8/30/22, 8:34 PM Chapter 14: Question & Answers

Questions

For many organisations in both the private and public sectors theannual budget is the basis of much internal management information.
Whenpreparing and using budgets, however, management and the accountantmust be aware of their behavioural implications.

Required:

(a) Briefly discuss four purposes of budgets.

(8 marks)

(b) Explain the behavioural factors whichshould be borne in mind and the difficulties of applying them in theprocess of budgeting and
budgetary control.

(12 marks)

(Total: 20 marks)

7 Budgeting 2

 ZERO-BASED BUDGETING

Questions

(a) Explain why Zero Based Budgeting might be a useful tool to employ to ensure that budgetary requirements are kept up to date.

(4 marks)

(b) Describe the steps needed to be undertaken in order to implement a Zero Based Budgeting system in respect of:

the questioning of why expenditure needs to be incurred

how a decision is made as to which activities should be provided with a budget, and
what questions should be asked when budgeted activities need to be ranked to allocate scarce resources.

(8 marks)

(c) Critically assess the use of Zero Based Budgeting as a tool that might be used to motivate employees.

(6 marks)

(d) Explain the advantages of encouraging employee participation in budget setting.

(7 marks)

(Total: 25 marks)

8 Quantitative analysis

 FASHION CO

Questions

Fashion Co, a manufacturer of fashion garments, is investigatingwhether or not to accept a retailer's order for 100,000 winter coatswhich
will be codenamed Winners.

The following information is available in relation to Winners:

(1) The 100,000 garments will be manufacturedin batches of 1000 garments. Fashion Co has been offered a price of$50,000 for each
batch of 1000 garments supplied to the retailer.

(2) New machinery costing $250,000 will have tobe purchased for this contract and it is estimated that this machinerywill have a value of
$25,000 at the end of the contract.

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8/30/22, 8:34 PM Chapter 14: Question & Answers
(3) A 75% learning curve will apply for thefirst 60 batches of Winners after which a steady state production timewill apply. The labour
time per batch after the first 60 batches willtherefore be equal to the time for the 60th batch. The cost of the firstbatch was measured at
$15,000. This was for 1500 hours at $10 per hour.

(4)Variable overhead will be 30% of the direct labour cost.

(5)Given the above learning effect for labour,direct material will be $10,000 per batch for the first ten batches,$7,500 per batch for the
next ten and $6,000 per batch thereafter.

(6) A new warehouse will have to be rented for three months to store Winners at a cost of $5,000 per month

Fashion Co is seeking to achieve a net profit equal to 80% of thesales revenue arising from the manufacture and sale of Winners.

Required:

(a)Prepare detailed calculations to show whether the targeted 80% net profit margin will be achieved.

(12 marks)

(b)Calculate what length of time the second batch will take if the actual rate of learning is

(i) 70%

(ii)  80%

(5 marks)

(c)Suggest specific steps that Fashion Co could take to improve the net margin calculated above.

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