Chapter # 05

Budgeting
Question # 06: {Autumn-06, Q # 03, 11 Marks}
Tram-way Hardware Store has been owned by Mr. Petrol. He had himself made all investment in the business and had not obtained any
financing. He appointed a junior accountant to maintain the manual accounting records. During the month of August, he asked his accountant
to provide certain information including estimates as he was planning to withdraw some amount for his personal use.
After the failure of his accountant to provide the required information, he has hired Sales forecast for the next three months Rs.
your services for this purpose. You have gathered the following information from September 6,000,000
the records: October 5,000,000
(i) Sales for August 2006 amounted to Rs. 5,000,000.
November 5,500,000
(ii) Based on past experience, collections are expected to be 56% in the month of sale and 43% in the month following the sale. 1% remains
uncollected.
(iii) Gross margin on sales is 20% and cost of goods sold comprises of purchase cost only.
(iv) 80% of the goods are purchased in the month prior to the month of sale and 20% are purchased in the month of sale. Payment for
goods is made in the month follow the purchase.
(v) Other monthly recurring expenses which are paid in cash amount to Rs. 40,700.
(vi) Annual depreciation on fixed assets is Rs. 555,600. Fixed assets 9,940,000
(vii) Annual staff salaries are budgeted at Rs. 600,000. Acc. Depreciation 1,900,500
(viii) Bad debts provision as at 31.8.2006 stands at Rs. 190,400. Owner's capital 2,800,000
(ix) Balances of some other accounts as at 31.8.2006 are as follows: Profit and loss 8,380,000
Required: Cash and bank 1,980,940
(a) Prepare a balance sheet as at 31.8.2006.
(b) Calculate the projected balance in accounts payable as on 30.9.2006.
(c) Prepare a projected income statement for the month of September 2006.
Question # 07: {Autumn-07, Q # 04, 20 Marks}
Noor Uddin is planning to start a new business. He will invest his saving of Rs. 3,500,000 and intends to make borrowing arrangements with a bank to meet the
working capital requirements. His planning is based on the following estimates:
(i) He has identified a factory cum office premises at a monthly rent of Rs. 80,000 which will be payable in advance at the beginning of each month. However,
he needs to give 3 months’ rent as security deposit to the landlord before occupying the space. Other fixed overheads excluding depreciation are
estimated at Rs. 120,000 per month which will be paid in the same month.
(ii) He has signed a contract for supply of machinery costing Rs. 1,800,000. The payment will be made Month Units Rs.
at time of delivery in January 2008. This machinery has an estimated life of five years with no January -- --
residual value. February 2,400 3,120,000
(iii) Production will start in January 2008 and 60% of the next month's sales will be manufactured in March 3,200 4,160,000
January 2008. Thereafter, the production will consist of 40% of the current month's sales and 60% April 4,000 5,200,000
of the next month's sales. May 4,800 6,240,000
(iv) He estimates the following sales for the first five months:
(v) Sales will be made on credit basis. 5% cash discount will be allowed for payments in the current month. It is estimated that 35%of each month's sales will
qualify for this discount. Balance 65% will be recovered in the next month.
(vi) Variable production cost per unit has been estimated as:

(vii) Raw materials costing Rs. 1,600,000 will be purchased in January 2008 in cash.
Thereafter, he intends to follow a policy of purchasing 50% of the monthly requirement in the same Rs.
month and 50% of the next month's requirement. Direct material 600
All purchases after January shall be made on 30 days credit. Direct labour 200
(viii) Salaries shall be paid in the first week of subsequent month. Variable overhead 100
(ix) 70% of the variable overheads shall be paid in the same month and 30% in the next month. Total variable cost per unit 900
Required:
Prepare a cash budget for the months January 2008 to April 2008 showing the balance of cash/running finance at the end of each month.