87,900      1,81,575

 

41,000       40,500           38,500

5,400       5,400               4,800

4,200        5,100            5,100

14,000      15,000        17 ,000

4,000        3,825             3,925

–                 15,000               –

–                    –                65,000

68,600        84,825         1,34,325

1,11,400     1,03 ,075     47 ,250

   

 

 

 

 

Note:

1) Assumed that wages, factory, administration and selling expenses are payable in the following month.

 

(2) Sales Commission                         July                                  Aug

June                                                76,500 X 5/100        78,500  5/100

80,000 x 5/100                                    = 3,825                        = 3,925

=4,000

Problem 7. Reliance India Ltd., A newly started company wishes to prepare cash budget from January. Prepare a cash budget for the first six months from the following estimated revenue and expenses.

Overheads

Months            Total sales          Materials          Wages        Production                Selling &

Distribution

$                           $                     $                      $                             $

January            20,000             20,000             4,000               3,200                           800

February          22,000             14,000            4,400              3,300                           900

March              28,000             14,000             4,600              3,400                           900

April                36,000             22,000             4,600               3,500                           1,000

May                 30,000             20,000             4,000               3,200                           900

June                 40,000             25,000             5,000               3,600                           1,200

 

Cash balance on 1st January was Rs. 10,000. A new machinery is to be installed for $ 20,000 on credit to be repaid by two equal installments in March and April.

 

Sales commission @ 5% on total sales is to be paid within a month following actual sales.

 

$ 10,000, being the amount of 11nd call, may be received in March. Share premium

amounting to $ 2000 is also obtainable with the 11nd call.

 

Period of credit allowed by suppliers                         2 months

Period of credit allowed to customers            1 month

Delay in payment of overheads                      1 month

Delay in payment of wages                            1/2 month

Assume cash sales to be 50% of total sales.

 

Solution : Cash Budget

 

Workings:

 

(1) Sales Commission

 

Jan 20,000 x 5/100      = 1,000

Feb 22,000 x 5/100     = 1,100

March 28,000 x 5/100 = 1,400

April 36,000 X 5/100  = 1,800

May 30,000 x 5/100    = 1,500

June 40,000 x 5/100     = 2,000

 

(2) Material suppliers treated as creditors.

(3) Cash Sales is 50% of total sales.

Cash Sales                               Credit sales

$                                                  $

Jan                                           10,000                                     10,000

February                                  11,000                                     11,000

March                                      14,000                                     14,000

April                                        18,000                                    18,000

May                                         15,000                                    15,000

June                                         20,000                                    20,000

(4) Payment of wages

Jan = 50% Jan+ 50% Dec

2,000 + nil = 2,000

 

Feb = 50% Feb + 50% Jan

2,200 + 2,000 = 4,200

 

March = 50% March + 50% Feb

2,300 + 2,200 = 4,500

 

April = 50% April + 50% March

2,300 + 2,300 = 4,600

 

May = 50% May + 50% April

2,000 + 2,300 = 4,300

 

June = 50% of June+ 50% of May

2,500 + 2,000 = 4,500

 

 

Problem 8. From the following forecasts of income and expenditure of TPK &   Ltd., prepare a cash budget for six months commencing from 1st June 2000 when the bank balance is estimated to be $ 1,10,000.

 

Mont        Sales          Selling      Purchases       Wages     Factory     Administration    Research

overheads                                      Overheads       Overheads         Expenditure

$                $                 $                    $              $                     $                          $.

March     82,000     5,000           40,000          10,000   8,400            3,400                  2,000

April       88,500     3,250           37,000          8,000       5,600              2,500               2 ,400

May       84,000      4,100           40,000          8,400       5,900           2,760                 2,400

June       93,000      3,710           39,000          8,800   5,920              2,480               2,400

July       72,000       3,210         39,900            6,000   5,440               2,600               2,400

Aug         82,500      3,600       35,000            9,600   5,880               2,520               2,600

Sep          98,600     3,450         36,400           8,000   6,000               2,700               2,600

Oct         92,800      3,210         36,500           8,400   5,680               2;560               2,600

Nov.      1,04,400     3,200      32,000             7,600 5,360               2,620               2,400

 

Lag in payment of wages : ¼  month

Lag in payment of factory overhead : 1 month

Lag in payment of Administration overhead :1/2 month

Lag in payment of Selling overhead : 1 month

Lag in payment of Research Expenditure : 1 month

Period of credit allowed by the creditors : 3 months

Period of credit allowed by the customers : 2 months

 

Other Information :

(i) A sales commission of 5% on sales, and due two months after sales, is payable in addition to selling overheads.

 

(ii) Capital expenditure planned is (a) Machinery purchased in June 2003 for $ 1,00,000 payable on delivery and (b) Building purchased in June 2000 for $ 8,00,000 payable in four half yearly instalments, the first being payable in July 2000.

 

(iii) Interest on Bombay Port Trust Bonds amounting to Rs. 50,000 is to be received in Octobet 2000.

 

(iv) Cash sales are estimated at $ 2000 per month.

 

(v) A dividend of $ 10,000 is to be paid in September 2000.

 

(vi) Tax amounting to $ 30,000 is to be paid on 1st August 2000.

 

(vii) A call money of $ 2 per share on Equity share capital of $ 5,00,000 divided into 50,000 shares of $ 10 each is to be received on 1st July 2000.

 

Workings:

1. Sales  commission

 

 

 

2. Wages

 

.

1/4 previous

month

3/ 4 of current

Month

April

$

4,425

 

 

April

$

 

2,500

6,000

8,500

May

$

4,200

 

 

May

$

 

2,000

6,300

8,300

 

June

$

4,650

 

 

June

$

 

2,100

6,600

8,700

July      August      Sep.      Oct.      Nov.

$             $             $              $           $

3,600      4,125     4,930   4,640    5,220

 

 

July      August    Sep.        Oct.       Nov.

$          $              $           $            $

 

2,200     1,500     2,400      2,600     2,100

4,500    7,200   6,000     6,300      5,700

6,700      8,700   8,400     8,900    7,800

 

3. Administration overhead        June

$

½  previous month                1,380

½  of current month                 1,240

2,620

July

$

1,240

1,300

2,540

August          Sep         Oct.         Nov.

$                    $              $             $

1,300        1,260        1,350       1,280

1,260        1,350        1,280        1,310

2,560        2,610        2,630         2,590

 
       

Credit sales

 

                 March         April        May

$                   $               $

Sales       82,000        88,500     84,000

Less : cash

sales         2,000           2,000       2,000

80,000         86,500     82,000

June

$

93,000

 

2,000

91,000

July      August       Sep.        Oct.        Nov.

$              $               $              $             $

72,000  82,500    98,600     92,800   1,04,400

 

2,000    2,000        2,000       2,000        2,000

70,000   80,500    96,600    90,800    1,02,400

 

Problem 9. From the following information and the assumptions that the balance in hand on 1. 1.2002 is $ 75,000, prepare cash budget.

Months

 

 

January

February

March

April

May

June

Sales

$

 

72,000

97,000

86,000

88,600

1,02,500

1,08,700

Materials

$

 

25,000

31,000

25,500

30,600

37,000

38,800

Wages

$

 

10,000

12,100

10,600

25,000

22,000

23,000

Selling and

Distri.cost

$

4,000

5,000

5,500

6,700

8,500

9,000

Production

cost

$

6,000

6,300

6,000

6,500

8,000

8,200

Administration

cost

$

1,500

1,700

2,000

2,200

2,500

2,500

 

Assume that 50% are cash sales. Assets are to be acquired in the month of February and April. Therefore, provision should be made for the payment of $ 8,000 and $ 25,000 for the same. An application has been made to the bank for the grant of a loan of $ 30,000 and it is hoped that it will be received in the month of May.

 

It is anticipated that a dividend of $ 35,000 will be paid in the month of June. Debtors are allowed one month’s credit. Sales commission@3% on sales is to be paid.

 

Creditors (for goods or overheads) grant one month’s credit.

Assume all expenses are paid in the following month.

Solution : Cash Budget

Particulars

 

Opening balance

Receipts

Cash Sales

Bank loan received

Amount received

from Debtors

Total Receipts

Jan                  Feb            March

$                        $                $

72,500        96,340         1,21,330

 

36,000        48,500         43,000

 

 

36,000         48,500

1,08,500      1,80,840     2,12,830

Apr

$

1,55,650

 

44,300

 

 

43,000

2,42,950

May

$

1,51,292

 

51,250

30,000

 

44,300

2,76,842

June

$

2,05,767

 

54,350

 

 

51,250

3,11,367

 

Payments

Provision of capital

expenditure

Dividend paid

Wages

Selling and  distribution cost

Production cost

Administration cost

Amount paid to

creditors

Sales Commission

Total Payments

Closing Balance

[TR – TP)
 

 

 

 

10,000

 

 

 

 

 

 

2,160

12,160

96,340

 

 

8,000

 

12,100

 

4,000

6,000

1,500

 

25,000

2,910

59,510

1,21.330

 

 

 

 

10,600

 

5,000

6,300

1,700

 

31,000

2,580

57,180

1,55,650

 

 

25,000

 

25,000

 

5,500

6,000

2,000

 

25,500

2,658

91,658

1,51,292

 

 

 

 

22,000

 

6,700

6,500

2,200

 

30,600

3,075

71,075

2,05,767

 

 

 

35,000

23,000

 

8,500

8,000

2,500

 

37,000

3,261

1,17,261

1,94,106

 

NOTE : Sales commission paid in the same month itself.