CHAPTER EIGHT QUESTIONS

Example 1
The company manufactures two products, P and L, and is preparing its budget for
20X8. Both products are made by the same grade of labour, grade G. The company
currently holds 800 units of P and 1,200 units of L in stock, but 250 of units of L have
just been discovered to have deteriorated in quality, and must therefore be scrapped.
Budgeted sales of P are 3,000 units and of L 4,000 units, provided that the company
maintains finished goods stocks at a level equal to three months’ sales.
Grade G labour was originally expected to produce one unit of P in two hours and one
unit of L in three hours, at an hourly rate of K2.50 per hour. In discussions with trade
union negotiators, however, it has been agreed that the hourly wage rate should be
raised by K0.50 per hour, provided that the times to produce P and L are reduced by
20%.
Required:
Prepare the production budget and direct labour budget for 20X8.

Example 2
A company manufactures a single product, the close, with a single grade labour. Its
budget and finished goods stock budget for period 3 are as follows:
Sales 700 units
Opening stock, finished goods 50 units
Closing stock, finished goods 70 units
The goods are inspected only when production work is complete, and it is budgeted
that 10% of finished work will be scrapped. The standard direct labour hour content
of the close is three hours. The budgeted productivity ratio for direct labour is only
80% (which means that labour is only working at 80% efficiency). The company
employs 18 direct operatives, who are expected to average 144 working hours each
in period 3.
(a) Prepare a production budget
(b) Prepare a direct labour budget
Example 3
(a) Prepare a budget for 20X8 for the direct labour costs and overhead expenses of a
production department at the activity levels of 80%, 90% and 100%, using the
information listed below and ignoring inflation.
(i) The direct labour hourly rate is expected to be K3.75
(ii) 100% activity represents 60,000 direct labour hours
(iii) Variable indirect labour cost K0.73 per direct labour hour
Variable consumables supplies cost K0.375 per direct labour hour
Variable canteen cost 6% of direct and indirect labour
costs
(iv) Semi-variable costs are expected to relate to the direct labour hours in the
same manner as for the last five years.
Year Direct labour hours Semi-variable costs
K
20X1 64,000 20,800
20X2 59,000 19,800
20X3 53,000 18,600
20X4 49,000 17,800
20X5 40,000 16,000

(v) Fixed costs

K
Depreciation 18,000
Maintenance 10,000
Insurance 4,000
Rates 15,000
Management salaries 25,000
(b) Calculate the budget cost allowance (i.e. expected expenditure) for 20X8 assuming
that 57,000 direct labour hours are worked.
Example 4
A company manufacture a single product, the Y. Budgeted results and actual for June
20X7 are shown below.
Budget Actual results Variance
Production and sales of Y (unit) 2,000 3,000
K K K
Sales revenue 20,000 30,000 10,000 (F)
Direct material 6,000 8,500 2,500 (A)
Direct labour 4,000 4,500 500 (A)
Maintenance 1,000 1,400 400 (A)
Depreciation 2,000 2,200 200 (A)
Rent and rates 1,500 1,600 100 (A)
Other costs 3,500 5,000 1,400 (A)
Total costs 18,100 23,200 5,100
Profit 1,900 6,800 4,900 (F)
Suppose that you are given the following additional information:
(a) Direct materials, direct labour and maintenance costs are variable.
(b) Rent and rates and depreciation are fixed costs.
(c) Other costs consist of fixed costs of K1,600 plus a variable cost of K1 per unit made
and sold.
Required:
Prepare a flexible budget and show the variances.
Example 5
From the following information which relates to the company you are required to
prepare a month by month by month cash budget for the second half of 20X7.
(a) The company’s only product, a vest, sells at K40 and has a variable cost of K26
made up of material K20, labour K4 and overhead K2.
(b) Fixed costs of K6,000 per month are paid on the 28th of each month.
(c) Quantities sold/to be sold on credit:
May Jun Jul Aug Sep Oct Nov Dec
1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,600

(d) Production quantities

May Jun Jul Aug Sep Oct Nov Dec
1,200 1,400 1,600 2,000 2,400 2,600 2,400 2,200

(e) Cash sales at a discount of 5% are expected to average 100 units a month.
(f) Customers settle their accounts by the end of the second month following sale.
(g) Suppliers of material are paid two months after the material is used in production.
(h) Wages are paid in the same month as they are incurred.
(i) 70% of the variable overhead is paid in the month of production, the remainder in
the following month.
(j) Corporation tax of K18,000 is to be paid in October.
(k) A new delivery vehicle was bought in June. It cost K8,000 and is to be paid for in
August. The old vehicle was sold for scrap at K600, the buy undertaking to pay in
July,
(l) The company is expected to be K3,000 overdrawn at the bank at 30 th June 20X7
(m) No increase or decrease in raw materials, work in progress or finished good are
planned over the period.
(n) No price increases or cost increases are expected in the period.
Solution
Cash budget for 1 July to 31 December 20X7
Jul Aug Sep Oct Nov Dec Total
K K K K K K K
Receipts
Credit sales 40,000 48,000 56,000 64,000 72,000 80,000 360,000
Cash sales 3,800 3,800 3,800 3,800 3,800 3,800 22,800
Sales of vehicle 600 - - - - - 600
44,400 51,800 59,800 67,800 75,800 83,800 383,400

Payments
Materials 24,000 28,000 32,000 40,000 48,000 52,000 224,000
Labour 6,400 8,000 9,600 10,400 9,600 8,800 52,800
Variable overhead (W) 3,080 3,760 4,560 5,080 4,920 4,520 25,920
Fixed costs 6,000 6,000 6,000 6,000 6,000 6,000 36,000
Corporation tax 18,000 18,000
Purchase of vehicle 8,000 8,000
39,480 53,760 52,160 79,480 68,520 71,320 364,720

Receipts less payments 4,920 (1,960) 7,640 (11,680) 7,280 12,480 18,680
Balance b/f (3,000) 1,920 (40) 7,600 (4,080) 3,200 (3,000)
Balance c/f 1,920 (40) 7,600 (4,080) 3,200 15,680 15,680

Working
Jun Jul Aug Sep Oct Nov Dec
K K K K K K K
Variable overheads
Production cost 2,800 3,200 4,000 4,800 5,200 4,800 4,400

70% paid in month 2,240 2,800 3,360 3,640 3,360 3,080

30% in following month 840 960 1,200 1,440 1,560 1,440
3,080 3,760 4,560 5,080 4,920 4,520

Example 6
Peter Likando has worked for some years as a sales representative, but has recently
been made redundant. He intends to start up in business on his own account, using
K15,000 which he currently has invested with a building society. Peter maintains a
bank account showing a small credit balance, and he plans to approach his bank for
the necessary additional finance. Peter provides the following additional information.
(a) Arrangements have been made to purchase fixed assets costing K8,000. These will
be paid for at the end of September and are expected to have a five-year life, at
the end of which they will possess a nil residual value.
(b) Stocks costing K5,000 will be acquired on 28th September and subsequent monthly
purchases will be at a level sufficient to replace forecast sales for the month.
(c) Forecast monthly sales are K3,000 for October, K6,000 for November and
December, and K10,500 from January 20X4 onwards.
(d) Selling price is fixed at the cost of stock plus 50%.
(e) Two months’ credit will be allowed to customers but only one month’s credit will
be received from suppliers of stock.
(f) Running expenses, including rent but excluding depreciation of fixed assets, are
estimated at K1,600 per month.
(g) Peter intends to make monthly cash drawings of K1,000.
Required:
Prepare Peter Likando’s budgeted profit and loss account and a budgeted balance
sheet.