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Independent University of Bangladesh, Chittagong Campus Program: MBA Title of the course: Managerial Accounting Course Prefix # 515

Mohammed Rafiqul Alam


B.Com(Hons).M.Com.MBA.FCMA

Module # 04:

Budgetary Control

(a) Introduction (b) Profit planning (c) Budget, Budgeting and Budgetary Control (d) Difference Between Planning and Control Advantages of Budgeting (f) Limitations of Budgeting (g) Responsibility Accounting (h) Choosing a Budget Period (i) Participative Budgeting or Self Imposed Budgeting (j) Human Factors in Budgeting (k) Budget Committee (l) Preparation of Master budget (m) Zero Based Budgeting (ZBB)

(a)

Introduction

Budgeting is an integral part of our society. As a student, you budget your study time and your money. Families budget income and expenses. Governmental agencies budget revenues and expenditures. Business enterprises use budgets in planning and controlling their operations. Planning and control are the important functions of management. For assisting management in these two functions, the techniques of budgetary control and standard costing are applied. Of course, budgeting is not something new to government departments, where every year there is an attempt to equate revenues with expenditure. In private life also, there is an attempt to balance expenditure with earnings. In the business world, a budget is the formal expression of the expected income and expenditure for a definite future period. Thus budgeting is necessary everywhere in national, domestic and business affairs. As the size of the organization increases, the need for budgeting is correspondingly more because a budget is an effective tool of planning and control. Budgets are helpful in coordinating the various activities (such as production, sales, purchase etc.) of the organization with the result that all the activities proceed according to the objectives. Budgets are means of communication. Ideas of the top management are given the shape of a budget and are passed on to the sub ordinates who are to give them the practical shape. As the activities of the various departmental heads are coordinated at the preparation of a budget, it is helpful in developing a team work which is very much needed for the every success of an organization. Thus a budget is necessary to plan for the future, to motivate the staff associated, to co-ordinate the activities of different departments and to control the performance of various persons operating at different levels. Our primary focus in this chapter is budgeting-specially, how budgeting is used as a planning tool by management. Through budgeting, it should be possible for management to maintain enough cash to pay
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creditors, to have sufficient raw materials raw materials to meet production requirements, and to have adequate finished goods to meet expected sales. (b) Profit planning

Profit planning can be defined as the set of steps that are taken by firms to achieve the desired level of profit. Planning is accomplished through the preparation of a number of budgets, which, when brought through, from an integrated business plan known as master budget. The master budget is an essential management tool that communicates management's plan throughout the organization, allocates resources, and coordinates activities. (c) Budget, Budgeting and budgetary Control:

A budget is a detailed plan for acquiring and using financial and other resources over a specified period of time. It represents a plan for the future expressed in formal quantitative terms. The act of preparing a budget is called budgeting. The use of budgeting to control a firm's activities is called budgetary control. Master budget is a summary of a company's plan that sets specific targets for sales, production, distribution, and financing activities. It generally culminates in cash budget, a budgeted income statement, and a budgeted balance sheet. In short, it represents a comprehensive expression of management's plans for the future and how these plans are to be accomplished. (d) Difference Between Planning and Control: The term planning and control are often confused, and occasionally these terms are used in such a way as to suggest that they mean the same thing. Actually, planning and control are two quite different concepts. Planning involves developing objects and preparing various budgets to achieve those budgets. Control involves the steps taken by management to increase the likelihood that the objectives set down at the planning stage are attained and that all parts of the organization are working together toward that goal. To be completely effective, a good budgeting system must provide for both planning a control. Good planning without control is time wasting. (e) Advantages of Budgeting: Companies realize many advantages / Benefits from a budgeting program. Among these benefits are the following:
1. 2. 3. 4.

5.
6.

Budgets provide a means of communicating management's plans through the organization. Budgets force managers to think about and plan for the future. In the absence of the necessity to prepare a budget, many mangers would spend all of their time dealing with daily emergencies. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively The budgeting process can uncover many potential bottlenecks before they occur . Budgets coordinate the activities of the entire organization by integrating the plans of the various parts of the organization. Budgeting helps to ensure that everyone in the organization is pulling in the same direction. Budgets provide goals and objectives that can serve as benchmark for evaluating subsequent performance. Limitations of Budgeting
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(f)

Budgetary control also suffers from certain limitations. These are as follows: 1. There may be resistance from the individuals to budgeting as budgeting points out efficiency or inefficiency of individuals and fixes up responsibility as far as possible. The system emphasizes Topdown instead of Bottom-up participation. Lack of co-operation and co-ordination will make effective implementation of budgetary control difficult. 2. Detailed analysis of deviations and variances cannot be made according to all possible originating causes. Therefore, fixing up responsibility may be frustrated in the absence of detailed analysis of variances. This, in turn, affects adversely the control function, as it cannot be exercised unless responsibility is implemented. 3. As a basis of comparison and guide to future action, budgets may become ineffective in those industries which are subject to frequent changes in processes and technology, quality of material, market condition and so on. 4. People, who work in implementation stage, do not like to give extra effort to generate more revenue than budgeted where no rewarding system exists. On the other hand every body inclined to spend the budgeted amount with in the given period where no punishment system is available for nonattainment of goals. Here budgetary system can not act as a control technique. 5. In a budgetary system, no prospective plan can be taken in the middle of the year without having initial authorization and allocation of budget approving committee. (g) Responsibility Accounting:

The concept of responsibility accounting is very important in profit planning. The basic idea behind responsibility accounting is that a manager should be responsible for those items that the managers can actually control to a significant extent. Each line item (i.e., revenue or cost) in the budget is made the responsibility of a manager, and that manager is held responsible for subsequent deviations between budgeted goals and actual results. Someone must be held responsible for each cost or else no one will be responsible, and the cost will inevitably grow out of control. Being held responsible for costs does not mean that the manager is penalized if the actual results do not measure up to the budgeted goals. However, the manager should take the initiative to correct any unfavorable discrepancies, should understand the source of significant favorable or unfavorable discrepancies, and should be prepared to explain the reasons for discrepancies to higher management. The point of an effective responsibility system is to make sure that nothing "falls through the cracks" that the organization reacts quickly and appropriately to deviations from its plans, and that the organization learns from the feedback it gets by comparing budgeted goals to actual results. The point is not to penalize individuals for missing targets. (h) Choosing a Budget Period:

Operating budgets ordinarily cover one year period corresponding to the company's fiscal year. Many companies divide their budget year into four quarters. The first quarter is then divided into months, and normally budgets are developed. These near term figures can often be established with considerable accuracy. The last three quarters may be carried in the budget at quarterly totals only. As the year progress, the figures of the second quarter is broken down into monthly amounts, then the third quarter figures are broken down, and so forth. This approach has the advantage of requiring periodic review and reappraisal of budget data through out the year.

Continuous or perpetual budgets are used by a significant number of organizations. A continuous or perpetual budget is a 12 month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed. In other words, one month (or quarter) is added to the end of the budget as each month (or quarter) comes to a close. This approach keeps managers focus at least one year ahead. This approach keeps managers focused on the future at least one year ahead. Advocates of continuous budgets argue that with this approach there is less danger that managers will become too narrowly focused on shortterm results. (i) Participative Budgeting or Self Imposed Budgeting: The success of a budget program will be determined in large part by the way in which the budget is developed. In the most successful budget programs, managers with cost control responsibilities actively participate in preparing their own budgets. This is in contrast to the approach in which budgets are imposed from above. The participative approach to preparing budgets is particularly important if the budget is to be used to control and evaluate a manager's performance. If a budget is imposed on a manager from above, it will probably generate resentment and ill will rather than cooperation and commitment. Definition and Explanation of Participative or Self Imposed Budgeting: The budgeting approach in which managers prepare their own budget estimates is called self imposed budgeting or participatory budgeting. This is generally considered to be the most effective method of budget preparation. Managers at all levels participate and coordinate with each other in budgeting process.
THE INITIAL FLOW OF BUDGET DATA IN A PARTICIPATIVE BUDGETING SYSTEM Top Management

Middle Management

Middle Management

Supervisor

Supervisor

Supervisor

Supervisor

The initial flow of budget data in a participative system is from lower levels of responsibility to higher levels of responsibility. Each person with responsibility for cost control will prepare his or her own budget estimates and submit them to the next higher level of management. These estimates are reviewed and consolidated as they move upward in the organization.

Once self imposed budgets are prepared, are they subject to any kind of review? The answer is yes. Budget estimates prepared by lower-level managers should be scrutinized by higher levels of management. Without such a review, self imposed budgets may be too loose and allow much "budgetary slack." The result will be inefficiency and waste. Therefore before budgets are accepted, they must be carefully reviewed by immediate superiors. If changes from the original budget seem desirable, the items in question are discussed and modified as necessary. All level of an organization should work together to produce the budget. Since top management is generally unfamiliar with detailed, day to day operations, it should rely on subordinates to provide detailed budget data. On the other hand, top management has an overall strategic perspective that is also vital. Each level of responsibility in an organization should contribute in the way that it best can in a cooperative effort to develop an integrated budget. Participative or Self imposed budgeting is an ideal budgetary process. However most companies deviate from this ideal budgetary process. Typically top managers initiate the budget process by issuing broad
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guidelines in terms of overall target profits or sales. Lower level managers are desired to prepare budgets that meet those targets. The difficulty is that the target set by top managers may be unrealistically high or may allow too much slack. If the budgets are too high and employees know they are unrealistic, motivation will suffer. If the targets allow too much slack, waste will occur. And unfortunately top management is often not in a position to know whether the targets they have set are appropriate. Admittedly, however, a pure self imposed budgeting system is not without limitations. It may lack sufficient strategic direction and lower level managers may be tempted to build into their budgets a great deal of budgetary slack. Nevertheless, because of the motivational advantages of self imposed budgets, top managers should be cautious about setting inflexible budgets. Advantages and Disadvantages of Self Imposed Or Participative Budget: A number of advantages or benefits are cited for such self imposed budgets. 1. Individuals at all level of organization are recognized as members of the team whose review and judgments are valued by top management. 2. Budget estimates prepared by front line managers can be more accurate and reliable than estimates prepared by top managers who are more remote from day to day activities and who have less intimate knowledge of markets and operating conditions. 3. Motivation is generally higher when an individual participates in setting his or her own goal then when the goals are imposed from above. Self imposed budgets create commitments. 4. If a manager is not able to meet the budget and it has been imposed from above, the manager can always say that the budget was unreasonable or unrealistic to start and, therefore, was impossible to meet. With a self imposed budget this excuse is not available. Participative budget has following main limitations or disadvantages: 1. Time consuming and costly. 2. May foster budgetary gaming through budgetary slack (j) Human Factors in Budgeting: The success of a budget program also depends on: The degree to which top management accepts the budget program as a vital part of the company's activities. 2. The way in which top management uses budgeted data.
1.

If a budget program is to be successful, it must have the complete acceptance and support of the persons who occupy key management positions. If lower or middle management personnel sense that top management is lukewarm about budgeting, or if they sense that top management simply tolerates budgeting as a necessary evil, then their own attitude will reflect a similar lack of enthusiasm. Budgeting is hard work, and if top management is not enthusiastic about and committed to the budget program, then it is unlikely that anyone else in the organization will be either. In administering the budget program, it is particularly important that top management not use budget as a club to pressure employees or as a way to find someone to blame if something goes wrong. Using budgets in such negative ways will breed hostility, tension, and mistrust rather than greater cooperation and
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productivity. Unfortunately, the budget is too often used as a pressure device and great emphasis is placed on "meeting the budget" under all circumstances. Rather than being used a weapon, the budget should be used as a positive instrument to assist in establishing goals, in measuring operating results, and in isolating areas that are indeed of extra effort or attention. Any misgivings that employees have about a budget program can be overcome by meaningful involvement at all levels and by proper use of the program over time. Administration of a budget program requires a great deal of insight and sensitivity on the part of management. The budget program should be designed to be a positive aid in achieving both individual and company goals. Management must keep clearly in mind that the human aspect of budgeting is of key importance. It is easy to become preoccupied with the technical aspect of the budget to the exclusion of the human aspects. Indeed, the use of budget data in a rigid and inflexible manner is often the greatest single complaint of persons whose performance is evaluated using budgets. Management should remember that the purposes of the budget are to motivate employees and to coordinate efforts. Preoccupation with the dollars and cents in the budget, or being rigid and inflexible, can only lead to frustration of these purposes. In establishing a budget, how challenging should budget targets be? In practice, companies typically set their budgets either at a "stretch" level or a "highly achievable" level. A stretch level budget is one that has only a small chance of being met and in fact may be met less than half the time by even the most capable managers. A highly achievable budget is one that is challenging, but which can be met through hard work. Managers usually prefer highly achievable budgets. Such budgets are generally coupled with bonuses that are given when budget targets are met, along with added bonuses when these targets are exceeded. Highly achievable budgets are believed to build a manager's confidence and to generate commitment to the budget program. (k) Budget Committee:

Definition: Budget committee is a group of key management persons who are responsible for overall policy matters relating to the budget program and for coordinating the preparation of the budget. Functions and Responsibilities: A standing budget committee will usually be responsible for overall policy matters relating to the budget program and for coordinating the preparation of the budget itself. This committee generally consists of the president; vice president in charge of various functions such as sales, production, and purchasing; and the controller. Difficulties and disputes between segments of the organization in matters relating to the budget are resolved by the budget committee. In addition, the budget committee approves the final budget and receives periodic reports on the progress of the company in attaining budgeted goals. Disputes can (and do) erupt over budget matters. Because budgets allocate resources, the budgeting process to a large extent determines to which department get more resources, and which get relatively less. Also, the budget sets the benchmarks by which managers and their departments will be at least partially evaluated. therefore, it should not be surprising that managers take the budgeting process very seriously and invest considerable energy and even emotion in ensuring that their interest, and those of their departments, are
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protected. Because of this, the budgeting process can easily degenerate into an interoffice brawl in which the ultimate goal of working together toward common goals in forgotten. Running a successful budgeting program that avoids interoffice battles requires considerable interpersonal skills in addition to purely technical skills. But even the best interpersonal skills will fail if, as discussed earlier, top management uses the budget process inappropriately as a club or as a way to find blame. (l) Master Budget:

Definition and Explanation: The master budget is a summary of company's plans that sets specific targets for sales, production, distribution and financing activities. It generally culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet. In short, this budget represents a comprehensive expression of management's plans for future and how these plans are to be accomplished. It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. More one budget estimate effects other budget estimates because the figures of one budget is usually used in the preparation of other budget. This is the reason why these budgets are called interdependent budgets. Parts | Components and Preparation of a Master Budget: Following are the major components or parts of master budget. Click on a budget link for detailed study.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Sales Budget Production Budget Material Budgeting | Direct Materials Budget Labor Budget Manufacturing Overhead Budget Ending Finished Goods Inventory Budget Cash Budget Selling and Administrative Expense Budget Purchases Budget for a Merchandising Firm Budgeted Income Statement Budgeted Balance Sheet

THE MASTER BUDGET INTERRELATIONSHIP

Sales Budget


Budgeted Income Statement

Ending Inventory Budget


Overhead Budget

Production Budget


Cash Budget

Direct Materials Budget Direct Labor Budget


Budgeted Balance Sheet

Selling and Admn. Budget

Advantages and Disadvantages of a Master Budget: Some advantages of a master budget are that it can give an idea of where a company wants to go and what it has to do in order to get there. It will also allow the company to realistically project future cash flows which in turn would help in getting certain types of financing. Some disadvantages of a master budget include the time involved in producing such a budget. This is primarily the reason a smaller company may not make a master budget if the company has a very small managerial staff.

Master Budget
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(1)

The sales budget:

The sales budget is the starting point in preparing the master budget. Nearly all other items in the master budget, including production, purchases, inventories, and expenses, depends on it in some way. Schedule 1 MEREDITH COMPANY Sales Budget For the Year Ended December 31, 19x1
1 10,000 $20 $200,000 Quarters 2 3 30,000 40,000 $ 20 $ 20 $600,000 $800,000 4 20,000 $ 20 $400,000 Year 1,00,000 $ 20 $2,000,000

Expected sales in units Selling price per unit Total sales

Schedule of expected cash collections

Accounts receivable, 12/31/x0 First quarter sales ($200,000) Second quarter sales ($600,000) Third quarter sales ( $ 800,000) Fourth quarter sales ( 400,000) Total cash collections

$90,000 140,000

$60,000 420,000 $480,000

$180,000 560,000 $740,000

$230,000

$240,000 280,000 $520,000

$ 90,000 200,000 600,000 800,000 280,000 $1,970,000

Note: Seventy percent of a quarters sales is collected in the quarter of sales; the remaining 30 percent is collected in the quarter following. 9

The sales budget is constructed by multiplying the expected sales in units by the sales price. Schedule 1 on the previous page contains the sales budget for Meredith Company for 19x1, by quarters. Notice from the schedule that the company plans to sell 1,00,000 units during the year, with sales peaking out in the third quarter. Generally, the sales budget is accompanied by a computation of expected cash receipts for the forthcoming budget period. This computation is needed to assists in preparing the cash budget for the year. Expected cash receipts are composed of collections on sales made to customers in prior periods, plus collections on sales made in the current budget period. Schedule 1 below contains a computation of expected cash collections for Meredith Company.

(2)

The Production Budget

After the sales budget has been prepared, the production requirements for the forthcoming budget period can be determined and organized in the form of a production budget. Sufficient goods will have to be available to meet sales needs and provide for the desired ending inventory. A portion of these goods will already exist in the form of a beginning inventory. The remainder will have to be produced. Therefore, production needs can be determined by adding budgeted sales (in units or in dollars) to the desired ending inventory (in units or in dollars), and deducting the beginning inventory (in units or in dollars) from this total. Schedule 2 below contains a production budget for Meredith Company Schedule 2 MEREDITH COMPANY Production Budget For the Year Ended December 31, 19x1 (in units)
Quarters 1 2 3 4 Year

Expected sales (schedule 1) Add desired ending inventory of finished goods * Total needs Less beginning inventory of finished goods 2 Units to be produced
*

10,000 6,000 16,000 2,000 14,000

30,000 8,000 38,000 6,000 32,000

40,000 4,000 44,000 8,000 36,000

20,000 100,000 3,000 3,000 1 23,000 103,000 4,000 2,000 19,000 101,000

Twenty percent of the next quarters sales. The same as the prior quarters ending inventory

1 Estimated 2

Students are often surprised to learn that firms budget the level of their ending inventories. Budgeting of inventories is a common practice, however. If inventories are not carefully planned, the levels remaining at the end of a period may be excessive, causing an unnecessary tie-up of funds and an unneeded expense of carrying the unwanted goods. On the other hand, without proper planning, inventory levels may be too small, thereby requiring crash production efforts in the following periods, and perhaps loss of sales due to inability to meet shipping schedules.

(3)

Inventory Purchase-Merchandising firm

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Meredith Company prepares a production budget since it is a manufacturing firm. If it were a merchandising firm, then instead of a production budget it would prepare a merchandise purchase budget showing the amount of goods to be purchased from its suppliers during the period. The merchandise purchase budget is in the same basic format as the production budget, except that it shows goods to be purchased rather than goods to be produced, as shown below: Budgeted cost of goods sold ( in units or in dollars)------- xxxxx Add desired ending merchandise inventory ---------------- xxxxx Total needs ----------------------------------------------------- xxxxx Less beginning merchandise inventory --------------------- xxxxx Required purchase (in units or in dollars)------------------- xxxxx The merchandising firm would prepare an inventory purchases budget such as this one for each item carried in stock. Some large retail organizations make such computations on a frequent basis (particularly at peak seasons) in order to ensure that adequate stocks are on hand to meet customer needs. (4) The Direct Materials Budget

Returning to the Meredith Company example, after production needs have been computed, a direct materials budget should be prepared to show the materials that will be required in the production process. Sufficient raw materials will have to be available to meet production need, and to provide for the desired ending raw materials inventory for the budget period. Part of this raw materials requirement will already exist in the form of a beginning raw materials inventory. The remainder will have to be purchased from suppliers. In sum, the format for computing raw materials need is: Raw materials needed to meet the production schedule------Add desired ending inventory of raw materials --------------Total raw materials needs --------------------------------------Less beginning inventory of raw materials--------------------Raw materials to be purchased-----------------------------------MEREDITH COMPANY Direct Materials Budget For the Year Ended December 31, 19x1
1 14,000 5 70,000 16,000 86,000 7,000 79,000 $ 47,400 Quarters 2 3 32,000 36,000 5 5 160,000 180,000 18,000 178,000 16,000 162,000 $ 97,200 9,500 189,500 18,000 171,500 $102,900 4 19,000 5 95,000 7,500 102,500 9,500 93,000 $ 55,800 Year 101,000 5 505,000 7,500 512,500 7,000 505,500 $303,300

xxxxx xxxxx xxxxx xxxxx xxxxx


Schedule 3

Units to be produced ( schedule 2) Raw materials needed per unit ( pounds) Production needs ( pounds)-----------------Add desired ending inventory of raw materials 1 ( pounds)-------------------------Total needs ( pounds) Less beginning inventory of raw materials (pounds)---------------------------------------Raw materials to be purchased( pounds)--Cost of raw materials to purchased at $0.60 per pound--------------------------------

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Ten percent of the next quarters production needs. For example, the second quarter production needs are 160,000 pounds. Therefore, the desired ending inventory for the first quarter would be 10 percent 160,000 pounds = 16,000 pounds. The ending inventory of 7,500 pound for the fourth quarter is estimated.

Schedule of expected cash disbursements


Accounts payable, 12/31/x0 First quarter purchase ( ($47,400) Second quarter purchases ($97,200) Third quarter purchases ( $ 102,900) Fourth quarter purchases ( $55,800) Total cash disbursements $25,800 23,700 $23,700 48,600 $72,300 $ 25,800 47,400 97,200 102,900 27,900 $301,200

$48,600 51,450 $100,050

$49,500

$51,450 27,900 $79,350

Note: Fifty percent of a quarters purchase is paid in the quarter of purchase; the remaining 50 percent is paid for in the quarter following.

Preparing a budget of this kind is one step in a companys overall materials requirements planning (MRP). MRP is an operation research tool that employs the computer to assist the manager in overall materials and inventory planning. The objective of MRP is to ensure that the right materials are on hand, in the right quantities, and at the right time to support the production process. Schedule 3 contains a direct materials purchases budget for Meredith Company. Notice that materials requirements are first determine in units ( pounds, gallons , and so on ) and then translate into dollars by multiplying by the appropriate unit cost. The direct materials budget is usually accompanied by a computation of expected cash disbursements for the raw materials. This computation is needed to assist in developing a cash budget. Disbursements for raw materials will consist of payment for prior periods, plus payments for purchase for the current budget period. Schedule 3 contains a computation of expected cash disbursements for Meredith Company. (5) The Direct Labor Budget The Direct labor budget is also developed from the production budget. Direct labor requirements must be computed so that the company will know whether sufficient labor time is available to meet production needs. By knowing in advance just what will be needed in the way of labor time throughout the budget year, the company can develop plans to adjust the labor force as the situation may require. Firms that neglect budget run the risk of facing labor shortages or having to hire and fire at awkward times. Erratic labor policies lead to insecurity and inefficiency on the part of employees. To compute direct labor requirements, the number of units of finished product to be produced each period (month, quarter, and so on) is multiplied by the number of direct labor hours required to produce a single unit. Many different types of labor needed. The hours of direct labor time resulting from these computations can then be multiplied by the direct labor cost per hour to obtain budgeted total direct labor costs, Schedule 4 following contains such computations for Meredith Company. (6) The Manufacturing Overhead Budget:

The manufacturing overhead budget should provide a schedule of all costs of production other than direct materials and direct labor. These costs should be broken down by cost behavior for budgeting purposes, and a predetermined overhead rate developed. This rate will be used to apply manufacturing overhead to units of product throughout the budget period. A computation showing budgeted cash disbursements for manufacturing overhead should be made for use in developing the cash budget. The critical thing to
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remember in making this computation is that depreciation is a non-cash charge. Therefore, any depreciation charges included in manufacturing overhead must be deducted from the total in computing expected cash payment.
Schedule 4 MEREDITH COMPANY Direct Labor Budget For the Year Ended December 31, 19x1
1 14,000 0.8 11,200 $7.50 $84,000 Quarters 2 3 32,000 36,000 0.8 0.8 25,600 28,800 $7.50 $7.50 $192,000 $216,000 4 19,000 0.8 15,200 $7.50 $114,000 Year 101,000 0.8 80,800 $7.50 $606,000

Units to be produced( schedule 2)------Direct labor time per unit ( hours)------Total hours of direct labor time needed Direct labor cost per hour----------------Total direct labor cost---------------------

We will assume that the variable overhead rate is $2 per direct labor hour, and that fixed overhead costs are budgeted at $ 60,600 per quarter, of which $ 15,000 represents depreciation. All overhead costs involving cash disbursements are paid for in the quarter incurred. The Manufacturing overhead budget, by quarters, and the expected cash disbursements, by quarters, are both shown in Schedule 5.
Schedule 5 MEREDITH COMPANY Manufacturing overhead Budget For the Year Ended December 31, 19x1
1 11,200 $2 $22,400 60,600 83,000 15,000 $68,000 Quarters 2 3 25,600 28,800 $2 $2 $51,200 $57,600 60,600 60,600 111,800 118,200 15,000 15,000 $96,800 $103,20 0 4 15,200 $2 $30,400 60,600 91,000 15,000 $76,000 Year 80,800 $2 $161,600 242,400 404,000 60,000 $344,000

Budgeted direct labor hours Variable overhead rate Budgeted variable overhead Budgeted fixed overhead Total budgeted overhead Less depreciation Cash disbursement for overhead

(7)

Ending Finished Goods Inventory budget:

After completing Schedules 1-5, sufficient data will have been generated to compute the cost of a unit of finished product. This computation is needed for two reasons; first, to know how much to charge as cost of goods sold on the budgeted income statement and second, to know what amount to place on the balance sheet for unsold units. The dollar amount of the unsold units planned to be on hand is known as the ending finished good inventory. For Meredith Company, the cost of a unit of finished product is $ 13 consisting of $ 3 of direct materials, $ 6 of direct labor, and $ 4 of manufacturing overhead and the ending finished goods inventory is budgeted to be $ 39,000. The Computations behind these figures are shown in Schedule 6. (8) The selling and administrative expense budget

The selling and administrative expense budget contains a listing of anticipated expenses for the budget period that will be incurred in areas other than manufacturing. The budget will be made up of many smaller, individual budget s submitted by various persons having responsibility for cost control in selling
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and administrative matters. If the number of expense items is very large, separate budgets may be needed for the selling and administrative functions. Schedule 7 contains the selling and administrative expense budget for Meredith Company for 19x1.

Schedule 6 MEREDITH COMPANY Ending Finished Goods inventory Budget For the Year Ended December 31, 19x1
Item Quantity Cost $0.60 per pound 7.50 per hour 5.00 per hour 1 Total $ 3 6 4 $ 13 3,000 $13 $39,000

Production cost per unit: Direct materials--------5.0 pounds Direct labor-------------0.8 hours Manufacturing overhead- 0.8hours

Budgeted finished goods inventory: Ending finished goods inventory in units ( schedule 2) ---------Total production cost per unit ( see above)-------------------------Ending finished goods inventory in dollars ------------------------1 $404,000 80,800 hours = 45.00

Schedule 7 MEREDITH COMPANY Selling and administrative expense Budget For the Year Ended December 31, 19x1
1 10,000 $1.80 $18,000 40,000 35,000 ----------------$93,000 Quarters 2 3 30,000 40,000 $1.80 $54,000 40,000 35,000 1,900 --------$130,900 $1.80 $72,000 40,000 35,000 37,750 --------$184,750 4 20,000 $1.80 $36,000 40,000 35,000 -------18,150 $129,150 Year 100,000 $1.80 $180,000 160,000 140,000 39,650 18,150 $537,800

Budgeted sales in unit--------------Variable selling and administrative expense per unit * -------------------Budgeted variable expense---------Fixed selling and administrative expenses: Advertising---------------------Executive salaries--------------Insurance-------------------------Property taxes--------------------Total budgeted selling and administrative expenses------------*

Commission, clerical, and freight -out

(9)

The cash budget

The cash budget pulls together much of the data developed in the proceeding steps. The cash budget is composed of four major sections: 1. The receipts section. 2. The disbursement section.
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3. The cash excess or deficiency section. 4. The financing section. The receipts section consists of the opening cash balance added to whatever is expected in the way of cash receipts during the budget period. Generally, the major source of receipts will be from sales, as discussed earlier. The disbursement section consists of all cash payments that are planned for the budget period. These payments will be include materials purchases, direct labor payments, manufacturing overhead costs, and so on, as contained in their respective budgets. In addition, other cash disbursements such as income taxes capital equipment purchases, and dividend payments will also be included. The cash excess or deficiency section consists of the difference between the cash receipts section totals and the cash disbursement section totals. If a deficiency exists, the company will need to arrange for borrowed funds from its bank. If excess exits, funds borrowed in previous periods can be repaid or the idle funds can be placed in short-term investments. The financing section provides a detailed account of the borrowings and repayments projected to take place during the budget period. It also includes details of interest payments that will be due on money borrowed. Banks are becoming increasingly insistent that firms in need of borrowed money give long advance notice of the amounts and times that funds will be needed. This permits the banks to plan and helps to assure that funds will be ready when needed. Moreover, careful planning of cash needs via the budgeting process avoids unpleasant surprises for companies as well. Few things are more disquieting to an organization than to run into unexpected difficulties in the cash account. A well- coordinated budgeting program eliminates uncertainty as to what the cash situation will be two months, six months, or a year from now The cash budget should be broken down into periods that are as short as feasible. Many firms budget cash on a weekly basis and some larger firms go so far as to plan daily cash needs. The more common planning horizons are geared to monthly or quarterly figures. The cash budget for Meredith Company for 19x1 is shown on a quarterly basis in Schedule 8. Schedule 8 MEREDITH COMPANY Cash Budget For the year ended December 31,19x1
Sch edu le Cash balance, beginning---------------Add receipts: Collections from customers --------Total cash available before current Financing-------------------------------Less disbursements: Direct materials-----------------------Direct labor----------------------------Manufacturing overhead------------Selling and administrative----------Income taxes--------------------------Equipment purchases----------------Dividends-----------------------------Total disbursements-------------Excess( deficiency) of cash available over disbursements---------------------1 $42,500 1 230,000 272,500 3 4 5 7 9 49,500 84,000 68,000 93,000 18,000 30,000 10,000 352,500 (80,000) Quarters 2 $40,000 480,000 520,000 72,300 192,000 96,800 130,900 18,000 20,000 10,000 540,000 (20,000) 15 3 $40,000 740,000 780,000 100,050 216,000 103,200 184,750 18,000 ---10,000 632,000 148,000 4 $40,500 520,000 560,500 79,350 114,000 76,000 129,150 18,000 ----10,000 426,500 134,000 Year $ 42,500 1,970,000 2,012,500 301,200 606,000 344,000 537,800 72,000 50,000 40,000 1,951,000 61,500

Financing: Borrowings ( at beginning)------------Repayments ( at ending)--------------Interest ( at 10% per annum)---------Total financing--------------------Cash balance, ending--------------------

120,000 ------------120,000 $40,000

60,000 ------------60,000 $40,000

----(100,000)

----(80,000) (6,500) 1 (86,500) $47,500

(7,500) 1
(107,500)

$40,500

180,000 (180,000) (14,000) (14,000) $47,500

The company requires a minimum cash balance of $ 40,000. Therefore, borrowing must be sufficient to cover the cash deficiency of $ 80,000 and to provide for the minimum cash balance of $ 40,000. All borrowings and all repayments of principal are in round $1,000 amounts. 1 The interest payments relate only to the principal being repaid at the time it is repaid. For example, the interest in quarter 3 relates only to the interest due on the $ 100,000 principal being repaid from quarter 1 borrowing, as follows: $100,000 10% quarter 4 is computed as follows: $20,00010%1 year--------- $2,000 $60,00010%

3 = $7,500. The interest paid in 4

3 ---------------4

4,500

Total interest paid------------ $ 6,500

(10) The budgeted income statement A budgeted income statement can be prepared from the data developed in schedules 1-8. The budgeted income statement is one of the key schedules in the budget process. It is the document that tells how profitable operations are anticipated to be in the forthcoming period. After it has been developed, it stands as a benchmark against which subsequent company performance can be measured. Schedule 9 below contains a budgeted income statement for Meredith Company for 19x1. Schedule 9 MEREDITH COMPANY Budgeted Income Statement For the year ended December 31,19x1
Sales (100,000 units at $ 20) --------------------------Less cost of goods sold ( 100,000 units at $13) -----Gross margin --------------------------------------------Less selling and administrative expense ------------Net operating income --------------------------------Less interest expense --------------------------------Income before taxes ----------------------------------Less income taxes (estimated)----------------------------Net income -------------------------------------------Schedule 1 6 7 8 $2,000,000 1,300,000 700,000 537,800 162,200 14,000 148,200 72,000 $76,200

(11) The Budgeted Balance Sheet The budgeted balance sheet is developed by beginning with the current balance sheet and adjusting it for the data contained in the other budgets. A budgeted balance sheet for Meredith Company for 19x1 is presented in schedule 10. The companys beginning-of-year balance sheet, from which the budgeted balance sheet in schedule 10 has been derived in part, is presented below MEREDITH COMPANY Balance Sheet December 31,19x0
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=============================================================== Assets Current assets: Cash $42,500 Accounts receivable 90,000 Raw materials inventory( 700 pounds) 4,200 Finished goods inventory( 2,000 units) 26,000 Total current assets $ 162,700 Plant and equipment: Land 80,000 Building and equipment 700,000 Accumulated depreciation (292,000) Plant and equipment, net 488,000 Total assets $ 650,700 ======= Liabilities and Stockholders Equity Current liabilities: Accounts payable (raw materials) Stockholders equity: Common stock, Retained earnings Total stockholders equity Total liabilities and stockholders equity $ 25,000 $175,000 449,900 624,900 $ 650,700
=========

Schedule 10 MEREDITH COMPANY Budgeted Balance Sheet December 31,19x1 Assets


Current assets: Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Plant and equipment: Land Building and equipment Accumulated depreciation Plant and equipment, net Total assets $47,500 120,000 4,500 39,000 (a) (b) (c) (d) $ 211,000 80,000 (e) 750,000 (f) (352,000) (g) 478,000 $ 689,000 Liabilities and Stockholders Equity $ 27,900 (h)
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Current liabilities: Accounts payable (raw materials)

Stockholders equity: Common stock, Retained earnings Total stockholders equity Total liabilities and stockholders equity
Explanation of December 31, 19x1, balance sheet figures:

$175,000 (i) 486,100 (j) 661,100 $ 689,000

a. The ending cash balance, as projected by the cash budget in Schedule 8. b . Thirty percent of fourth quarter sales, from schedule 1 ( $400,00 30%= $ 120,000). c From schedule 3 the ending raw materials inventory will be 7,500 pounds. This material costs $0.60 per pound. Therefore, the ending inventory in dollars will be 7,500 pounds $ 0.60= $ 4,500 d From schedule 6. e. From the December 31,19xo, balance sheet ( no change) f. The December 31,19xo, balance sheet indicated a balance of $ 700,000. During 19x1, $ 50,000 additional equipment will be purchased ( see schedule 8), bringing the December 31, 19x1, balance to $ 750,000. g. The December 31,19x, balance sheet indicated a balance of $ 292,000. During 19x1, $ 60,000 of depreciation will be taken ( see schedule 5), bringing the December 31, 19x1, balance of $ 352,000. h. One half of the fourth quarter raw materials purchases , from Schedule 3. i. From the December 31,19xo, balance sheet ( no change) j. The December 31,19xo, balance--------- $ 449,900 Add net income , from Schedule 9 ------76,200 526,100 Deduct dividend paid, from schedule 8 -40,000 December 31, 19x1, balance--------------- $ 486,100

(m)

Zero Based Budgeting (ZBB):

Definition Explanation and Concept of Zero Based Budgeting (ZBB) Method: Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly in government and not for profit sectors of the economy. Under zero based budgeting managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The base line is zero rather than last year's budget. In traditional approach of budgeting, the managers start with last year's budget and add to it (or subtract from it) according to anticipated needs. This is an incremental approach to budgeting in which the previous year's budget is taken for granted as a baseline. This approach is called incremental budgeting. Zero based budgeting approach requires considerable documentation. In addition to all of the schedules in the usual master budget, the manager must prepare a series of decision packages in which all of the activities of the department are ranked according to their relative importance and the cost of each activity is identified. Higher level managers can then review the decision packages and cut back in those areas that appear to be less critical or whose costs do not appear to be justified. Zero based budgeting is a good idea. The only issue is the frequency with which a ZBB review is carried out. Under zero based budgeting (ZBB) ,the review is performed every year. Critics of such type of budgeting charge that properly executed zero based budgeting is too time consuming and too costly to justify on an annual basis. In addition, it is argued that annual reviews soon become mathematical and that the whole purpose of zero based budgeting is then lost. Whether or not a company should use annual reviews is a matter of judgment. In some situations, annual zero based reviews may be justified; in other
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situations they may not because of the time and cost involved. However, most managers would at least agree that on occasion zero based reviews can be very helpful. Advantages and Disadvantages of Zero Based Budgeting: Advantages | benefits of zero based budgeting process: 1. Efficient allocation of resources, as it is based on needs and benefits. 2. Drives managers to find cost effective ways to improve operations. 3. Detects inflated budgets. 4. Municipal planning departments are exempt from this budgeting practice. 5. Useful for service departments where the output is difficult to identify. 6. Increases staff motivation by providing greater initiative and responsibility in decision-making. 7. Increases communication and coordination within the organization. 8. Identifies and eliminates wasteful and obsolete operations. 9. Identifies opportunities for outsourcing. 10. Forces cost centers to identify their mission and their relationship to overall goals. Disadvantages | Limitations of zero based budgeting method. 1. Difficult to define decision units and decision packages, as it is time-consuming and exhaustive. 2. Forced to justify every detail related to expenditure. The research and development (R&D) department is threatened whereas the production department benefits. 3. Necessary to train managers. Zero based budgeting (ZBB) must be clearly understood by managers at various levels to be successfully implemented. Difficult to administer and communicate the budgeting because more managers are involved in the process. 4. In a large organization, the volume of forms may be so large that no one person could read it all. Compressing the information down to a usable size might remove critically important details. 5. Honesty of the managers must be reliable and uniform. Any manager that exaggerates skews the results.

Problem # 01: Asian Products, Ltd., has budgeted sales for the next four months as follows: Sales in units
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April---------50,000 May---------75,000 June---------90,000 July---------80,000 The company is now in the process of preparing a production budget for the second quarter. Past experience has shown that end- of- month inventory levels must equal 10 percent of the following months sale. The inventory at the end of March was 5,000 units. Required: Prepare a production budget for the second quarter; in your budget, show the number of units to be produced each month and for the quarter in total. Problem #02: G. Corporation makes a product that has peak sales in June of each year The company has prepared a sales budget for the second quarter of2003, as shown below: April May June Total Budgeted sales $6,00,000 $ 7,50,000 $ 9,00,000 $ 22,50,000 The Corporation is in the process of preparing a cash budget for the second quarter and must determine the expected cash collections by month. To this end, the following information has been assembled: 70% in the month of sale 20% in month of following sale Collections on sale: 8% in second month following sale 2% uncollectible The Corporation gives a 2 percent cash discount for payments made by customers during the month of sale. The accounts receivable balance to start the quarter is $ 1,95,000, of which $ 45,000 represents uncollected February sales and $ 1,50,000 represents uncollected March sales. Required: 1. What were the total sales for February? For March? 2. Prepare a schedule showing the budgeted cash collections from sales, by month and in total, for the second quarter. Problem # 03: Milo Company manufactures a single product for which peak sales occur in August of each year. The Company is now preparing detailed budget for the third quarter and has assembled the following information to assist in the budget preparation: a. The marketing department has estimated sales as follows for the reminder of the year ( in units): July------------- 30,000 October---------------- 20,000 August--------- 70,000 November------------- 10,000 September----- 50,000 December------------- 10,000

The selling price of the companys product is $ 12 per unit. b. All sales are on account. Based on past experience, sales are collected in the following pattern:
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30 percent in the month of sale 65 percent in the month following the sale 5 percent uncollectible Sales for June 2004 totaled $ 300,000 c. The company maintains finished goods inventories equal to 15 percent of the following months sales. This requirement will be met at the end of June. d. Each finished units of product requires 4 feet of Gilden, a material that is sometimes hard to get. Therefore, the company requires that the inventory of the Gilden on hand at the end of each month be equal to 50 percent of the following months production needs. The inventory of Gilden on hand at the beginning and end of the quarter will be: June 30---------------------- 72,000 feet September 30-------------? feet e. The Gilden costs $ 0.80 per foot. One half of a months purchase of Gilden is paid for in the month of purchase; the remainder is paid for in the following month. The accounts payable on July 1 for purchases of Gilden during June will be $ 76,000. Required: 1. Prepare a sales budget, by month and in total, for the third quarter. (Show your budget in both units and in dollars.) Also prepare a schedule of expected cash collections, by month and in total, for the third quarter. 2. Prepare a production budget for each of the months July- October. 3. Prepare a materials purchases budget for Gilden, by month and in total, for the third quarter. Also prepare a schedule of expected cash payments for Gilden, by month and in total Problem# 04: You have been asked to prepare a cash budget for December 2004 for Akash Corporation. The following information is available about the corporations operation: a. The beginning cash balance on December 1 will be $ 40,000. b. Actual sales for October and November and expected sales for December are as follows: Cash sales Sales on account October $ 65,000 4,00,000 November $ 70,000 5,25,000 December $ 83,000 6,00,000

Sales on account are collected over a three- month period in the following ratio: 20% collected in the month of sale, 60% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible. C Purchase of inventory will total $2,80,000 for December. Thirty percent of a months inventory purchases are paid during the month of purchase. The accounts payable remaining from Novembers inventory purchase total $ 1,61,000 , all of which will be paid in December. d Selling and administrative expenses are budgeted $ 4,30,000 for December, of this amount, $
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50,000 is for depreciation. e Equipment costing $ 76,000 will be purchased for cash during December, and dividends totaling $9,000 will be paid during the month. f. The corporation must maintain a minimum cash balance of $ 20,000. An open line of credit is available from the companys bank to bolster the cash position as needed. Required: 1. Prepare a schedule of expected cash collections for the month of December. 2. Prepare a schedule of expected cash payments during December to suppliers for inventory purchases. 3. Prepare a cash budget for the month of December. Indicate in the financing section any borrowing that will be needed during the month. Problem # 05: Marshal Companys balance sheet as of April 30, 2004, is given below: Marshal Company Balance Sheet April 30, 2004 Assets Cash -------------------------------------------------- $ 9,000 Accounts receivable, customers------------------ 54,000 Inventory ------------------------------------------30,000 Plant and equipment, net of depreciation------- 2,07,000 Total assets----------------------------------------- $ 3,00,000 Liabilities and Stockholders equity Accounts payable, suppliers--------------------- $ 63,000 Note payable--------------------------------------14,500 Capital Stock-------------------------------------- 1,80,000 Retained earning---------------------------------42,500 Total liabilities and stockholders equity------- $ 3,00,000 The company is in the process of preparing budget data for the May 2004. A number of budget items have already been prepared, as stated below: a Sales are budgeted at $ 200,000 for May. Of these sales, $ 60,000 will be for cash; the remainder will be credit sales. One half of a months credit sales are collected in the month the sales are made, and the remainder is collected in the month following . All of the April 30 receivables will be collected in the May. b Purchases of inventory are expected to total $ 120,000 during May. These purchases will all be on account. Forty percent of all purchases are paid for in the month of purchase; the remainder is paid in the following month. All of the April 30 accounts payable to suppliers will be paid during May. c The May 31 inventory balance is budgeted at $ 40,000. d Operating expenses for May are budgeted at $ 72,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $ 2,000 for the month. e The note payable on the April 30 balance sheet will be paid during May with an interest of Tk.100. f New equipment costing $ 6,500 will be purchased for cash during May. g During May, the company will borrow $ 20,000 from its bank by giving a new note
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payable to the bank for that amount. The new note will be due in one year. Required: 1. Prepare a cash budget for May 2004. Support budget with schedule showing budgeted cash receipts from sales and budgeted cash payments for inventory purchases. 2. Prepare budgeted income statement for May 2004. Ignore income taxes. 3. Prepare a budgeted balance sheet as of May 31,2004. Problem # 06: Rohan Products manufactures and distributes toys to retail outlets. One of the Companys products, Supermix , requires 3 pounds of material A in the manufacture of each unit. The Company is now planning raw materials needs for the third quarter of 2004,the quarter in which peak sales of Supermix occur. In order to keep production and sales moving smoothly, the Company has the following requirements: a. The finished goods inventory on hand at the end of each month must be equal to 3,000 units plus 20 percent of the next months sales. The finished goods inventory on June 30 is budgeted to be 10,000 units. b The raw materials inventory on hand at end of each month must be equal to one half of the following months production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 54,000 pounds. c The company maintains no work-in-process inventories. A sales budget for Supermix for the last six months of 2004 is given below: Budgeted sales in units 35,000 40,000 50,000 30,000 20,000 10,000

July August September October November December

Required: 1. Prepare a production budget for Supermix for the month July-October. 2. Prepare a budget showing the quantity of materials A to be purchased for July, August, and September 2004, and for the quarter in total. Problem # 07 Atlas Corporation is ready to begin its third quarter, in which peak sales occur. The company has requested a $ 40,000, 90- day loan from its bank to help meet cash requirements during the quarter. Since Atlas Corporation has experienced difficulty in paying its loan in the past, the loan officer at the bank has asked the company to prepare a cash budget for the quarter. In response to this request, the following data have been assembled: a b On July 1, the beginning of the third quarter, the corporation will have a cash balance of $ 44,500. Actual sales for the last two months and budgeted sales for the third quarter follow: May (actual)------------------- $ 250,000 June (actual)------------------ 300,000
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July ( budgeted)-------------August (budgeted)----------September ( Budgeted)-----

400,000 600,000 320,000

Past experience shows that 25 percent of a months sales are collected in the month of sale, 70 percent in the month following sales, and 3 percent in the second month following sale. The remainder is uncollectible. Budgeted merchandise purchase and budgeted expenses for the third quarter are given below: Merchandise purchase Salaries and wages Advertising Rent payments Depreciation July $ 240,000 45,000 130,000 9,000 10,000 August $ 350,000 50,000 145,000 9,000 10,000 September $ 175,000 40,000 80,000 9,000 10,000

d e

Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which will be paid during July, total $ 180,000 Equipment costing $ 10,000 will be purchased for cash during July. In preparing a cash budget, assume that the $ 40,000 loan will be made in July and repaid in September. Interest on the loan will total $ 1,200

Required: (1) Prepare a schedule of budgeted cash collections for July, August, and September and for the quarter in total. (2) Prepare a cash budget, by month and in total, for the third quarter. (3) If the company needs a minimum cash balance of $ 20,000 to start each month, can the loan be repaid as planned? Explained. Problem # 08 The following data relate to the four quarters of the financial year 1996-97 of the Janata Company Ltd. Cash Balance (30-6-96) Bills Receivable (30-6-96) Tk. 16,400 Tk. 70,000

It is decided to have a cash balance at the end of each quarter in between Tk. 16,000 and Tk. 18,000. Any excess cash is used to pay in multiples of Tk. 2,000 for the outstanding Bills Payable. Any deficiency below the desired cash balance is made up by borrowing on Bills Payable in multiples of Tk 2,000. One third of the sales are for cash and are subject to a cash discount of 2%. The remaining portion is sold on terms of 90 days. So, it is estimated that credit sales of one quarter will be collected during the next quarter. Interest amounting of Tk. 6,000 is to be paid on Debentures during the second quarter and the same amount during the fourth quarter. Debentures amounting to Tk. 20,000 are to be paid off at per during the fourth quarter. Dividends of Tk. 4,000 are to be paid each quarter. Other informations are as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Gross Sales

1,20,000
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1,44,000

1,50,000

1,50,000

Cash requirements for Vouchers payable Pay-roll cash Requirements Other cash collections

64,000 26,000

78,000 32,000 4,000

88,000 34,000

96,200 34,000 4,000

Required: Prepare a Cash Budget by quarters for the financial year 1996-97 Problem # 09 Prepare a cash budget of Green light Company for July to September 1982 from the particulars given below: 1. Actual sales, purchases, Wages and other expenses for the preceding three months of the budget period were: April Sales Purchases Wages Other expenses 800000 450000 200000 50000 May 800000 400000 180000 60000 June 750000 420000 220000 60000

2. Budgeted sales, purchases, Wages and other expenses are April Sales Purchases Wages Other expenses 900000 500000 240000 70000 May 850000 450000 200000 60000 June 800000 350000 180000 50000

3. Customers are allowed two months credit while credit allowed by suppliers is one month. 4. Lag in payment of wages and other expense is month. 5. Sales and purchases are made 10% on cash and 90% on credit. 6. Sales commission @ 2% on sales is payable in the month following the month of collection. 7. Advance income tax is payable in August Tk. 40000/ 8. Rent payable @ Tk. 3000 per month. 9. Plant will be purchased in July for Tk. 100000. 10. The cash balance on 1st July is Tk. 1,30,000. Problem # 10 Hilliard Company an office supplies specialty store. Prepare its master budget on a quarterly basis. The following data have been assembled to assist in preparation of the master budget for the first quarter: (i) As of December 31 (the end of the prior quarter). The companys general ledger showed the following account balances:

Cash
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Debit Tk. 48,000

Credit

Accounts Receivable Inventory Building and Equipment (net) Accounts payable Capital Stock Retained Earnings

2,24,000 60,000 3,70,000 . 7,02,000 Tk 93,000 5,00,000 1,09,000 7,02,000

(ii) Actual sales for December and budgeted sales for the next four months are as follows: December 280000 Jan. 400000 Feb. 600000 March 300000 April 200000 (Actual)

(iii) Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sales. The accounts receivable at December 31st are a result of December credit sales. (iv) The companys gross profit rate is 40% of sales. (v) Monthly expenses are budgeted as follows: Salaries and wages, Tk. 27,00 per month; Advertising. Tk. 70,000 per month; Shipping, 5% of sales; Depreciation, Tk. 14,000 per month; other expenses, 3% of sales. (vi) At the end of each month, inventory is to be on hand equal to 25% of the following monthss sales needs, stated at cost. (vii) One-half of a months inventory purchases in paid for tin the month of purchase, the other half is paid for in the following month. (viii) During March, other equipment will be purchased for each at a cost of Tk. 84,500: (ix) During January, the company will declare and pay Tk. 45,000 cash dividends (x) The company must maintain a minimum cash balance of Tk. 30,000. An open line lf credit is available at a local back for any borrowing that may be needed during the quarter. All borrowing is done at the beginning of a month. Borrowings and repayments of principal must be in multiples of Tk. 1,000 Interest is paid only at the time of payment of principal. The annual interest rate is 12%. Required: Prepare a budgeted Income Statement for the first quarter and a budgeted Balance Sheet at the end of the first quarter.

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