Accounting 3 - Budgeting

Question 1

4 budgets useful for a manufacturing and distributing company?

Answer 1

Production budget
Direct Materials budget
Direct Labour budget
Cash budget

Question 2

Required production formula for each quarter?

Answer 2

(Required units for sale + desired closing stock) - opening stock

Question 3

If desired closing stock for a month is 10% of next month’s sales, what will the closing stock be for March with April’s sales projected to be 24,000 units?

Answer 3

2,400 units

Question 4

Desired closing stock calculation?

Answer 4

Usually a % of next month/quarter/year sales

e.g. 10%

Question 5

Opening stock calculation?

Answer 5

Usually the closing stock of the previous month/quarter/year

Question 6

Production budget
- Closing stock (10% of next month's sales), opening stock and production for March?
February sales = 5,000
March sales = 10,000
April sales = 14,000

Answer 6

March opening stock (february closing stock) = 1,000
March closing stock = 1,400 (10% of April sales)
March production = 10,000 + 1,400 - 1,000 = 10,400

Question 7

Where does necessary data come from for the Resource (direct materials + direct labour) budgets?

Answer 7

PRODUCTION budget

Question 8

Calculations for direct materials budget?

Answer 8

Purchases (kg)
- materials used in production + desired closing stock - opening stock
Purchases (£)
- purchases (kg) x Material price

Question 9

Calculations for direct labour budget?

Answer 9

Required hours for production x Hourly rate = labour cost (£)

Question 10

Cash budget structure? (top-down)

Answer 10

Receipts

• cash
• credit

Payments

• purchases
• labour
• overheads
• dividends
• tax

Net surplus

• opening balance
• closing balance

Question 11

2 points of care with cash budgets?

Answer 11

1 - TIMING of receipts + cash flows (dividends at the end of the year etc)
2 - Giving discounts to some customers (e.g. 3% discount if cash sale instead of credit sale)

Question 12

Calculate quarter receipts for a cash budget for Q3 with following info:

• Q2 sales = 10,000
• Q3 sales = 13,000
• 70% of sales are cash, 27% are credit (paid in next quarter), 3% are uncollectable
• a 5% discount is given to cash sales

Answer 12

Cash sales from Q3 = 0.7 x 13,000 x 0.95 = £8,645

Credit sales from Q2 (received in Q3) = 0.27 x 10,000 = £2,700

Total cash = 8645 + 2700 = £11,345

Remember the discount and which quarter each cash flow is coming from.

Question 13

If a cash budget shows a short-term SURPLUS, what are our recommended actions?

Answer 13

• Pay creditors early to obtain discounts
• Attempt to increase sales by increasing debtors and stocks
• Make short-term investments

Question 14

If a cash budget shows a short-term DEFICIT, what are our recommended actions?

Answer 14

• Increase creditors
• Reduce debtors
• Arrange an overdraft

Question 15

If a cash budget shows a long-term SURPLUS, what are our recommended actions?

Answer 15

• Replace/update fixed assets
• Expand
• Make long-term investments

Question 16

If a cash budget shows a long-term DEFICIT, what are our recommended actions?

Answer 16

• Raise long-term finance

- Consider shutdown/disinvestment opportunities