ISTRATIONCOST

continuea
Example continued
100
Solution - Oihce
152 40
Wayne's Racing Kayaks
2020
INCOME STATEMENT FOR THE
YEAR ENDED 29 FEBRUARY 1140
Note
Sales 867 000 upment 13000
less Cost of
sales
619 330
Gr0ssproDt 4 247 670 130540
Selling and distribution cost
Administration cost
46710)
130 540) 13.10
Net profht 70 420 Activity
Gear CC in Activity 13.9 to
informationmfor
Creative
an
e S t a t e m e n ton 28 February 2018.
complete the Productio
Wayne's Racing Kayaks o
COST STATEMENT AND
NOTES TO THE
PRODUCTION
2020

INCOME
STATEMENT FORTHE sethe i
t e m e na
Solemer
t ndIn
FEBRUARY
YEAR ENDED 29 Activity 13.77
COST
1. DIRECT (RAW)
MATERIALS
t a k e r from the
was taken
was accounting records of Esethu
Balanceatthebeginningofthe year
y
Purchases (60 000+ 270000)
34 00 information
t u r e r so fladies'han

below
handbags. Manufacturers,
330 0 ne
Camiageon purchases
and notes
364 000 Aequired
Production
Cost
Statement
LessBalanceandtheendof the year (36 800) he
Direct materialscost 327 200
information
2018
March
COST on 1
2. DIRECT LABOUR ces
tactorywages 180 000 / wmaeialstock 6724
material)
hand(indirect 1590
Skills developmentleyy 8000 oUmables
on
ntributions
UnemploymentInsuranceFund 9000 H b t - i n - p r o c e s sa c c o u n t
135
Direct labour cost 207 00 39 784
COST
3. FACTORY OVERHEAD ctions and otherinformationfor theyearending 28 February 2019
Indirectmaterial (3 200 +4 500-2 150) 5550 Summary
in cash
Indrect labour 40800 RWDateralspurchased credit 19332
on
Rent expense 21000 kamalerals
purchased
4000 tor production 496 200
Water and electricity awmaterials issued
Insurance 9000
WMeyespoidtDirectlabour 38780
Depreciation on factory equpment 16 000 10560
Indiect
labour
96350 for production 70890
oTSUmables purchased
4. COST OF FINISHED GoODS SOLD ktuy rent paid
Startingstock:Finishedgood 47080 F&xtaryinsurance pald 1600
Plus:Cost offnished goodsmanufacturedduringtheyear 628 550 32 500
Retorymaintenance paid
Less: Closing balanceoffnished goods (56 300 2860
Depeciation on tactory
Costoffinished goodssold 619 30 1143220
GSso'sale of finished goods
1829 152
5.SELLINGAND DISTRIBUTION COST S9e of frished
goods 1136079
Advertising T00 GR priceof hnished goods 1056
Depreciation: Delivery vehicle 600 GTSumables on hand (indirect material), 28 February 2019
Bad debts 3400
Commission 8000
Vehicle expenses 12
30500
373
372 13
CHAPTER 13
COST ACCOUNTING AND MANUFACTURING BUSINESSES MANUFACTURING

BUSINESSES
CHAPTER
AND
ACCOUNTING
 Actvity 73.73

Activity 13.12 o n TshivwulaManufacture s to

informationo n prepare the
endin 28 Pro
well a s otes, for the year
omeStatement,
crduilre ction2018.
February Cost Statement
Manufacturers, manufa
Required
s ethen

for Bounce
information below
Use the
Proaduction C o s t Statement, a n d Income Statement, as well s balls dncom Sheet on 28 February 2018:
prepare the the
.
o Balance
She2e

t h e y e a r ending
2 8 February
2017.
notes for nation
the
ryandmachinery
R400 000o
nfoeom

16% per year) R200 000

Information t fro perye

February 2016 (o R25 000

from the Balance Sheet on 29
Bank

Extract
iceequpment
m KL
Raw matenal stock tions for the year
nmary oftransactions ending 28 Februar
Work-in-process account 4 100
Finished goods on hand 7 200 w m a t e n i a l s t O C Kp u r c h a s e d

Indirectmaterial 16 520
28 February 2 0 1 7 3700
Summary of transactions for the year ending Cieclit
plUrcnased

cash
Purchase of raw material/material in
maleridis

on iaw
e

Purchase of raw material/materidl on credit 252 000 25 C0

Camage on purchase of raw maternalpaid
by cheque 159 200
(
Rawmaterialissued Tor productIon
060 g e s V e ti d b 0 U r

409 400 14
Wages: Directlabour ndiet
abou

Wages: Indirect labour 229 000

14730
Solanies

Unemployment Insurance Fund Contribution-

direct wages Factorymanager
ctaf
0C00
2290 Administralvestaff 196 000
Salaries: Factory secunty 48 000
Salaries: Salesanddistribution staf 86 000
Salesstaf
evu-
rdctory
workers 172000
development
ev. 3600
Salaries:Administrative sta 138 000 | stils
& 20

Insurance:actory 8 200
Advertising

Insurance:Administrative offices 4 800 Insuld

Administration
14 800
Prinung and stationery: I /00| factory
on d
d epartment
AdminisSfauon
5200
Water and electricity: kactory b0S0|
1440
Waler andelectricity: Offices 1250 |Stavonely
15 200 |
Warer dnd elECCIy
Depreciation on tactory equipment 15000
Depreciation on office equipment
Deprecation
2600 37 000
actory andmachinery
Factory maintenancee
10200 2500
1200 Office eqUipiet
Baddebts 8700 Maintenance of tactory/machinery
4600
CommissiQn paid onsales 13600
Sundry 3dministratIve expenses 8 400 Comimisionpad onsales
1800
Indirect material purchased and paid per cheque 18 240 Baddebts 14300
6000 Sundry administrative expenses
Rent expense:Factory 72000
19200 Rent expenses
|Rent expense: Administrative offices 796900
32
Interest on loan
Cost of finished goods manufactured during year 1800000
Sales: Finished goods (mark-up of 33% on cost price) 1060 000 Sales:Finished goods (mark-up of 50% on cost price) 621 500
Diect material/raw materialsissued forproduction
121600
Year-end inventory on 28 February 2017 Fatshed goodsproducedduringtheyear
Raw materialstock Additional information
Rent expense and water and
Work-in-process account is occupied by the factory.
r Or the rented propertybetween the factory and the
department
administration deparnu
Finished goodson hand 3450 cricity must be divided

Indirect material cording to the amount of floor space occupied.

375
BUSINESsESCHAPTER

MANUFAC TURING
AND
ACCOUNTING
374 CHAPTER 13 COsT ACCOUNTING AND MANUFACTURING BUSINESSES
 A

The opening balances in the various stock accounts on 1Ma s i n gt h e s e f i g u r e s

Raw materlal stock March
R64 000 2017
p 1Analysingt h e s

Work-in-process
were a u n i ti Aicates the cOst tor the
R16 200 matenal of one
Finished goodson hand R110600 folows p t
matenia
c los

costper ncrease, this figure will i

suppliersincre rease. If the
unit. 1f
and there cuting aw
cut-off (waste) matenal,
is less cuto of
enal
s1s
planned
fcarefuly
ully this figure
11. Analysing financial figures ualdeerease
men. indicates
nit ind whether the
l a b o u rc
ect c ost
1r
per
unit

not. It is also
manufacturing of the
an indication of
MANUFACTURING BUSINESS poductISlabour-inte the
productivity
PRODUCTION COST STATEMENT FOR THE YEAR Direct material cos ient the how
Note
ENDED MM
per unlt
loyees.
unit
indicates

manufacturing processis.
cost increase to0 much from one year to the next. Abusiness wil1 frst
per One

NumberDuectol mattial cow

R ect
Direct material cost (DMC) This
shoula.
gooces forroquotations.
prices o
price

unns prod
determine

Divect labour cost (0LC) XXX to ds per unit will also decrease if the factory is more
this
Direct cost per unit
Prime cost XX Direct labour cost ok at

of
finished

i s the
e total
t o t a l .cost per unit.
Primecost
Number of units Factory overhead cost (FOC) XXX per unt Cost This

costs per unit I decrease if the business can manage to

NumberDirectof lunits
aboUK COST nroductive.

XXX Bactory
overhead
head costs are a fixed cost.
factory overhea
Total cost of production units, as

PLUSWork-in-process at beginning of year XXX produces more

ercentagegros
es nrofit on cost of sales shows how much profit the business

XX Factory overhead This should be enough to cover all the other expenses like sales and
costs per unit madep e r i administration costs
LESS Work-in-process at end of the
year
XXX Factoryofoveihead cosy
Number
ibution costs a n d .

ice per unit is the average pnce

at which the units were sold durine
Cost of production of finished
goods
(X) units produs3 Selling

XX t h ey e a r .
distribution
cost per ld stay the same even if more sales
Cost of finished seling and a variable
cost.

as this is
if more sales take place, as it is
goods per unit take place,
ninistration
cost perunit will decrease
Cost of production of finished goods s
e c o n o m i e s of scale,
is calledeconomies i.e. as more is produced,
Number of units produced This concept
a fixed cost. costs ares shared over a greater number o units.
administration
constant

Activity 13.14
MANUFACTURING BUSINESS table.
Complete the following How will you comment
INCOME STATEMENT FOR THE YEAR Indicator
How to calculate
ENDED MM YYY Selling price per unit Cost per unit/ on youranswer?
Note Sales for the
Sales Number of unitsyearsold cost per
Directmaterial
LESS Cost of sales unit (DMC/unit)
Gross proft on
Gross proht goods sold
finished Direct labour cost per
unit

Selling and dstribution cost(SDO) Gross proht, 100 (DLC/unit)

Cost of sales Direct cost per unit
XXX)
Administration cost (AC)
Net profit 0XX) Selling and distribution Factoryoverhead costs per
XXX cost per unit unit(FOC/unit)
Administration cost Selling and distribution cost Cost of finished goods per
per unit Number of units sold
unit
Administration cost
Number of units sold
Percentage gross proht on
Contribution per unit cOstofsales
=

Selling price per unit -Variable cost per unit Selling price perunit
Variable cost per unit Selling and distribution
DMC/unit +DLC/unit +SDC/unit COst per unit (SDC/unit)
Breakeven point Administration cost per

Total fxed costs unit (AC/unit)

Total fixed costs Contribution per unit Totalfixed cost
Factory overhead costs + Variable cost per unit
Administration costs Contribution per unit
Breakeven point 377
BUSINESSESCHAPTER 13

376 MANUFACTURING

CHAPTER 13 COST ACCoUNTING AND

ACCOUNTING AND MANUFACTURING
COST

BUSINESSES
 Example
Calculation and interpretation ot statements
The sclling price per canoe is R3 400. of Wayne' unit

During Naclng Kay

per

the cost

nmanufactured duringNcal
sold. A total of 260 canoes were se + SDC/uni

the year 235

p u C u n i t+ D
DLLL
L //u n t
+

Required ycar cantes wtte 796,15

+
A
1183,18
83,

Use the information from the statements of 846+

ending 29 Pebruary 2020 on page 372 to Wayne's Racin

. Direct cost of raw nmaterial per unit calculate the followi Kayaks for
2. Direct labour cost the Fandcosts costs +
administration costs
yea
a o r yoverheadcosta

d
per unit
3. Total direct cost per unit 130
540

+
4.
Factory overhead costs per unit 6 190

5.
Production cost of finished - 26B90

Sales and distribution cost goods per unit

C o n t r i b u a o np e runa unit
6. total.vanable costs per unut
unitIess
per unit
7.
Administration cost per unit selling
price
per

8. Variable cost per unit 3 4 0 0 - 22 3 7 , 7 9

, Fixed cost
total
Otalfixed cost
hixed c

10.Contribution per unit point

= contribution per unit

11.Breakeven point |,
Breakeven

226890
Solution TT62,21

= 1 9 5u n i t s

1. Direct material cost per unit =

- direct material cost
number ol units
327
200
260 produced
A c t i v i t y1 3 . 1 5

that manufactures bows for pets Thee

tent
business
= 1 258,46 manufacturing
s CC s a
for a week.
Ihe selling price per unit s P200. Dhanng
a pet
9 food to feed A
totalci 2 307u
2.
Direct labour cost per unit direct labour cost
h
aryenough

29 February
2012, 12
000 units weresold

207000 number of units 2 yearending

260 produced during
nunufactured
the year.
= 796,15
the yean ending
of Happy Pets CC fos
Aequired
the s t a t e m e n t s
. Total direct taken from
(prime) cost per unit = prime cost Use the
information
calculate the following: 5.
534200 number of units
produced 29 February 2012
to
unit In 2011 the
Direct matenal cost
per urt was

260 material cost per

2054,62 1.Direct (raw) r e a s o n s for the change. was RS8

be
Nhatcan
Give possible the Direct labourcost unt
4. unit. in 2011
Factory overhead costs per unit =
-
Factory overhead costs 2 Direct
labour cost per
number of units reasons for
the change?
6350o produced
260
370,58
Total direct cost per
unit
unit
overhead costs cost per
4. Factory unt
of finished goods per
Cost of finished goods cost of production of finished goods Cost of production
per unit= distribution cost per unit
number of units Sales and
b28550
260
produced Administration cost per unit

Variable cost per unit

2 417,50
Total fhxed costs
6, Sales and distribution costs SJles and distribution cost
per unit =
10. Contribution per unit
number of units sold
11. Breakeven polnt
183,18
7, Administration cost per unit adninistrationcost
number of units sold
30 540
235
511,92

379

378 eost AC<ouN

Information
Happy Pets CC
eet on 28
February 2013
PRODUCTION COST STATEMENT FOR Sheet
on
28

THE YEAR ENDED 20 Balance

FEBRUARY 2
the

Diect materal cest

Oirect kabour cOSt Note
PhiTe cost
Factony overtead coSt
Totalcost afproduction 1130
A0O Work in proKeEs az begi
mning ct year
LESS Work in prKESs a
Cost of
end of yea
production of fnished goods
45691T equipment
WES deprston dnoimce 820
eMestpedianon ontactory
INCOME STATEMENT
FORTHE YEAR ENDED 29 dkprecationon vehicles

FEBRUARY 2012 ancactions for

transactions
for the
the year ending 28 February 2014
ve:

SS: ost of sels Note of

Aesarcrery
puUThased

EaNT n spurcnased

Eirg ard dsTUin cOSt h a t n t e r a purthased

(1 6500
dministreaion co 17
Net pruht faw materiak
OUts dn
(sTS

Activity 13.16 440 10 ehide mantenance costs

Mokhele
Manufacturers manufactures
division occupies Diectwages
sales staff.
half the
building, whileremote-controlled
the other toy cars. The
UpamploymentInsuranceFund contribution: Factory
rés actorysaCunty
Required
halfis
occupied by manufacturing
1. Use the
administrative an himisistrative staff

s sai
the end information on the
next
of the
financial year: page to prepare the Ratesand taxes
a.
Production Cost following on 28
February 2014, Fsurance
b.
Income StatementStatement Water and electiay
2. with notes
Calaulate the
cost offollowing
a.
The Sundiyctory erpenses
year
finished goods per unit if 15 000 Additional information
b. The cars were 'Water and electricity must be divided between the factory and the admun stratve
variable
costs per unit manufactured during the
The contribution department at a 3:1 ratio.
d. The per unit, be divided equz
and insurance must
total presuming the
fixed costs cars were sold
for R60 each
Cpenses with regards to rates and
taxes

Detween the factory and the administrative department

e.
the breakeven
point the factory and delver trsneo
to
is used to raw materials to
transport
Enicle have to bedivided betveen
the mamu'aktur

t o customers. All the expenses

division and the sales division. but the ransaction
nas

to the supplier,
R1 300 were sent back
i e r i a l s costing
not been recorded yet.
Depreciation must be calculated as follows:
Office equipment at 10% of the cost price
balance
Factory at 20% per year on the adjusted
value
vehicles at10% per year on the carrying
2014
Inventory on hand on 28 February 9740
Raw material stock R13740

Work-in-process RB1 544

ChAVTE 12CGST Finished goods on hand R3 600

381
ACCOUnTING AND Indirect material
AU#ACTUG USINESSES ACCOUNTING
3NO
MANUSACTURI<
SUSiNES56S
CHAPTER 13

ST
 he nndncid y Enusa
adjustments
Besides the manufacturing department, the business so has aOnsales
the l.
wenenormat notes
and
below,
day ofbrar
on,
following: taken fron
Paypbey
t h e

department.
ulbctu ureduction Cost Statement for the period the
brrldAan
Required
1, Complete a Production Cost Statement for the period end
well as the following notes: endlng 28
adrriristave Pepe
ogether
wilth

n i r e cm
t
a Produc
the

aterial
following notes:

costs
19February 20s,
Direct material costs Februar 2015, p i r e cl

cactory
ta b o u rc o s t s

o v e r h e a dc o s t s

Direct labour costs s h e dg

gooo
oodssold

Factory overhead costs hinished

calculatethee followina
ing:
Cost of finished goods sold cost
of costs p
per
e r unit
costs

2. Complete the following calculations to the nearest cent: Direct

material

costs
p e r unit

Direct material costs per unit of a finished labour

a.
product litect
p r i c eo ff i n i s
inished goods sold
b. In 2014 the DMC/unit was
R25. VWhat suggestions will you distribution costs per
C.Total production cost per unit of a finished product and product labour-intensive or not?
m a n u f a c t u r e dp r o d u c
Sales
d. Gross profit for the year d for the bueci
manutactured
manufa

e. The mark-up earned on the cost price. the mh nits

units
to sho
the h
s the.

(Hint: Calculate
proh
enough

R12?
f. What will happen to the profit-margin if the vas colKeVenpoi
point tteaig
o e ru n i t w a s

Were

business manar 180 000 units were d and the

units, but the fixed costs stay the same? ous year
viousy00,It is considerably less than
sales and
bduce more this year s dittb
000
R126

Information amounted
concerned2
to

Should the onTer te

Balances
Rawmaterial stock
01/03/2014 nformation
Work-in-process stock 43890 8I0Ln05 O p e n i n gb a l a n c e s e
on 1 March 2018

25 760 S479
Finished goods on hand
Consumablestores onhand (indirect material) 60720 1890 Rawmatenal
stock

Hötk-in-process
stock

5879
hand

Summary of transactions for the year ending 28 February 2015 629 gooos
on
Finshed

Consumablestoresstock
Credittransactions
(costprice)
Purchases: Raw materials Factory and
equipment
and equipment
LIndirect material 386 mulateddepreciation
ontactory
kcumula

Cash payments 156 for the

yearending28 February 2019
Camage onpurchases Summary of transactions
materials
Wages: Directlabour Puctbaseofraw
-

materials
of raw
Indirectlabour 295356 Garage on purchase

Salaries: Salesstaff 41964 Parchaseofindirect

material

75752 (administrative)
Factory security Porchase ofcleaning products
Administrative staff 86700 equipment ( September 2018)
100 00 Purchaseoffactory
Purchases:Stationery S46
Production wages
Rentpaid: Shop 24510 Sailsdevelopment levy (factory)
Factorybuildings 1640 Unemployment Insurance Fund
contribution (factory)
Maintenance: Shop 14 S00 Salares: Factory staff
Factory 33870 Salaries: Administrative staft 16200
Sundry expenses:Factory 6822 Salaries Sales stat
Sales costs (excluding salaries 35 20
Isurance: Factory
Administrative expenses (excluding salaries) 4 500
65.20
Water and electricity
Cash receipts 7-00
Sales of hinished goods 1281818 Sundry expenses factory
Administration cOsts
Additional information Maintenance costs. Factory
14 20
Depreciation: office and shop equipment R18 960
Tatal ales and distribution costs
Depreciation: factory R22 400
Total administration costs
During the year 10 000 units were completed, and 9 952 units were sold.
1
BUSINESSES CHAP
382 AND
MANUFACTURING

CRAPTER 13 COST ACCOUNTING AND MANUFACTURING BUSINESSES

OSACcOUNTING
 t h ebreakeven point
thep r o f tm a r g i n .
on thecos price per backpack.
Notes and adjustments kulate
ulate
the
proft
with regard to the
The balance ofconsumables
on 1 March 2018, Included the
llowing ngureswith

previous fnancial y
Indirect material
R1 000 following: the
o
owner.

wete qven.
Consumable stores (administrative) R200 advice
to

.No entry has been made for R650 with regards to Speedy Tran.
of raw materials to the factory. sport for the 016 6
Total
A calculation error was made during the physical stocktakina of .
transpontport
not yet been corrected on the inventory statements:
erroneously calculated
materlal that has
300 units of 5c each
(see next bullet).
were as
having a value of
SOc earh
each
AJRDRAIasis
Inventory on hand according to physical stocktaking on 28 1and
sold

Raw materials R62 785 February 2019

Work-in-process R36 000
ntomation
Indirect material
Consumable stores (administrative)
R1 080
R420 ehne
01/032016
Finished goods R57 000
rt- o e s
stock

The following information appears on the wages statement with ro. 61 0

production wages for the last week of February 2019: ards to Prstedgoodos n
hand

indirect material
indirect

nand: 65
Employees stoves0n
U b e

R5 800 otherinformation for the

Gross wages tions and
maryoftransactionsa
year ending 28
Deductions
Unemployment Insurance Fund R58 purchased
Februar 2017
stock
Tenal
Medical fund R300 g
hded
m t aenal
purchased

R522 st
PAYE haWmaterial

Net wages R4 920 Carage

paiat matenial
IndIeCt
pid stock
sTage matenal
Additional information
dules.aW
(SDTS
.Theemployer matches contributions to
production

the
Unemployment Insurance Fund isuedtor
rand-for-rand basis. on a Waterals labour
Diecat
The employer contributes 1% of the gross wage to the Skills Megaspaidt
Development i abour

wy
. .
ndnect
No entry with regards to any of the above was made. Migaspoid
.85% of all water and electricity was used by the manufacturing division, gbresAdministrativestaff
Depreciation on the factory and equipment has to be calculated at 10% Derw
r on
staff
distribution
theadjusted balance. Apart from the purchases on 1 September 2018, there were uriesSalesand Fund contribution: Direct labour
no
other transactions with regard to the factory and equipment during the molovment Insurance
year.
During the year 210 000 identical units were manufactured, and 207 615 units Were cal Dtpreoadonon lactory

equipment
l assessment 13.2 ecation onofhce
Infor vehicle
Deyecaton on delivery 480
Marks: 80
Time:50 minutes tdbulding

Surance
Happy Hiker is a business that manufactures backpacks for hikers. Their financial year
Weterand electricity 10 450
ends on 28 February. During the financial year ending 28 February 2017,3 300
were manufactured. The owner of Happy Hiker has approached you to help determine
backpadks SEtonery

whether his business is operating on an efficient basis. Hheartsing 1240

onision paid on sales 134 00
Required 1976400
1. Use the information provided to prepare the following on 28 February 2017,the end
of the financial year:
Adltional information
1.1 Production Cost Statement
1.2 Income Statement, with notes, for the year ending 28 February 2017. 154 Raw material stock was on hand on 28 February 2017.
Rent and insurance is calculated according to floor space occupied.
2. Calculate the cost of finished goods per unit if 3 300 backpacks were manufactured
Ihe premises occupy 2 000 m', and are utilised as follows:
during the year. B Factor 1 500 m2
3. Calculate the variable costs per unit. 5 Administrative department 200 m?
4. Calculate the contribution per unit if the backpacks were sold at R600 each. 3 Sales department
5. Calculate the total fixed costs. 300 m
Ine tactory consumes 80% of all water and electricity.
J04
CHAPTER 13 COST ACCOUNTING AND MANUFACTURING BUSINESSES CHAPE
BUSINESSES
ACCOUNTING AND MANUFACTURING
 hical
the
relating to th
p r a c t i c e sr e l a t i
manutacturing sector,
of
manufacturers simil
y h eu
r netnicapl ra

gritt
i x i n g When
inflated prices products ge A
12. Ethical issues relating to manufacturing roducts
at
contracts or
or tenders together and
practices by manufacturers
ohenng
osel
bibes
the
s
to
secure

r and trading with governm conSpre

12.1 Unethical acturing

nulact
le
at abuse human
the need for businesses to
t he,
the moral and e
Code emphasises operas.
usually ical
usually
nvph
KING CODE
The King
manner, in
which economic,
e n v i r o n m e n t a l and sociai co

This certainly applies tor

sustaina
considerations petewathuneeVe
themmore
is
reality
expen,
that
This makes dificult way of
that

doing
hinyv
it f

integrated into
decision making.
solutions and efficient eco-frien
he manufactare manufacturers in
terms of
Taufachn
price. This mCN
industry, where
sustainable
friendly processes Ting acturer,
since retailers look to
source will oten prejudice
and maintained in order to preserve scarce resources epectable
be developed
the environment.
and prote hpyaspoSsible. suppies as
The manufacturing industry can be a very competitive envir
profit-maximising behaviour frequently triumphs over ethical a
tive
environment in which 22Accountabit ityandttransparency
ailers to hod the
making unethical social conceny
for retai

Such behaviour often

results in manufactu:
Manufacturing costs hoices in theiv
g
demand

ble for their actions.) manufacturers withwhom

Retailers
attempt to minimise manufacturing
costs.
anufacturing costs
can be
accou
research into the conduct of their
are now

manufacnurexpecuedt
ers an o
herei sa

in ethical manner by implementing

more efticient manufaen
ruring process reduce o r m at h o r o u g h r e s e a r c
nore

an
raw materials or establishing tighter internal
trade

operate
in a responsible, ethicalan
sourcing cheaper controls hey
they
knowledge of a manufacturer acting
costHowever
at
there are unfortunately still many manufacturers who choose to reduc s

and often illegal practices. Some of the by using should

i shoulcease doing business with anethicaly or
unethical, unsustainable that
retailer

media andmamufacture
the
the relevant authontües. The
below. explained untawtul
All
then
them
to
relev

tatchdogorganisationsplayy a
hould
report vital role in cxposing manutacturersvarios
who tra o transgress,
Unethical labour practices und
shou

to consumer to apply pressure on these

which small factories where e up manu
Operating or using sweatshops,
are uldimately
product
icts.
made to work very hard, in poor conditions, for very low wages jees are is
hutit
their

boycorting

Using child labour

by
1 2 3 U n e t h i c a lb e h a v i o u r
naviour of employee
and satety regulations in factories
Non-compliance with health
of thei
operations, manufacturing ousinesses are aso
finished products: and fraudul
erhical and fraudulent behaviour from
Manufacturing and supplying poor quality
nature
unethical

. Using cheap low-grade raw maternals in production in order to reduce

tothe
Dularly
vulnerable
to
employees,
d fraud. It often difficult for a manufacrurer to adequately safeguard
material costs s u c ha st h e
raw
materials
goods that are continualy lowing in
and finished
materials that have passed their sell-by date the
This for employees
creates opportunitie
working in the
Using raw and
control
production.

processes in order to speed up to steal goods trom the manufacmurer.

Taking short-cuts in the manufacturing and
ofut
and storage areas These
productionline ge fron
from the petty theft of raw materials to elaborate fraudulenm
production
Allowing sub-standard fi hed products to pass through the quality control
range
typicaly worth thousands of rand are stolen.
cimes
s c h e m ei
s nw h i c h ch finished goods
process out-dated finished products
made, aged or
Supplying poorly
manufacturers
local
Supporting
impact on the environment: 124 South Africa plays a inc vital role
Practices that have a destructive industry in
regulations
manufacturing
This industry also helps our economy to
.Non-compliance with environmental
e in o u r country.
numbe
of people rernment revenue. It is therefore extremely
resources
s o u r c e of govern
Obliteration o r depletion of scarce a
vast

significant products
and leaks of hazardous
material grow
and is a
our
manutacturers
by buying locallyproduced
Spillages important support
to
have a social duty to attempt to
source their
llegal disposal of waste Retailers also

.Various other forms of pollution wherever possible. manufacturers

before looking overseas.

local
products from
harmful products:
Manufacturing of potentially testing
without conducting adequate safery
Producing goods
Producing unsafe goods
for example tobacco (cigarettes)
Manufacturing addictive products,
Manufacturing weapons

Cruelty to animals:
testing8
Using animals in product
Intensive farming

13
CHAPTER

BUSINESSES
MANUFACTURING
D
 3.7

Activity 13.19
which appeared
article, on
the
News24
uhe
folloingartic

1
Work in groups of four. Read through the article about
campaign and then discuss, in groups of4, why It
the Proudly c
outh Africar
follow.
website, and answer the
important to
support local
loc o A R - L O C A LS
LEKKER MINISTER SAYS
CAL
Proudly South African is the"buy local" campalgn
government, organised business, organised labourlaunched in
products ament-On olarwaterrheater supplie
in
government's
ine
ho"localise" thelr
tallation programme,
organisations (the constituencies resented in e001 byanc ricipate
products vll be
ne, Energy Ministe
Development and Labour Council Nedlac) to to tboost job the
lacl communl
lonal ty on
T
h hu
urrs d a y

er Dipuo
local"by promoting South African companies and creation
their 'home-qr and pride ln
Econom e e r
sad

debatei n Parliament
Par
on her
department 2012
services.
me-grown' productsts and ood progress with the solar
er budget, she
low-pressure typeheater-wereprogramme,saidmostoOstthaof hilethe
gooc

pening
installed-Particularly the le
been

had
e
Buying South African stimulates an increased demand for
products and services. This translates into locally-r
-produ
temsh
ainable, and the time has arrived imported
safeguarding for
unsus

opportunities, economic
of
growth, and the creation of more existing
Ceary
opporte
unities. I have
therefore decided usthatinftervene if we
opportunities in our country. q
employment his
wete
loc

sar
s
water
heate
localjob

gramme will Work on

their
n aa different
different model. Only
ill be abla.Odel.Onlya
products will
rom thie
a
the
re

able to
particlpate in thethose suppliers
localise
By buying Proudly South African, both consumers and t ocomm
to
," she said.
personal contribution to nation-building. Consumersbusinesses
b s i d yp r o g r a m m e , "

are udgetsubsidypro

because only quality products carry the

get an assi makin
king a govemment
Proudly South African mark
of the Campaign are furthermore committed to
an while quality
uplifting
responsible business practices which are reflected in the ethos anc members SAPA

manner the Campaign represents and stimulates the membershincsocially ihwwW.news24.com/Scitech/News/Sola

curehtpwww. wS/Solar-local-is-lekker-minister-say-20120517
which benefits all.
creation of a
n
virthitous circle this
Membership is not restricted to a particular type of business or vestions
linister Peters mean by aving suppliers
Minister

business or institution, whether it renders a organisation

professional service or is a on .Any
does

Where,according t
What
the article, do most of the
solar water must"localise" their
1 heater systemsproducts?
business; a public entity, sports body, school, tertiary
department, municipality, NGO, town or
institution, govern:
city or even an individual,
manufacturing talled in
South
Minister
Africa come from?

Peters feel that

feel that tthe current situation
that are
is
to join the Campaign, provided that they
support the
may be eligihi
gible why does
unsustainable?
Campaign's
objectives and meet the Campaign's membership criteria. overal aimsa
E x p l a i ny o u ra n s w e r .

and is
governmen
rnment offering to suppliers who commit to
benent
4What water heater)? localise their
The qualifying criteria for Proudly SA membership are: roducts
(solar
established the solar water heater
Local Content s Wlhyha government
this needs
prograr
explain why programme to be included
in the
At least 50% of the cost of
production must be incurred in
South Africa and there must be
triefly
government budget
"substantial
anyimported materials. transformation" of ase study 13.2

High Quality Product Bad the extract

from an article from www.compcom.co.za and answer
the questions that
The product or service must be of a proven
high quality. follow.

Fair Labour Practice

The business must comply with labour MEDIA RELEASE
legislation and adhere
to fair labour
practices 10November 2011

Environmental Standards
The business must be Apollo Tyres settles its price fixing case with a R45 million fine
environmentally responsible and
adhere to production
processes that are environmentally The Competition Commission has entered into a settlement
agreement with Apollo
friendly and acceptable. Tyres South Africa ("Apollo"), formerly Dunlop, in which Apollo admits that it took
partin the tyre manufacturers'cartel. The cartel involved the main tyre manufacturers
nagreeing on pricing and price increases, known among them as coffee table talks
Source: Proudlysa.co.za [Accessed March 2012] ApolloTyres has agreed to pay a penalty of R45 million which represents 4,759%ofts

208total turnover and admits that it was involved in price fixing conduct

388
CHAPTER 389
13CoST ACCoUNTING AND MANUFACTURING BUSINESSES *
13
MANUFACTURING
BUSINESSES CA
COST ACCOUNTING AND
 edtomanulacture
facture motor cars,

vastly diferent, it
ousehold detergent pharmaceu
are follows that the
Commlssilon's referral on 6 Septemh
biyana
urnit
hffcr. Although inherer
furroduction processes will differ
The agreement follows the er
of its investigation against the South African Tyre Manufacturers 2010 of the
o ft h e s e
production pro
cach
type

will
here eare naks
spechic
spe assocateed
fv encountered in the e focus
(rSATMC") and four local tyre manufacturers and suppliers namelu
South Africa (Pty) Ltd anllo,Gon
onference (Pyndings i
e sd
ks
with
pically
t h ta r e on
ufacruing envirosome
nment.of the
South Africa (Pty) Ltd., Continental Tyre
South Africa (Pty) Ltd. ("Bridgestone") to the
Competition Tribunalgestone tonsks
de the following:
Bridgestone was granted conditional immunity by the Commision udicat ks: The cient running of the produ
n following its
application for corporate leniency and corporation pursuant thereto oductivity
r i s

roppages orbottlenecks in t
hereto. n

TheCommission initiated this case followinga complaint lodged by a nliae

delays
erials, c o n taminations
am within the production linproces.
production e, shortaSuchgesofrisks
alleging that the local tyre
manufacturers
simultaneously leet owne,
adjusted thelr oemploye
fe
process, faulty
around the same time and within the same parameters. This was f o l l e s Such risks includ
ethics
Such

production machiner
of followed
and seizure operation on the premises Bridgestone, Apollo and SATN by a search liy
work

of
product:

produ roduct
of poor quality and
of too
many fective
2008. Subsequently, Bridgestone applied forand was granted on 4
April
t y producing
ducts,
or sample.
or producing produd
conditional Immunity
order

to

from prosecution, ing erials: The cuttinggof raw material

Off-cuts should beshould bee planned
n oa
rc c o r
Hastage
o f
raw.

o prevent excess waste. plar

that the cartel operated
The Commission's revealed
investigation
during
1999 to at least 2007. The tyre manufacturers agreed on price increases the
y carelul minimised.
period he
manufacturingindusr it is vital to
control these isks as
and implementation thereof.
price increases
manuon
pefiul can be extremely
prodtuctionca costly inefficient and
hecartel concerned the manufacture and supply of passenger tyres, light
truct
commercial tyres, trucks and bus tyres, off the road tyres, agricultural tvrerand
earthmover tyres in South Africa. The main customers of these products aren yrisks
associated with the safety and well being of
g e i k sthat
are the
employees
eciothe

aring process, as well as the

who purchase tyres for resale to consumers, vehicle manufacturers who dealers
urchase ty
manufa

of the protection
for new vehicles models and the government which procures tyres for state ng
in
the
production
line. There is not
only an
The
factory,
vehicles and fleets through a tender process managed by the State TenderBoad
nachinery
and
involvedOyees
mployees work in a sate environment, but ethical
ponsibiliy t o
with also
volved employees being injured or
The Commission welcomes the settlement by Apollo, noting the cooperatior
the part of new owners of the business after it was acquired from Dunlan t iancial
implications

and satety
precautions. due becomingil
2006. tof health alsohave specific health and safety
Apollo has further agreed to refrain from engaging in this conduct and to develon tries that
to
nd manufacturers could be fined or barred from operatingif their
indu regulations need
and implement a compliance programme to ensure its employees are aware of he

provisions of the Competition Act.

ound to be inadequate. ddition, damage caused to the
In
nroducts due
deymeasure

machinery
and prodi to a
preventable disaster, such as fire, can be
a
,
could even lead
to financially ruin.
Source: Adapted from article on and

www.compcom.co.za ey costly
risks
Questions theft and
error

is this unethical behaviour generally called? fraud, risks are to the complex
compounded due
1. What inherent business
2. Explain what happened in one sentence.
anufacturing Manufacturing typically involves n
environment.

3. What was the penalty for this unethical behaviour? in the production process. At the same
workingsimultaneous
amployees
ime,
4. Why was an investigation lodged by the Commission?
of raw materials,partially completed goods and finished products
5. What are the products supplied by the cartel? ige uantities
and out of production.
6. Who was affected by this increase in price? elowing in
This makes the manufacturing extremely diffcult to control and
environment

risks and opportunites for fraudulent

to countless
gpOses the production process
13. Internal control and internal auditing Hhaviour. This includes pilfering of raw materials, theft of finished products, fraud
or fictitious suppliers, production errors, costing
chemes often involving fake orders
As you learnt in Grade 11, internal controls are established and implemented
isakes and unnecessary wastage. To protect against these risks, manufacturers
to protect a business against risk. The internal auditing function then reviews
aed to implement tight operational controls, physical safeguards and
employ
the risk management and internal control systems of the business in order to maintain accurate and detailed records of the resources used in producdon.
determine whether risk is being managed and controlled acceptable level. So
to an

it makes sense that we first consider the risks associated with the manufacturing Evironmental risks
environment, before we discuss the internal controls used to guard against these Dese are risks that are associated with the harmful impacts
that the
risks and the internal audit of a manufacturing business. environment. Such risks include vanous
uringprocess could have on the theethicaland mora
resources. Besides
Opolution and depletion of scarce these risks,
there alsc are

13.1 Risks associated with the manufacturing environment ponsibility that manufactu have to guard against
RISKI
The manufacturing industry is extremely diverse, producing a very broad spectrum mplications. Manufacturers who fail to comply
may publcaly
OT products by using a wide range of manufacturing processes. Since the producton ations may have to payhefty fines, may be prosecuted or damaged.
24, Which could result in their reputation being irreparauiy
391

BUSINESSES
CHAPTER 13
390 CHAPTER 13 COST ACCOUNTING AND MANUFACTURING BUsINESSES MANUFACTURING

AND
ACCOUNTING
 ntroduction ntroduced to several basic

budgeting concepts an
i n t

Were
Wethen
Chapter 14 you

ofbudgets.
bu
of expanded
10 YPes
components of a Cash
Various
e various
ious
how to forecastcollee in Grade cepts
etandps
Budgeting at
thhe

arnt
lea
ions from 11, rojected
nking

inbse alsoonsolidated knowledge by learn

We
also

debtors a Income
this

payments
d i r o r sW e
then

will be able to: enent We udgeta a Projecred Income State oWtPe

By the end of this chapter, you on the analyst ent for
Cment
we will be on
cus we a
sole radprepare and
n t aCashBud

. Analyse, interpret and compare Projected Income Statements focus

Key concepts
Projected Income
Statements for sole our
n
ain
ets and Projected Income
ntrod.eetion interpret
Statemedon
Statement Cash Budget
or companies traders apansono /C a s h
year

However, befo and

for both sole
Analyse, interpret and compare Cash Budgets for sole traders or This 2nies

undere
e
these new
Debtors Collection Integrate ethical issues relating to budgeting and projections companies ompae aaggood
o o d understanding of how

preparethtoesepics,it i
n sand
con

Schedule Creditors
have w to
.Integrate internal audit and control processes relating to budgete a you

lassification and preparationbudgets.

Payment Schedule
projections by comparing budget to actual figures
operating budget / Buagept eriod

financial budget
planning internal sential tooltha is used by the
essen

ntrol business ivities. management most

a g ¢ m o .

of
control analysis
interpretation
BNlgenngaing
monitor
is
an

and
c

future
period
A
D . v i t i e s

budget
is a writt businesce.
nesses
may be prepared riten financialp
for a or many dplan
sales, purchases, operatind
companson an,
as
prepness, such
nrepared
s o fa bus

may also be prepared prod oduction,

and creditors. hey
a s h ,d e b t o r sa n d
or a
various diferent
see, according to this budget
covering weeks,
months or even
As you can several years.
plan we will be able to buy
textbooks for deme,
school this year. We may
every learner in the
even have money left over to repair the pot 2 1B u d g ep
t e r i o d

holes in our soccer held. But is there room in three

to buy a new
the
budget ared for one month, months, six
months, avear
goal-keeper for our Bualgensc be predepending on the needs of the business. year or
or even
a

SOCcer team?
years, isawn is called the bud
drawn up is
The period of
budget period. Budgets time
budget
theb
r
which
time:
periods of generally
of three
prt-term budgets: usually less than one year
er one

n-term
budgets: usuall one year (12 months)

ng-term
budgets: usually prepared tor a number of years.
1 2 Budget c l a s s i f i c a t i o n

for almost any business

mentiona
budgets can be prepared activity However,
As
budgetsaregenerally ssified into two main groups namely, the operating budget
financial budget.
nd the

221Theoperating budget
consists of the vañous budgets which relate to the income
The operating budget
These budgets include the sales budget, cost of sales
nd erpenses of a business.
ludgetand expenses budget. These budgets are used to plan and
operating
borecast the income and expenses for the budget period. The operating budgets
are

combined to form the Projected Income Statement.

222 The financial budget

the assets
he tinancial budget consists of the various budgetsthewhich
relate to

iabilities of business. These budgets include Cash Budget, the Capital

adBuget a
as well as budgets for debtors, creditors and inventory. These budgets

t O plan and forecast changes relating to assets over t and liabilities

A Budgeted be prepared using the intormanon
period. Balance Sheet may
Contained nt various financial budgets, together with the projected pront o
net

b0S shown inethe

Projected Income Statement.

395
394 BUDGETING CHAPTER14
CHAPTER 14 BUDGETING
 n a lc o n t r o
2.3 Budget preparation . nternaC/ ont

tor
When preparing a budget,
management will athervePimp reatingreason

th an eftective tool tha can bebudge

portant
a

business activities that are required to take attempt to nl sed that i" prvnde
place in order to and lorecast the ement
Bith

ess. Budgets play

of the business. However, it is very
important for the infor attai the
business.
role in to monity a
vital
by management to ensure the inte-
budget to be realistic and the budget should
of future expectations. In lact, information contaobecine
provide an ace
preparing an unrealisticc budao ate represemed in the s
ies
of

and
are
1sed by
the
used

followed
business are
busin tha come trd the anduntrd TERNAL
are avoided
counter-productive and may have a
disastrous budget
management will usually use the records of effect on thoi
will
Aaton
often be
a s how
owproblemsa
p rO,
plans
o

control
ependiiue
under

budget. Management will then consider various business. Theref he

is kept
ndbusi 5s
objectives are achieved
the budget, such as: other face r r a r g e t sa

The business objectives: For that may inflforuencethe budgets to monitor businese -
example, the objective of
-ment
w i l lu s e

be increase their profit in the

to the actual results and
the budgeted
budget
period They would then need to budgetperiod hCrweent can identiry potential
turn influence the forecast
for a
increase
in
th business
by 50% fromn the previous
may pmbuctlirtherintbet
npazsons
anagement

cen
dhgures
the actual and problem
blem areas. Whe Aormingregalat
Promhethese
Their expected purchases and
amounts for almo
OSt sales,
item in whic
budgeted fiutese
operating expenses every
a n td i i ations to establishthe
thete
Teasons for the anagement w
increased, would the debtors and creditors would certai their fmanagement will either: are

forecasts, This.rtainly needbudget

to ,
as

major impact the business's projected

on
cash flow.
eir
hindings, action resolve issue
to r devvations Based
Existing business agreements: For example, Would: havea de. modify
orrective
perations; or
b u s i n e s so p e r a t i o
on
takec
by
business's lease agreement, management can examiningtha asures
ing the terms .
entcontrol measi to
prevent similar
during each monthdetermine problems trom
piement cor

that is expected to be paid the . o

the
of
information can be used to orecast the
Statement and budget for the outfl
rent
the budget
expense in Dd.
of rent
This
t h et u r u r e .

it may be found that the

happerung in
of cash due to the Proje me.
instances,

ealistic or due to ations were as a

Cash Budget. the nco unrealistic

Past, current and seasonal trends: For

payment
of rent me
rentiin the ed
aseseed
figures
being
ngent will make adjustments t
managemer
ugetea used:Co
mstanceses havingresultchanged.
d
\
of the
example, most busines
and busy times during the year. A business budgere r e
e n such
that sells ice esses nave quiet businesses,

th dire nd
that they need more stock:and extra creams will. Inmany by
using
doet amounsre

amounts to set
while the opposite would be true for personnel during December determine spending
dena
tment may
xed limits on
the winter
months. This and January,
an nrol
example, tne
marketing
be
allocateda expenidinure
into account when
preparing a budget. should ould be taken
gretan
or d. They would then have to
work within thishxed budget for a
Economic climate: For example, when the cularsceed this
economy
management will have more conservative expectations
is in recestin
a
on, orbe
management.
this amount without first
able to
exceed

receiving directadget and will

approval from
and will adiner
budget accordingly
other external factors: For example, if Communication and co-ordinati
price or electricity tariff is due to increasemanagement knows that the etrol net.
during the budget period. the rocess also helps to ensure that there is
will account for this in their forecasts. In
addition, if the trade union,
The budget
a business. This is
good communicationand
represents the business's employees, is planning to demand whicl ation within
important in particularly
for all of its members, then an
increase in nou where udgets are prepared
for many
departments by several larger bu
when forecasting salaries and
management would consider this informatric
mation
For example,
business
if a purchases
budget is being preparedmanagers within the
for the purch
wages. then the manager who is prepanng that
department, budget will ned to
ou
n the person preparing
the sales
budget what the projected sales are forfindtheour
3. Reasons for budgeting ad Also, the production manager cannot, for
for cash purchases, without hrst checking with theexample, budger a large
finanial manager
There are a number of reasons why budgeting is such an shether this fits in with the forecasts in the Cash Budget.
important and valuable
business tool and there are several ways in which a business
benefits from havino Once the individual departmental budgets have been prepared, the vaious
an effective
budgeting process. Some of the most important reasons for budetino departments will come together to prepare a hnal co-ordinated main budger. Thus
include the following: Cooperation and communication between various departments is an essendal part
of the budgeting proces.
3.1 Planning Furthermore, budgets allow management to communicate their expectaions
Planning is arguably the primary purpose of budgeting. When preparing a and convey the business's objectives to the various departments and emplyees
budget, management express the future plans of the business in financial terms. throughout the business.
This allows management to assess the feasibility of their
strategic plans and to 34
determine whether those plans are likely to result in the business achieving its Motivation and evaluation
objectives. As is the case with most types of planning, budgets often need be
darother important benefit of budgeting is that budgets, and the budgeaing proxces
adjusted and fine-truned before being finalised. Once the budget is completed, an help to motivate employees. This is normally accomplished in wo ways

should provide the business with a financial plan, which sets the course that necs
to be followed and the actions that need to be
taken, in order to achieve its goals.
397
396 BUDGETING CHAPTER14
CHAPTER 14 BUDGETING
 Firstly, involvemenn the pleconthnued
in
budgeting process helps to moti
Bmployees who are involved creating and seting
their oown le cmil. rmato
bud. budger sloyees
more likely to strive to achieve the
objectives of those en.
ended 30 June 2018
Secondly, budgets may also be used to motivate
employ budgets. be x Stores o r
the
year

performance targets based on the budgets. Emplovees by tatement

es, such as bonuses or

promotion, for achicvingareor t ensetting
olfered ote
targets. ex
ding those
Budget targets are also often used by management as a
bench
theperformance of its employces. mark for cvaluating M p e a t n gn o m e

4. The Projected lncome Statement Rentuneome

As you learnt in Grade 11, the Projected Income Gs

persunIincome

monitor and control the profitability of a Statement is eased to plan,

business. The
Statement reflects the estimated income and Projected I
expenses over thee hdOme
prting
eypenses

is used to forecast and plan the amount of

Ganes
andwages

its operation. Thus, when preparing a

profit business will gendget period and
a

Projected Income Statemenr tthe keythrough

Athertising

to keep in mind is profit. word Water

a n de l e c t u i c i t y

The Projected Income Statement provides

management with a foOre. hsurance

expected performance of the business over the

budget period. If the Dto
Income Statement torecasts results that are DEpeciano

unfavourable,
able to adjust the business plan ahead of time and can then marnocted Qperatingproht(loss)
improve the projected results.
develop neu 14 15
ies to I n t e r e s ti n c o m e

In this section, we will start by briefly

revising the preparation interest pense
expense

153 200
of the Projected Income Statement. We will then discuss how the
provided in this budget is analysed, interpreted and compared with informa presentation Proht(loss
belore
I n t e r e s te x p e n s e

actual rec ults. (losS)

a f t e r tax

Netprot
4.1 Preparation and presentation of the Projected Income Additional information

Statement
monthly
salessare expected to increase by 20%o in July 2
a r e expe

The Projected Income Statement has the same format as the The average
"normal" Inconm uses a
f i x e d proit margin.
Statement, except that here the hgures are based on future Six Stores
, Sodin the monthly rental for
projections and not the l e a s e a g r e e m e n t , part of the busin
business
past results. Since the budget pernod may span several months or even years. ding to i n c r e a s e by 8% from 1 July:
2018.
rented out will
the Projected Income Statement often contains emise
several columns. The Projected will i n c r e a s e by 10% from July 2018.
Income Statement is usually prepared based on the previous year's Income Salaries and wages a t 3% of sales.
Advertising
is budgeted
Statement and takinginto account any planned orpredicted activities
business electricity by 15% in July 2018
1S expected to increase
trends and economic conditions. The preparation and presentation of the .Water and
by R2 300.
i n s u r a n c e is expected to increase
Projected Income Statement is illustrated in the following example. .The annual to remain unchanged
for the cming year is expected
.The depreciation x e d deposit of R60 000 will deaease to 12% pa.
r a t e o n the
The interest
Example
Required
Use the following information to draw up the Projected Income Statement of
Stix Stores for July 2018.

399

UDGETING CHAPTER14
 les
areexpe February 2019.
pecte

and
Solution daditiona
R l 5000n

of sales is then
Information of
50%
on cost
cos

maintained.
by10%o nrease by 2an
remain constant.February 2019
ne
emake
monniYrent
ant
will
increase '

Stix Stores p e t r e c e i v e ds h o u l d

Projected Income Statement for the month ended 31 increase by P

month from 1
July 201a
pits
should

will
increase by R1 200
ar from 1February
Sales(750 000-12) x 120% Note
ddance
ehsu 2019 two advertisements will be January 2019
Cost of sales (75 000 x 665%) R ents will be placed. The cost of placed, and d
sho.Rote
ts

one
Gross proft (75 000 x
336) o f a l ltemporary
Leoall t
workers be r
will be R400.
will
ed adverof tisementingFebris R45uary 019
as 1
Oheroperating income S00%O0 Semces onthly saving
enses should remain es
onstant.
February 2019.The
Rent income (60 000 12) x 108%
5 000 otheropera
shoulda
n on
Depreciation
o ff
office
on
equipment
amount to R2 400 or
Gross operating income the
Operating expenses Activity 14.2 fnancal yeat.
Salaries and wages (72 00012) ofcthe
x 110% 30 400 m enominalaCcOunts
section the Trial Balance of
Advertising (75 000 x 36) 14 465 cainal
accounts

Vuvuzela Ttaders, a
sole
Water and
electricity (25 200 12) x 115%
6600
genbelow
treder,i.
Insurance(14 500+ 2300) +12
220 Megquled
Depreciation (21 600- 12)
2415| Reparet he e
Projected
Income Statement c
fVuvuzela Traders for March and
Operating profit (loss) 1400 Apri 2018.
ormation
Interestincome (60 000 x 126) + 12 800 w u z e l aT r a d e r s

Profit (loss) before interest expense 2018

Interest expense
15935 alance on
28 February

600
Net profit (loss) for the month 16 535 Debit

Note: The gross

proft margin =5 000
o00x 16 $35 300 00
=
33% Nent
income

Activity 14.1 UOCOuntecerved

Wagesandsalaries

Required DOOUnalowed

Use the given information to prepare the

anuary and February 2019. Projected Income Statement of NG0Onery
4800
Gadla Traders fos
280
Information lelepnone
9600
sadla Traders
suance
240
ncome Statement for the year ending 31 December 2018 Water and electricity 120
Turnoverfor the year htereston 0an
Costofsales 390 00 14700
Gross proft (2600 The figures above extracted from the books before the
were
accountant prepared the
Other operating income Income Statement for the financial year ending 28
13000 February 2018.
Rent income 18300 Aditional information
Discount received 18000| 60% of the sales are cash and the rest is on
credit. It is expected that sales willincrease
Grossoperating income by 20% during March, and by a further 10% from
April 2018.
Operating expenses 148300 Ihe mark up is 60% on
the cost price, and will be calculated at
(64920) from April.
50% on turnover
Bad debts
insurance Expected additional income for the
2400 ne iessee's
following two months
Advertising rental contract is renewed annually on 31 March. According to tne
Salaries and wages ement rent will increase by 15% from 1 April on an annual bais. In
42000 Calculate the rent for March
Other operating expenses 2017)
Net proft for the year 18000
400 83 380
CHAPTER 14BUDGETING
BUDGETING CHAPTER14
 It is
expected that the total amount of discount recelved
peplannedperce, crcentage

tobe cut
mark-up is
adequate
the financial year. wll
new
\Inercas
. enscs
eed
ean afford to pay
bonuses hire
Expected operating expenses:
Telkom announced tariff increases and It is
by 10% dhu husiness
can.

on.
additional sta
will increase by 25% in the new expected that
7pUgA,a n d
Tun an ademmng
financlal year. the
tolal telen ehe
Projected Income Statenment of
The Interest rate on the bond
of R80
hemoret
, the
ent can alter the
plans busines
000 Is 18%
annual pay hone bll
on the loan is due on 1 p.a. An
o n t h ,m a n a g e m e n

their
satisfied to try to prpedirts
April 2018.
av
ugeaite
nmonth
ce management are
It is expected that bad debts for March 2018 will yment of 2o yhappening the Projected Income Stater Nent ths frem
amount aPProve the
cit
.
April 2018.
Discount allowed during the past year
h

and R422 for

On and
planmng tej «il
sales. It is expected that the
I t is expected that no
accounted for
percentages will remain 2%% of
the
tangible assets willbe avera
the
c s t
Anaysi5, rpretation and
et period,
n t e r

will use the during the budaet

management
comparison
same. puaily
thebudget
udget perniod
bought
businessinfooperat
rmationi he
financial year. The current or sold durin Credit zame
tatementto
monitora and control the no

value of R120 000 and

carrying value of
tangible
assets the next atenhieved with the budgetedh ionm Proened
equipment the value of R
to
R15 000. include
de
t a lg u r e sa c h i
analysedSted

amounts. The
Depreciatvehiioncles
off on the carrying value at 20% nalysed, and base.
comparativompanng
e
carefully
per year. to th be theiriPata
Additional insurance with a blannual then assess whether.n
iss witten Can

interpretatin of this
C an,
l
April 2018. premium of R1 440 willbe management
o r a a t i o n ,m a n a

pDerforming
ert to expectations
It is expected that all taken out is
be taken
remaining expenses will increase on 3
uhe
business

tion
action nneeds to

by 56 fro orective investigate

her in
furthe order to identily
larch 2018.
improve underlying proble
to
f easures
4.2 Analysis, need to implemented or
interpretation and
dhey
neeo
,

Income Statements comparison of Proio ntro ures

were unrealistic
were un and need to be
The
cted budget
ngures

adjusted in thene Projeded

P
eparation of the Projected Income n c o m eS t a t e m e n t .
he
Statement is an essential
budgeting process. However the real valueof the part
par of the res withthe budgeted amoun
provides and the wayProjected
e nc o m p a r i n ga c t u a l

in the information that it

in which Income
nalmanagement
vaiance analysis to
known as
this information to ensure that the siness manag Statement whena technique
differences between the acnual and yse the data.hwil
effective analysis and interpretation of this
objectives achieved. Thrc uses
are technique,
the dit
the
the bud
that the business activities are well information, manapemen Through his
variances.

planned.and by an ensure
to a s
cerred erforming analysis, management
variance
actual results, management can ensure that
those activities comparing this informa
ormation to WhenPance Analysis Report, which is then uwllusually aw up tuble
carried out according to plan. are
Variance

used to yse the data. a

budgeted and acnualanalfigures

well asa
controlle tnown
VarianceAnalysis
ort sets out the
w e l S e t s
out
TheVarn
as well as for
the vanance amount and the each
4.2.1 Analysis and interpretation during the in
the
budget,
vañance petcenaa
During the planning stage, management will planning stage iem
ilustratedb e l o w .

analyse the information in the

Proiected Income Statement and based on their
will decide whether they have made the
best
interpretation of this analvsie Example
the T Analysis Report of Stix Stores for
management decide that they are not satishedpossible
from
plans for the business. 1f Extract July 2018
with the forecast Budgeted Varñance
then re-strategise and look tor
ways to încrease the figures, thev will figure
Actual figure
their plans. expected profit by adjustino Amount Percentage Comment
For example, management may opt for
a more
R75000 R76500 +R1 50 +l%
conservative
atways to cut expenses. They would then strategy and look Costo ales
RSO O00 RS1 000 +RI00 +%
Statement based on the prepare a revised
Projected
proposed changes see whether the
and Income Rentincome R10000 R9000 -RI 000
would be more favourable. expected results
Slresand wages R6600 R6600
Alternatively, management may consider a more
aggressive approach. They
may decide at the
to look R2250 R90 -R1 350-6%
prospects of boosting sales by conducting
OETISng

marketing campaign or expanding operation. major a

Waterand electncdty R2415 R3381 +R966 +40%
would result in an increase in Although this type of
projected expenditure, it may lead to strategy
more a
profitable forecast if the projected sales increased
would then redraft the significantly. Management Notes:
results. Through their
Projected Income Statement and analyse the new forecast Aplus sign (+) is often used to indicate that the variance ispositve,which
interpretation of these results, management will assess the
feasibility of such strategies. means that the actual figure is greater than the budgeted fiqure. Howeve, this
does not necessarily mean that it is a positive result for the busnes
By analysing and interpreting the information in the Aminus sign (-) is often used to indicate that the varanceisnegatie Nt
management can ascertain whether:
Projected Income Statement, means that the actual figure is less than the budgeted figure.
Hoeve, Uis

the business is dOes not necessarily mean that it is a negative result for the busines

the projected sales

expected
be profitable over the budget period Variance Analysis Hepore au
are figures satisfactory COIumn is often included at the end of the to eacn e
De used to enter comments or explanations relating
a
402 403
CHAPTER 14 BUDGETING 8UDGETI CHAPTER14
 ontinuod
Example continued srmaton
The management ot Stix Stores may intcrpret the Musie Store
edincome statem for the three month
results ate ment
January 2019 ending 31MarMarch
Analysis Report above, as follow8 shown.
wn n
Sales: Slightly
the
Varlance ch 2019
more than
expectcd, thus
favourable resul.
Cost of sules: Slightly more than cxpected, but in
a

AO ebruary 2019
mark-up percentage has been maintaincd. to proportion sales 03400)
Rent income: Significantly less than
expected; will need to be i. othe 25 600
establish the reason for this.
Salaries and wages: As expected; well controlled. gated to 160
Advertising: Significantuly under budget; although this is 10000 115
conurol point of view, advertising ormally has a Ositive from a htOme 6000
and thus the advertising budget should be fully positive impact 650
investigated further.
utilised
This willton sale AetRome 41 600
need too be
b
9geing
Mcome

(12 985)
45 00
Water and electricity: Signihcantly over
budget; urgent in 03
majorstigation is
required to establish the cause; contr measures need peratg
epeneS
7500
check whether electriciry tariffs have increased
necessary adjustments to the budget. unexpectedly, if so make
the
provement, 6000
385 17
Higes

gOUnt JHOWed

1500
By comparing acrual figures with the budgeted amounts 199
n the 1 280
Statement, and analysing and interprenng the results, managemeProjected Inco
eepnone

ncome Depecaton
2000
whether W a l ea
r nd
eleciicity

200
sales targets have been achieved
t h e planned mark-up has been maintained
20 350
22615 25 050
the projected income rom other sources has been
realized (e o
discount received etc.) (e.g. rent income, eGung pro
deposit)
nxed
00
income(on
each of the expenses has been well controlled and kept within tha t Int7rest
expense 22815 5 400
(e.g. telephone, consumable stores, electricity,
motor vehicle budget
expenses Proftbelore
interest
loan) (2500) (2 230)
bad debts etc.) expense(on
Intevest 20315
the budget for certain expenses has been adequately utilised lor
the
month
3150
(e.g. eLproit
649
discount
allowed, security
expenses, and
repairs maintenance
etc.) ertising,
.
the overall actual performance (profitability) of the business
has ched
expectations alulate the mark-up Percentage on cost that Meg uses in her business
Required

of the lease agreement, Meg ncreases the rent of her

The following example is used illustrate the type of
to
question that vou terms
Pebruary by a fixed percentage. Calculate this pere each tenants
expected answer in to order to demonstrate:
mau L
be . In ntage.
yearon to eacho her
your understanding of the Projected Income Statement pay employees additional R600 from February
an
. Megplans
your ability to analyse and interpret the intormation in the 2019.
Projected Income
Icome many people
does Meg employ?
Statement a. How
h. Bob Barley, the store manager,is not happy with the proposed ncreasein
your ability to compare actual figures with the
budgeted amounts in the his salary, but Meg disagrees. Give reasons for each of their opinions using
Projected Income Statement and then analyse and
interpret the results of those calculations to support your answer.
comparisons. figures and
4.The net profit Megs Music Store for the year ended 31 December 2018
of
amounted to R223 200. Meg has also informed you that business usuly picks
Example up in the second half of the year. Based on this information and by anal'sing
Meg Flute is the owner of Meg's Music Store, a business that sells and repairs the information provicded in the Projected
Income Statement, do you think
musical instruments, You are provided with the Projected Income Statement of will be satisfied il her business achieves the projected resulhs?
Use figures
Meg
Meg's Music Store for the months January 2019 to March 2019, to support your answer.

forecast the liquiclity of a business Howeve, by

5. The Cash Budget is used to

interpreting the information provided in the Projected IncomeStatement,ne

dluring
that Meg expects to experience cash tlow problems
do you think
budget period?
compiled a Varianee Analyssepunt.
At the beginning of Iebruary 2019, Meg
which included the following three items:

405
(MAPTR T
404 UDGI IHG
HAPIS 14 UGHG
 oniaueA
ancc perrentage
ad debts
R. =
R1 920.
320=
R2 000
600
amount f o r

u r g e n t l yE m p l o v e S g n i ß
exceeded t
e c A
30P
h etclephoneexpens has
e
yrince
anexpense
This issi
over figure by R1
budget and
budget.

Example continued of Meg's Music s.

%
over may

forshoullengtdhybe
6
84%
Analysis Report
from the
Variance for he.

avestigate urge
is

calls. Control mcasures need. telephone

mernational
Extract calls,
aich
January 2019
personal

be
Varlance nional introduced o
tem
Budgetedfigure Actual figure
Armount ghtened electricity
cxpense is R600 ]
the
RI500 R2760 +RI260 Percentage water
and
e.

under
bu budget. This expense has been well ojected faure
contrel.
Ielephone RI400 8A'Y speciallyconsideri
30%
the high cost of electric rolled
R2000 RGO0 The

is
ering
Woter and ele thaily the projected figure by Ri
RI920 which

60,
budgeted amount).whichAlih, 5
R320 thanth
Rad debts greater s
times
B a de b t s
5
figures in the table above. oet (or investigation i
a. Calculate the missing
sure how to interpret
these result a what actions she buolated
150latedc a s e , urgent
toh.M
S
required establish the
te.

ncedsto
to e r t h
b. Meg is not
should
an

bad
debt
prora
take. Provide Meg
with some advICe by
commenting on cach. of the items be the
place
inP
sc ce
to
re
nstth.
may
for controls

above.
in the table euate should
reallowi edit, set credn
she
collection

sment strict collection

strict procedures.
Solution example, implement

and
on
costR38 400 66% (or 28 800 limits

1. Mark-up percentage 42 000

2. % increase in r e n t -
R6 900-6
R6 000
000 = 15% Activity 714.3

Projected
Income
Statement
Statement cof Khan
Traders for the three
will increase by R600 (1 person) and with the
3. a. 3 people -Salaries wagee
ges will increase UAPprovoded 2018
business is owned by Mohar
Khan.
in 2019.
by R1 200 (2 people) February
b. Although each employee wil receive the same increase, the pe
ending3I
May

increases are different:

ntage anths

Bob's percentage increase R600

R7500 8%
pomation
panTraders

Statementfor the
n o j e c t e di n c o m e
State
three months ending 31 May 2018
=
x = 20% ene

March 2018 Aprl 2018

Wage earners'increase May 2013
173 600
Meg may argue that an 8o increase is quite generous and above tho 10 40
inflation rate. (124 O00) (136 00)
Bob may feel that the wage earners are recenving a very generous inCreaea
49 600 54 400 64 COD
while he is only receiving a fairly moderate increase. 15 580
4. The total net profit for the three months = R20 315 + R23 150 + R26 195 Grasspront

= R69 960 throperalingincome

3 580 3720 4C80
Therefore the average n e t proht p e r m o n t h = R69 960 3 R23 320 Dscount
veceived

The average net profit per month for the previous year = R223 200 12
12 000 19620 19520
Rentincome
65 180 71740
R18 600 bosoperatingincome

520-18 600 (28 056) 32 434)

profit per month 5 = 100
increase in net
R18 600 Operatingexpenses
Percentage 500
= 25,4% Packing materias

Yes, I think Meg would very pleased

be with these results. The average net 14000 14000
Salaries
R4 720 more than in the previous period, which is 8000
profit per month would be Advertising
4000
an increase of more than 25%. Also, the Projected Income Statement shows a 1428 1530
1302
each month. Given that business Dixcount allowed
positive trend with the net profit increasing 1200 120 200
is expected to be even better in the second half of the year, I think that Me
lelepnone
would be highly satisfied with these results.
1750 1750 17590
Depreciation 2856
5. No. The Projected Income Statement shows that interest on loan is expected 2604
Bad debts
to decrease over each month of the budget period, which means that Meg 2700 2700 2700
undry operating expenses
cash enable her reduce 8 360
anticipates that she will have suficient
resources to to
37 124 45 256
the loan during the budget period. Furthermore, the interest on fixed deposit peatingprofit 0
that have 500
is shown to increase each month, which means Meg expects to ntestincome (7.5% pa) 48 360
surplus cash to invest in the fixed deposit. hoft before interest expense 37 624 45190
(1 3S0)
lnterest expense (2150) (2150
47 010
43 606
ltprofht for the month 35 474
407
BUDGETING CHAPTER14
406 CHAPTER 14 BUDGETING
 antomati,
expensessibeng
nes dunng
sianihcantMabyy
ennyWaspleased
ed about the motor vehicle
h ewasconcerned

vehi which is an old delive van that

Owns
one

was bor
Additional information purchases are on credit
Dealers
ught on 1
75% ot
ter further
investigation
709% of all sales will be for cash,
while
month that it is sold. 2018,
after
furth

established that: analysis of the motor

in the s a m e h
rate, which on
only appliest
y 2013

June
usiness,Dennye
ve
Stock is replaced
discount
,amounted to R5 200
same
offer the month
of
creditors
businesss each

All the
made with
30 days.
lor vehicle e expenses was spent on
services and
motor
cost

payments e petror
o l rofthe
come Statemen
eemande repairsto
in the
Projected
Income Statement that are expected to van.
na the old delivery van with a ne
Required

1. List two operating

expenses

the budget
period.
old
de
idl le
ve rn
ri Ygreplacing

delivery van:
o
a
delivery van that
during the Du Income Statemen
new

during roiected
Projected Income Statement that are expe e T The

xpected to plan, which covers all

constant

in the 000.
000
remain
expenses
RI3O
2330
a f v e y e a rs e r v ce
2. List
three
increase in a
operating

similar
proportion
tosales
that appear
in tithe Projected Income statement, which
cost

nchudes periodof d offve

five years maintenance on
l d

fora
fuel-efficient than the old
3. List
three operating
expenses

Cash Budget. be
15%
ore
insurance cost by 20%.
delivery van
appear
in the udd appear
appear in
in the
the Cash
Cash Budget
Budget, but would not to
t h eb u s i n e s s s i
would not
that could ected

ofitems ler has agreed purchase the

to
4. Give two
examples Statement.
Hncrease ty n dc a rd e a l e r old deliveny van
Projected
Income
at
appear
in the by Khan Traders,
on cost
used
Aoal
second
percentage
Calculate the
mark-up month following the delivery van, he plans
creditors in the in order
proceeds tom the
new

5. his the
prefers to pay discount offered. Calculate th. cost of the new
kvalue bbu
uyy
to
t o
oft
6.
Mohammed

to take
advantage of
the prompt
settlement

809%6 of his creditors

to pay
decides ides
ehicle
to
cover
part

existing loan with

with
vehicle.
Prime
Pri Bank
The balance willbe
M o h a m m e d expects Oenay businesss

receives, if byextendingthe
fmanced
rate that he theending epreciation on
depreciation on vehi
vehicles at 10% pa.on cost
purchase. for
month of the of the business premises, whi which DenyD e a l e r Sa c c o u r n
accounts
that form part
identical offices
There are three iness. At
for the business. At the beainr
beginning of
7. rental income
to generate
Mohammed uses while the third ofice was vacant 1 dgeting and control of the motor vehicle expenses Over
the offices
were occupied, annual
March, two of which time Mohammed evn yuired
the

beginning April, by support your opinions.

on
of pects to
figures to
s
is due at the briely

rental increase third office. Calculate

the percentage by which the Use
Us
tenant for the
rental Comment
iod.
period.
unethical
o fu
behaviour by the driver of the delivery van that
have found a budget
A towards the motor vehicies expenses being over budaet?
examples

the
is increased annually?
two people
and pays them eacha salary 0. ofR7 000.TThe yhave

ovide
two
c o n t r i b u t e dt o w a r d s

currently employs pay for

the delivery van on 1 January 2013
8. Mohammed salaries expense is expected toincrease
in Dealers
Dealers

shows that the

Income
Statement did
Denny
enny
the of old delivery van on 30 June 2018
Projected value of
much
How carrying
in May 2018. trate that Prime Bank charges onthe loan, f the loan amount was
Mohammed has budgeted for this increase e
reasons why CGaleula

Give two possible

c u l a t et h ei n t e r e s

a. think is more likely/ Use figures and calculatione period.

reasons do you
budget
the
b. Which of the two during business be charged per month,ifDenny
the bu
000 i n t e r e s t will
answer. RI80 additional
to support your withdraw the entire fixed deposit and use the ch van?
Mohammed plans to n e w delivery
9. On 1 May 2018,
the
loan. Mohammed anticipates that the to buy the expectedmonthly costs relating to each ofthe
instalment on the decides
annual and c o m p a r e
funds to pay the cover the entire annual instalment list do
fixed deposit will be just enough to table to
and the
new elivery vans). Based on your fndings, you think
delive
funds from the
(the old the old delivery van with the
new one? Showallyour
amount. Calculate:
s h o u l d replace
that will be paid. thatDenny
instalment amount
the
a.
the loan.
interest rate that
is charged on calculations.
b. the
2018.
balance of the loan on 31 May
c.the Activity 14.5(challenge)
2018 to
for the budget period 1July
Activity 14.4 Statement of Josephine Stores
Income
couches. You are he Projected
Dealers business that sells beds and is given
below.
September 2018
a
Denny Denver owns Denny Income Statement of Denny
extract from the Projected
provided with the following also provided. The business s
2018. The actual figures
are normation
Dealers for May and June in woman's wear.
store that specialises
Ksephine Stores is a clothing runs the
business according to the followingset
Denny Dealers oned by Josephine Franco. Josephine

Projected Income Statement for May and June 2018

Extract from the
May 2018
June 2018 plicies: on cost is maintained
constant
stock level
Actual ADaed mark-up percentagethe in order to keep
Budget Actual Budget Sold are replaced in
same month

2250 2250 2250 03

Allgoods are bought on credit
|Depreciation on vehicles
2250
8880 following the purchase.
6600 8620 6600 editors are paid in the month
Motor vehicdle expenses
4500 4500
Insurance 4500 4500
1800 1800
1800 1800
| Interest on loan
8UDGETING CHAPTER14

CHAPTER 14 BUDGETING
408
 pinesprojections for the water and electricit..
expense were
The business's
financial year ends

Josephine Stores
on the 30 June.

Projected Income Statement for the three months ending 30

AsbuagetedR,ec
ungioma
a e r

xmon
heaths
cost

and
of

is
e

theb

100 per
has been
business

expectedt o remain that

r

month for water.

way
skom announc that the ele
reasonably consiste
over
theb
based
sased on the
ovet the preius
dget pertiod.loseptio
icity tarif
AugustSept2018ember 2018
ne2018,
Eskom.

September 2018
July2018 on 1
wOuld be
entage
byahxed
pDerce

Sales 375000 A05 000 September 2018 e teh

eepercent
r centage
increase in thee
electricity tarif that increaad
was announced
COst of sales (250000) (270000)
u n e2 0 1 8 .

125 000
41250 don
on23
Arner works as an internal audito:
Kedby
Gross pront
135 000 27500)
ephines
endNi
Ninda tto
o help her compare the Athe
proi cted
Other operating income 11870
12950 137 500 osephine
Nina

sina compiled a Variance Analysis

asKea

begjning oi
Report hiandguredrews with the Aunus t
Rent income
6200 6 200 13955
2018.

three items:
actua
following
Discount received S670
6750 665 he Josept
Analysis Report of Josephin
Mentot
n o

Gross operating income 136 870

147950 1290 fomthe ace
Variance
ores for
July 2018
2
Operating expenses (118 105) 151 455
(126865) Budgeted figure Actual figure
Salaries 60000 66000 12 805 Vanane
Amount
Uem

Wages 19 500 52800 R375000 R330 0O0

Discount alowed
1470
21840
1500
9 120 R4650 R8370 -PASOD Pe-\rtentane
Depreciation
3550 3550 1620 R8000 +R310
Telephone 4650 4150
4650 icsing figures in the table above. -5
Insurance

Water and electidity

5 200 5200 | 4650 e e endations do you think Nina
7S00 S00 5200 ice
W h aa
t dvi d these items? wouldha gjiven
Advertising 8 000 8580
8000 c Josephine compared the actual and
Bad debts
8000 following resultsbudgeted
of
735
to Nina: figures for
750 end
2018. She showed the
2018,

Sundry operating expenses 810

Ahe September

7500 7875 and

August
August 2018
Operating proft 18765
21085
78'5
Budget
September 2018
Interest income 1200 28 650 tem
Actual Budget
Proft before interest expense
S00 1500 R4055000 R403SO0 Actual
19965 RA12 500
22585 30150 R4650 R4750 PA2I 300
Interest expense (15% pa.) (2250) R4 650
(2250)
Net proft for the year 2100) RB 000 R8000 R3 000
17715 20 335 28050
do you think that Josephine followed Ninas advice a
Required these results,
Sedon
1. Calculate the percenta e gross Nina's recommendations successfuly? Explain your answer.
profit on sales that Josephine expects to achieve toimplemel
loan with ZZ Bank:and
during the budget period. Stores has a Josephine
invests the business
surpus
in a fxed deposit at R&B Bank. The interest income amount in the Projected
2. Calculate the percentage increase in rent income that is forecast for
September 2018 relates only to this fixed deposit, while the
3. Examine the amounts budgeted for discount received in the projected terest
Projected Income eStatement
hcome
loan with ZZ Bank.
Statement. due to the
apense is
a. Briefly describe the basic trend that is reflected by these budgeted figures. Theannual instalment on the loan is due on 31 August.Calculate the instalment
b. Explain why discount received is expected to follow this trend over the budget amount, if the interest rate on the loan remains unchanged.
period (actual sales for June 2018 amounted to R355 000) Galculate the interest rate received on the fixed deposit from R&B Bank,if
4. Josephine currently employs five shop assistants and three casual workers. The shop Dsephine plans to invest a further R40 000 in the fixed deposit on 1August2018
assistants each receive the same salary, while the casual workers are paid Cakculate the total of the loan and the total of the fxed deposit on 31 July 2018
equal wages.
Josephine increases salaries and wages in August each year.
a. How much will each ofthe shop assistants earn in July 2018?
losephine is concerned that she may not be handling the finances of the businessin
te most effciernt manner. What advice would you give her with regard to the loan
b. How much will each of the casual workers earn in July 2018?
and the fxed deposit? Use figures to support your answer.
C.What percentage increase in salaries has Josephine planned for her shop assistants
in August 2018? Activity 14.6
d. What percentage increase in wages has Josephine planned for her casual workers
in August 2018? a wide vanesy
4Ome Grown Ltd. was established in 2010. The company sells
e. Doyou think that these increases are fair? Give reasons for your opinion. 9enous hand-made products to large retailers, both locally and overses he
ract
ey's fnancial year ends on 28 February. You are provided with the ng3
f. What do you think is likely to happen regarding employment in September 2018?
Use figures/calculations to support your answer. inthe Projected Income Stateme of Africa Home Grown Ltd. for two yea
ary 2019. The actual hgures for the year ending 28 February 2018 are also provided.
410 BUDGETING CHAPTER14
CHAPTER 14 BUDGETING
 ppategslator npany po, CCtors
Oappr
appitre the
neration
t h a t ac o

iple of King ll which

addresser
nental
principl

eratesits directors the

befor to mannener in vhha
rate expected the year
d theshareholdersbe pleased witha spects endi
hecompan ng 28 Febru
y tax

Informatlon

Grown Ltd. of the

Afrlca Home

Extract from
the Projected
Income
Statement for two years endin

February 2019 companvys 2019)

Year ending
28 February 2018 Yeat ending 14.7(challenge)
dy971cha
28 February 20
Budget Actual Traders, whichssells bu
25 000 000 27 500 000
Budget
uepe
ownsHope
HlOPess also generates additional incoome b supplies and qeneral
providing geneta
eiemshebusin
Sules
(ost of sales
20000O00
700000
2200000 330990%3
6 46000 oua
ysevces , re
provide

and
with the following
Projected Income
April 2018.The actual
700 000
alsoStatprovided
emen d
March

Traders ends on 28 figuressare

Directors lees Hdwareiraders
ders
for
are als
1720000 1720000 7630%0 Februar
Hardware

/year
ofHIope.
Salarnes

Audit lecs
37400 72930 19506
Profht before lax
1795 000 2200 000 A1 140

Profit after tax 1292 400 1584 000 18650 omaton

Hardware
Iraders
ant for March and April 2018
Additional information
2005 500 a ncOMe
Stat
Statement

March 2018
Although Africa Home Grown Ltd. strives to make a profit, and has haa
succesful, the company's main objective is to help underprivileged e very Budget Actual April 2018
craftswomen in South Africa to make a better
ving. The company men and 330000 290 400 Budget
buys all
products from these craftsmen and craftswomen, and also assists them of its Actual
interest-free short-term financing to help them to expand their
hua (165 000) (145 200) 414 00
is
company very concerned about the environment and has a strict
production 165000 145 200
Q2000) (23000)
buying products that are made using sustainable practices. policy ofí o
only 176 000
27640 23880 184 000
Atthe annual general meeting (AGM) held in April 2018, the 8 520
shareholders of A.. 20 000 16 500
Home Grown Ltd. were very pleased with all aspects of the Africa 20 00
and praised the directors for their excellent work. company's perform S000
nance 5000
AVNONTe 2640
5000
Required 2380 3S20
1, Based on their business strategy and for ethical 192640 169 080
reasons, the directors of Africa k Eang om
hco me
204 520
Grown Ltd. have always used a relatively low fixed (157600) 21580
a. Calculate the fixed
percentage mark-up on cost (163460) (166 00)
percentage mark-up on cost that is used by the 94 000 173450
b. Why do you think the directors decided to use a companv gisand
wages-general
94 000 94 00
relatively low fixed percentage 5SO0 9400
up on cost? Provide reasons relating business
strategy and ethies in your
marlark- y-Sunlyguard
The internal audit function in the 5500
company is performed by two internal answer. SS00
2.
ONTAINAL 7750 7750
AUDIT Which item in the extract above includes the amount
paid to the internal
auditors eyreconon 1750
7750
Explain your answer. auditors Motrwehicleexpenses 4 000 7600 SU0
6780
3. The directors were not happy with the
amount charged by the kounallowed 3300 1230 360
for the year ended 28 February 2018.The same external auditing frm 4190
firm had taken adfngstckdehct 300 9200
same amount of time to audit the approximately
previous year's financial statement and had
the
charged R34 000. only 2200 7640 2640 5130
a. How do
you think the budget amount for audit fees for
the year ended elegphone 3200 5600 400
28 February 2018 was calculated? 4320
U/GNCe 3850 3850 380
b. By what
percentage does the amount charged by the external 3830
auditing frm for the Waw and electicity 700 6740
year ended 28 February 2018, exceed the 7000 6820
budget amount for that period?
C. The directors are
considering reporting the external Aherdsing 12000 500 18000 2000
body.Which professional body are they likely to lodgeauditing
firm to a professional Sndty operating expenses 14500 14850
d. What
punitive measures that might the professional complaint
a
with? 14S00 14670
body impose on the external 8RAing proft 35 040 5620 38520
auditing firm, if it finds the firm to be gulty of misconduct 42 430
4. At the AGM in April 2018, the (excessive charging)? itestincome 2000 2000 200
proposed increase in directors' fees for the year ending
200
28 February 2019 was voted
on by the shareholders. Hitbelowe interest expense 37040 7620 40 520 4480
a. What
percentage increase in directors' fees is being teet erpense
b. Do you think that the proposed?
shareholders will vote in favour of the tpoht forthe year
directors' fees for the year ending 28 February 20197 Provide proposed increase in 37040 7620 40520 44430
three reasons for your
opinion and use figures to support
your answer.
412
CHAPTER 14 BUDGETING
413
BUDGETING CHAPTER14
 CashBudget
monitor and

to plan, control the

satisfied with the overall performance of his businec,
BugerTiss1sed
Buger retlcct
the inflow,and outflow
the cash flow
lHquidi
of the cash over the of abus
not hess In N
Sipho was
business. budget peniod
s ta n dp l a n
the actual results for Marchh doorec2s/
end of March 2018, Sipho compared 2018. A CashB u a g e tt h e most important word to
Thus,
important keep in mindwhen
Income Statement. At the beginning of Aneth the the most
fhigures in the Projected
to make some strategic changes
an effort to
In
pril 2018,
improve the resulte
sof Siph budgeted
his busln decttded
der
is
argua,

flow properly part of the

argscash is ind is cah
budgeting3
a p lB
a n at business's

Budget nables t can lead to

Projected Income Statem
ud ge
the
the same time, Sipho also adjusted forAApril A h
organise agement to Cons anticidperataeble
d i f h c u t i e sT h ec .
hueto
pan
accordance with his new plans. 2018 in e s t h e m timei ne to
short-term adequate Overdrat
andt h ig
s ives

Required
ortoarrange.alternative financing, Management f. with
raft faclites
1.
ctual fhgures achieved
Give two reasons why is it important to compare actual fiquree
when surplus funds when

in the Projected Income Statement. with

determine
le cide on the are likelv
budgeted figures to decide to on
managemnen time best
Budget t o at
loet me
by briefly revisin the way utlise thoseavaladle,
and analysis, Sipho looked closely at to
2. During his comparison the
budgeted and owsm2
w i l l .start

those funds
CreditoTs preparation
2018.
sales figures for March
w

the
dactual
we
w e
sectiOn, Schedule, and
a. What percentage mark-up on cost did Sipho use in his budaes yDebtorsCollece ection.

how the Payment SchedPres

information ent Schedule presentatuCth0n
actual results.ovided in the Cash the
b. Did Sipho actuallyachieve this mark-up during March 201R March 2010 h i s
iscuss
h e nd i s c u s s
and
18 with acha
what percentage were the sales for March 2018
compared

under budget?
Budget is
Vewill

cBy and
this result. Comm interpreted
d. What were the two main strategic changes that Sipho madie in . on
f h eDebtorsCollection
C o Schedule and Creditors
April 2018? Briefly explaln why Sipho decided to make th
sales in to boost the rs
e. Do you think that these changes were successful?
Explain your an ges.
Debtors Collection
the
Payments
f. Which other area of the business, other thansales, also rade 11, hedule and the Credi
benefted from G r

normally drawn up before the Cash

Budget is reditors
changes? Explain why this may have occurred.
these earnt in

yentJcheduy
c h e d u l ea r e r

The security guard, who had worked at Hiope is used to determine

Hardware an Schedule the amount prepared
Debtors
C o l e c t i o nS c h e
3.
Traders for. ove r o u

of
retired at the end of February 2018. Sipho was very
busy at the end of Fe five years, from debtors during the
i t ob ec o l l e c t e d

budget period, whilecashthethat

the beginning of March and didn't get around to hiring a sets out the amount of
replacemen for March 2018. Jo DSchedule cash that is
At that time, he also thought that it mayt not really be
necessary to
employ a new
fhorsPayment.
during
the budget perio The
preparaion expected to be
of these
security guard, since there had hardly been any security problems
blems c example. twos
few years. during the previo d i n the
following

evious
a. Why do you think Sipho was so busy at the end
of February and beginnin
March? gof
b. Do you think that Sipho made a mistake by not employing a new Eanple
hew security guard
during March 2018? Explain using figures to support your answer. Steuired llowinginformat to prepare the Debtors Collection Schedule and
What action did Sipho take to correct this problem during dule of Buffalo Traders for the
April 2018 T r e d i o r sP a y m e n tS c h e d
kethe period 1 March 2018 to
d. Provide evidence from the Projected Income Statement to show
that
action improved the security in the business during April 2018. Sipho's WApril 2018

INTERNAL 4. Sipho was also concerned that the business had not been effective in
collectino f. I n f o r ma t i o n

CONTROL debtors during March 2018. Sipho implemented internal control

measurec to and budgeted credit sales and total purchases of Buffalo
this during April 2018. improve The
actu Traders
are a s f o l l o w s :

a. Provide two sets of comparative hgures from the

Projected Income Statemand l Credit sales Total purchases
support Sipho's concern.
Actual Budgeted Actual
b. What internal control measures do you think Sipho would have
implemented to Budgeted
improve the business's collections? R72000 REO CO0
Do you think that the collections from debtors improved in April 2018?
C.
Quote a y2018
R78000 RG4 00
figures from the Projected Income Statement to justify your answer.
Mecth2018
R26000 RI60
d. What major impact on the business, which iS not evident in the Projected Income
Statement, may result from poor collections from debtors? ri2018 R9100
5. The actual telephone expense was 759% over budget in March 2018. as follows:
a. How much per cent over budget was the telephone expense in April 2018? Trade debtors are normally collected
50% wichin the month in which the sales took place.
b. Provide two reasons for this considerable improvement. Explain your answer by
quoting figures from the Projected Income Statement. 25% in the following month.
20% in the second month after the sale.
6. Briefly comment on the budget and control of the: month.
5% is written off as irrecoverable in the third
a. motor vehicle expenses credit.
80% of the total purchases of trading stock are on
b. water and electricity expense. were made, in order to

7. The actual insurance expense for both March and April 2018 was exactly as budgeted.
Ureditors paid in the month after the purchases
are
take advantage of the 5% discount offered for prompt sertlement
Give a likely reason for this.

8UOGETING CHAPTER14
414 CHAPTER 14 BUDGETING
 Budgetedfigures
Actual figures
Example continued 2017 Jan2018 Feb2018
Oct 2017 Nov2017 22 200
Solution Sep
2017 55800 10800
18700 25 600
21000 9600 15600
22400 68400
Buffalo Traders 16-400
14600 4400
29 000 54 500
10800 6000
Debtors Collection Schedule for the period 1March 2018 to 30 A 5200 6600 4900
2018 18000 45400
Month Credit sales Collections 14 600
Mar2018 Bad debtsOulstanding Unhies
Apr 2018
laluary 2018R72 000 (x20%) R14 400 dditionalinformatlon as follows:
accounts
debts their
will pay allowed.
(x5%6) debtors of S% is
that a discount
the sale,
February 2018 R78 000 R3600 Dected month as
2596) R19500 same
month.
following
(x 209%) 30%inthe.
the following sale.
followin of
R15600 month at the end
s%6in second
irrecoverable
x 59%) the and will be written off as
be collected
March 2018 R86 000 R3900 5%,
15 int nrobably not
(x S09%)| R43 O00 sale.
month following the third month following
X.25%) two months and 40% in
R21 500 'heSecond are paid after
259%) of Creditors
purchases.
Apnl2018 R9100 (x506) R21 500
R45 500
xS0%) Activity 14.9
R76900 R82 600 R4S S00 information supplied
R7500| Required
and additional
R67 000 based on the data, projections
Buffalo Traders hepare
nare the following,
byM o e r a t T r a d e r s : February
December 2017 to 28
Collection Schedule
for the period of 1
Creditors Payment Schedule for the period 1 as well as the total
March 2018 to 30 April 2018 The Debtors considered uncollectable,
which amounts are
Feb2018 2018. Indicate 2018.
debtors on 28 February
Totalpurchases Mar 2018 amount owed by January 2018.
creditors during
64000 amount payable to
Cashpurchases (20%) Calculate the
76 000 2.
12 800
Credit purchases (806) 15 200 Information
51 200
60 800 Actual information
Oct 2017 Nov2017
Month Credit purchases Payments 120000 131400
Mar2018 Uedlsales 66600
Apr 2018| 60000
February2018 RS12 200 (x95%) Cash sales 3000
48640 3000
March 2018 Tading stock wilthdrawn
R6O800 (x959%)
S/ 760|
48640 Projections
57 760| Feb 2018
Dec2017 Jan2018
168000 114000
186000
Activity 14.8 Gredit sales 48 000
90000 72000
Cashsale's 4000
The information given below was taken from the books of Boland Traders Ltd. Tadingstock withdrawn 4000 4000
INTERNAL Required Additional information
CONTROL 1. Prepare the Debtors Collection Schedule of Boland Traders Ltd. for the three months Debts are usually collected as follows:
C the month of transaction. A discount of 5% is allowed.
ending 28 February 2018. 30% during
2. Prepare the Creditors Payment Schedule of Boland Traders Ltd. for the three months 50% after 30 days
ending 28 February2018 17% after 60 days
3. Does The remaining debts are written off as irrecoverable at the end of the second
thecompany have a good credit policy with regards to debtors? Suggest some
control measures that could be taken to improve their collections from debtors. month following the transaction.
4. What are the advantages to the company in the Al rade goods are sold at cost price plus 50% mark-up.
way that creditors get paid?
sold during
Trading stock is maintained at a constant level (purchases replace goods
the same month).
all
Trade goods purchased on credit usually amount to 75% of purchases.
Purchases on credit are paid two months after the date of the transaction.
416 BUDGETING CHAPTER 14
417
CHAPTER 14BUDGETING
 month.

total
sales per
of
continue 11lly
budgeted
for at

to Rl2
0,5%

800 per
month
and a r e paid

5.2 Preparation and presentation of the Cash

amount

As you learnt in Grade 11, only future cash transactions are get onher Kx
o p e r u n gC

hon
Dpe
enr ses

drawing up a Cash Budget. The expected cash inlows for the onsidered whe yeyue
unk

buhexpected
are reconted in the receipts section of the Cash Budget, while t t period
cash outflows for the budget period are recorded in the
od
Solon
ash Bude section ol the
The cash plus oror deficit for each month is determined by
surplus
ache month mbaInaders September
2018
September2018
total expected payments for the month from the total expectedtracting t August2018
othe
and
August
month. The surplus or deficit is then added to the cash
cash balanec eips orth
balance at dnetfor
ashBosg
period in order to determine the expected anount of cash on

period. The preparation and presentation of the Cash

beginning
end of
of 86400
90000
Budget is ilustrated 56880
tollowing example. in the 52 320
4320
Example fanieblos

(S4 000 x 86) 19200

3840
Required (48 000 x 8%) 3 040
Use the following intormation to
prepare the Cash Budget of (48 000x40%) (57 600 x 40%
28800
Khs 30 000
for August and September 2018. The totals column is not mba Traders (57600x5096)
required. AuguS 5096) 7 500
8 100
Information (60 00 x
(7 500x 1086) 154 980
On 31 July 2018, the bank
September
account of Khumba Traders 146 220
of Ri2 780.
showed Seoit
ircome

Total actual and budgeted sales: DOTALRECEIPIS

25 000
Actual sales: June2018 Total sales 24000
PAYMENTS

57600 69120
July 2018 R135 000 shpurthases

96%)
(72000x 966)
5600
Budgeted sales: August 2018
R120000 taymentstocrediors
(60000x
(3 50-5) x8 3500
September 2018 R14000 25800 27520
ADertsing

I(17200-2) x 3 (25800+1720) 2 200

40% of the total sales are on credit, while the rest is RIS0 00 Glaries
for cash. (8800+4 3500
3 S00
The debts of trade debtors are normally collected as Equipment
s0% in the month of the sale
follows 720 50
Drawings (150 000x 0,56)
40% after 30 days (144 000x0,59%)
Bankcharges 12800 12800
8 % after 60 days
2 % is written off as irrecoverable
Otheroperatingexpenses 7 920 | 146490
The business maintains constant stock levels and TOTAL PAYMENTS
uses a fixed
mark-up of 8 490
50% on cost.
18300
25% of purchases are for cash and the remainder is on credit. CASHSURPLUS/DEFICIT 5S20
Creditors are paid in the month after the
(12780)
purchase of the stock in order to
BALANCEAT BEGINNINGOF PERIOD 5520 14 10
receive the 4% discount offered for o
CASH ON HAND AT END OF
PERIOD
prompt settlement.
On 1 September 2018, the rent income of R7 500
per month will be
increased by 8%.
Mrs Khumba, the owner of Khumba Traders, is Calculations
planning a new Sep 2018
campaign for the beginning of August 2018. She will pay R3 500 advertising
un 2018 Jul 2018 Aug 2018

advertisements in the local newspaper during August 2018 and thenplace five
to
Totalsales 135000 120000 144 000 150000
to place a further expects 90000
eight advertisements in September 2018. CGshsales(606) 81000 12 000 86400
The total amount paid for salaries to the two 60000
shop assistants in July 2018 Creditsals(40%6) 54000 48 000 57 600
was R17 200. Mrs Khumba
plans to hire another shop assistant on 1 August Totalpurchases(lotalales- 1509%) 90000 80000 96000 100000
2018 at the same rate. The two current
shop assistants are due for an annual Cashpurchases (56) 22S00 20000 24000 25000
increase of 10% at the beginning of
September 2018. 72000
Mrs Khumba intends to buy new
equipment for the business costing R8 800 Gedinpurchzses(7596) 67500 60000 75000
and will pay it off over four months
starting in September 2018.
Mrs Khumba will continue to draw R3 500 cash from the business each
month.

18

CHAPTER 14 8UDGETING 419

BUDGETING CHAPTER 14
 of Cash Budgets
and comparison
alysis, interpretation and
torpretation the preparation of the Cash
Statement,
Income
benefit
Projected However, much of the
Activity 14.10 budgeting process.
e with art of themanagement s ability to analyse and interpret the
Hith

cIse

Requlred te
nc tems from eftective decisions regarding
the cash
to make
ys

Use information below to prepare in order

1. the the Cash should
Budget of Delta Str guogdes, management
during the budget period
nprona
August 2018.
July and Furthermore, business, by
frunon
np

the cash flow of the

h ebusines. Furth
2. In June 2018, the business moved to new premises and made other monitor
aand control
t h eC a s hB u d g e tto
.
changes This has caused cash fiow problems and has led to the hDstantial udget with the budgeted
amounts.

heavily overdrawn at the end of June 2018. Does the owner have actual 6gures
s belng 217runng the
optimistic about the business's future, or were the changes
blg
reason to be interpretation during
the planning stage

Information
mistake? alugis and a Cash Budget
will prepare
based on their
management
and
The current account was overdrawn by R3 878 on 30 June 2018.
nlanning stage. then analyse the information in the Cash Budget
They will business will
Actual and budgeted sales information: east will decide whether the
analysis,
andlorecas

of this intended
sheir interpretation during the budget period to carry out their
Sales ent Cash
resources
not satisfied with
the forecast figures,
Actual decide that they are flow by
May2018 s f management and look for ways to improve the expected cash
June 2018
160 000
210 000
Budgeted then re-strategise
u s i n gtheirplans,
the business's bank
y 2018 management may simply
look to increase
cover a
August 2018 rar example, make arrangements to short-term financing
secure
to
consider various
daft limit or Alternatively, management may
Credit sales amount to 60% of total sales. Gross mark-up is 40% of the budget period. look
nlar part flow. They may, for example,
on the projected cash
Debts are collected as follows: turnover
purticular

Strategies to improve
ner their collections from debtors by offering
more
. 309% in the month of the transaction. A discount of involve improving credit
50% after 30 days.
5% is
allowed.. nlans which sertlement discounts, while at the same time increasing their
15% after 60 days.
Ouraging early more tavourable pay1ment terms
with their creditors.

5 % is written off as bad debts. Huchases and negoiating

would then redraft the
Cash Budget based on the proposed
Management of these
80% of purchases of trading stock are Through their interpretation
on credit.
Creditors are paid and analyse the new projections. would have the
two months hanges the new plans
purchases are made. Trading stock on hand must be after s will assess whether
maintained by me: rojections, management
purchases. (Hint: See amounts of cost of sales, as well as means
withdrawal of trad.onhly esired effect on the projected
cash flow of the business.

be performed in isolation
and that
The drawings during the budget period are realise that budgers cannot
expected to amount to R4 s0o It is important
to
another budget is affected.
When
month. The owner will be taking trading stock tor own is modified invariably
use to the value of
R1 Son shen one type of budget the projected cash
monthly basis from July 2018. various plans to improve
500 on a considers the merits of
management on the Projected
The company borrowed RSO 000 from standard Bank at also need to analyse the impact
of those plans
an interest
year on 1 January 2017. Interest must be paid quarterly on 1
rate of 18h nas low, they will the examples above, a plan to improve
cash flow by
January, 1 April, 1 Julv Income Statement. From be
and 1 October. The loan is repaid in ten equal the forecast for interest expense to
payments on 1 July of every increasing borrowing would require second wil aftect
It is expected that a vehicle will be sold for cash vea
ear. while the strategy
during August 2018 at a loss ncreased in the Projected Income Statement,
Statement, such as discount
R2 800. The vehicle was
originally bought R25 000 and the accumulated of
for the forecasts of other items in the Projected Income
cost of sales.
depreciation on the vehicle is expected to be R1 1 200 on the date of sale. alowed, bad debts, discount received and even possibly
Packaging material amounts to 1% of total turnover and is paid in cash. can
and interpreting the information in the Cash Budget, management
Offices have been let since 1 August By analysing
2017. The rental agreement states the following:
Rent for the first year amounts to R27 600. scertain whether the business will have enough cash during the budget period to:

meet its short-term commitments

such as paying trade creditors and
Rent must be paid monthly.
repaying loans
A n annual escalation of 10% in the rent amount applies on 1 August every
Other budgeted information: year. purchase stock
pay operaüng expenses
purchase additional fixed assets.
July 2018 August 2018
Salaries 12 800 Furthermore, if the Cash Budget of the business predicts a cash shortfall in
a

12200 make
Bad debts 4800 6300 specihc month, management can make arrangements with the bank or
alternative plans in advance. Once management are satisfied with their planning
Depreciation 7200
720 they will inalise and approve the Cash Budget.
Operating expenses (io be pard by cheque) 9900 10 230
532 Analysis, interpretation and comparison during the budget period
During the budget period, management will use the information in the Cash
Budget to monitor and control the cash flow of the business by comparing the

420
CHAPTER 14 BUOGETING BUDGETING CHAPTER 14 421
 actual figues achieved with the budgeted amou the budgeted amounts in the Cash Budget, and
then be carciuiy ounts. with
and
analysecd, based he ourcs
whether the
their
comparat
thisive ligures
management can establish
on

acruring the results,

11management can assess whcther:
.the business isS
managing its cash tlow a s
rpretation ot
d ntcrprein

corrective action
they necd to
investigate
necds be
to
taken to
lurther in order to
expected
impro informai will 'allectngucoisfroonm
debtors as planned
expected (e.g.
rent income)
conrol mcasures necd to
ideri. as
cash income

implementcd or
t h e budget hgures were unreallstic and improv
to be
need to
be .
cash-f underlying ingditors as plannc
s crcdito

expense
items (e.g.
hone)
telephos

problems
any

adjusted
on

As is the case with comparisons

involving the Proie- in the oendingn any expense items (e.8 advertising)
nding
o v ep
r e on any
expens

managennc
management wil oten usE vanance analysis to anale ncome Sra. Cash Budp
spending
of question that you may be
dreted amounts in the Cash under
example is used to ilustrate the type
witnhat
to remember that Budget. tement, e lolowing
exi
to demonstrate:

herecome ana
order
here management are
cash payments) and n o t income a n d expenses
Howcv
comparinsCashHoweveOmpan
flow omparino.
it is i n g a
answer in
to
Cash Budget
understanding the or

the Cash Budget

discussing how the management of Khumba Tra ba Traders l illustratCash recortan r"ouriy to analyse and interpret the information in
in the
results shown in the ollowing cXtract from are cciptsand ur to compare actual ngures
with the budgeted amounts

Example
their
Variance likely
Analysis interpret
Report. t to ,

, o deet
biliy
Cash Bu
and and interpret the results of those comparisons.
then analyse
the
Extract from the Vanance
AnalysiS Report off Khu
rem
Budgeted Actual Khumba TraderS Erample

Drovided with the following partially

completed Cash Budget and other
The business, which sells cell phones
for
U a r ep r o

Cash se
figure
R86 400
figure Variance
Amount Percentage August
omment2018 armation relating to
Cosmic raders.
1s owned by Mickey Costa.
R103 680 +R17 280 nd cell phone
accessories,

Cashfrom debrors ?320 R44 47

Rent income 500 7848 +20%6 a f o r m at i o n

RO
500 15% CosmicTraders
Faymentsto creditors RS7 600 R59 328 00% July 2018
Salanes and wages 25 800 +R1728 CashBudgetfor June and July 2018
R25 800 June2018
Advertisin9 R3S00 R4 900 RECEIPTS
RI 400 - 4U70 187 000
The management ot Cashsales
Khumba
Cash sales: Received raders might interpret
the Gsh from debtors_
31 041

positive impact o n
considerably more than expected
cash flow; need to
:

esults, as f
30 000
establish the reae WS. Lo3n
try to achieve similar results
Cash from debtors: in the future. May need to ad. s in order
Rentincome
Received significantly less
negative impact o n cash flow; quires than expecr ethis budget PAYMENTS
urgent had a Cash purchases 31500
if collectionsare being
poorly ontrolled; if so investigation; need to 118656
major inmprovement; may simply be as a result of control meas establish aymenis to creditors

expected in previous periods. May need to credit sales es need Intereston loan (15%) 1 500 00

Rent income: No rent was

adjust the being less than budget. Salary-manager 15000 15 450
however management receirvea;
are aware that
this had a
negative impact Salary-salesassistant O00 8 050
the tenant had
permission pay the rent at the
to been grantede Deposil-purchase ofvehide 25 000
that this doesn't become an
ongoing
beginning of
September 2018; should enc Instalment payment vehicle (3 equal instalments) 14200
problem, else may need
new tenant. to look for a Rentexpense 8 200 9184
Payments to creditors: Paid sugh tly more Fakingmateials T0S0 1 100
negative impact on cash flow; may have than expected; this had minor
been due to credit
a
Telephone 2000 2000
being more than expected previous periods or purchases
in
taking Advertising 3 S00 4 500
settlement discounts oftered. advantage early
of
| Other cashexpenses
Salaries and wages: As expected: well
payment controlled. CASHSURPLUS/DEFICIT (8 141) 34947
Advertising: Percentage variance indicates that payments for advertising BALANCEAT BEGINNING OF PERIOD 3560
were significantly over
budget; however the variances amount is CASHONHANDAT END OF PERIOD
and thus only had a minor negative impact o n cash flow; should relatively
low
(4 581)
investigate
to ensure that there are no
problems with control; may find that advertising
was paid in advance in order to receive a reduced rate. May need to aow for
more spending on advertising in the
budget.

CHAPTER 14 BUDGETING
BUDGETINGCHAPTER 14 423