ACCA MA - Fma Study School Budgeting Part B Solutions

1
SBCS Global Learning Institute
ACCA MA/FIA FMA
Management Accounting
Lecturer: Nanda Maharaj
Study School Day 1

Budgeting
Part B
Solutions
2
The Budgetary Process
The budget period is the time period to which the budget relates.
The budget manual is a collection of instructions governing the responsibilities of

persons and the procedures, forms and records relating to the preparation and use of
budgetary data.
Managers responsible for preparing budgets should ideally be the managers who are
responsible for carrying out the budget.
The co-ordination and administration of budgets is usually the responsibility of a budget

committee.
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Budget manual
Functions of the budget committee:

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 Co-ordination of the preparation of budgets, which includes the issue of the

budget manual
 Issuing of timetables for the preparation of functional budgets
 Allocation of responsibilities for the preparation of functional budgets
 Provision of information to assist in the preparation of budgets
 Communication of final budgets to the appropriate managers
 Continuous assessment of the budgeting and planning process, to improve the
planning and control function
The budget process is as follows:

1 Communication of objectives
─ Budgets should be prepared in line with the overall objectives of the organisation.
2 Identification of the principal budget factor

─ This is the limiting factor on the whole organisation and is typically sales demand
(although it could be materials or time or labour and public sector is usually
government funds).
3 Preparation of sales budget
4 Finished goods, production, resources, overheads, raw material inventory, raw

materials purchases, OAR budgets
5 Negotiation of budgets
─ Budgets shown to superiors for approval
6 Coordination of budgets
─ Revision of one budget may affect all budgets
7 Final acceptance of budgets and preparation of master budget

─ Contains budgeted statement of profit or loss, budgeted statement of
financial position and cash budget
8 On-going review of budgets

Actual performance is regularly compared to budget
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First, there will be the sales budget. Everything else will depend on that, the principal
budget factor. The sales budget will be in terms of units and revenue.
Once you know the sales budget, you can plan your production. The units to be made
will not necessarily equal the units that are sold.
The business may plan to make extra units to build up levels of inventory or it might
make fewer units to use up inventory.
Once production is known, usage of many other resources is estimated. Labour hours
and cost will depend on production. As will materials.
Some factory expenses such as machine running costs will also depend on production.
Once these functional budgets have been worked out, the business will usually have
completed its most complex budgets.
There are still many items that have to be calculated such as research and
development, fixed cost budgets and advertising.
Once all functional budgets have been completed they will be reviewed and co-
ordinated and the master budget can be produced.
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Cash Budgets
Format: Cash Budget

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Functional Budgets
(1) Sales Budget = (Sales Units x Selling Price per Unit)
(2) Production Budget = ( Closing Inventory + Sales – Opening Inventory)
(3) Material Usage Budget = ( Production Units x kgs per unit)
(4) Labour Hours Budget = (Production Units x Labour Hours per unit)
(5) Labour Cost Budget = ( Total Labour Hours x Labour Rate per hour)
(6) Material Purchases Budget = (closing inventory + production – opening

Inventory) x Material price per kgs
(7) Closing Trade Receivables = Opening Receivables + Sales – Receipts
(8) Closing Trade Payables = Opening Payables + Purchases - Payments

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Questions: The Budgetary Process

(1) What does a master budget comprise?
o The budgeted income statement
o The budgeted cash flow
o The budgeted cash flow, budgeted income statement and the budgeted
statement of financial position
o The entire set of budgets prepared
Answer: C
(2) Which of the following is NOT a functional budget?

A. Cash budget B. Production budget
C. Selling cost budget D. Distribution cost budget
Answer: A
(3)
Answer: B
(4) In a situation where there are no production resource limitations, which of the
following items of information must be available for the production budget to be
completed?
o Budgeted change in finished goods inventory
o Material purchases from the purchases budget
o Standard direct labour cost per unit
o Sales volume from the sales budget
Answer: A & D
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(5) When preparing a production budget, what does the quantity to be produced
equal?
o Sales quantity – opening inventory of finished goods – closing inventory of
finished goods
o Sales quantity – opening inventory of finished goods + closing inventory of
finished goods
o Sales quantity + opening inventory of finished goods + closing inventory of
finished goods
o Sales quantity + opening inventory of finished goods – closing inventory of
finished goods
Answer: B
(6) The quantity of material in the material purchases budget is greater than the inferred
from quantity of material in the material usage budget.
Which of the following statements can be this situation?
o Raw material inventories are budgeted to decrease
o Wastage of material occurs in the production process
o Finished goods inventories are budgeted to increase
o Raw materials inventories are budgeted to increase
Answer: D
(7) A company plans to sell 24,000 units of product R next year. Opening inventory of R
is expected to be 2,000 units and PQ Co plans to increase inventory by 25% by the end
of the year.
How many units of product R should be produced next year?
Production (units) = 24,000 + {125% x 2,000} – 2,000 = 24,500 units
(8) Each unit of product Alpha requires 3 kg of raw material. Next month’s production
budget for product Alpha is as follows.
Opening Inventories:
Raw materials 15,000 kg
Finished units of Alpha 2,000 units
Budgeted sales of Alpha 60,000 units
Planned Closing Inventories:
Raw materials 7,000 kg
Finished units of Alpha 3,000 units
How many kilograms of raw materials should be purchased next month?
Production (kg) = 60,000 + 3,000 – 2,000 x 3 kg = 183,000 kg

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Purchases (kg) = 183,000 + 7,000 - 15,000 = 175,000 kg
Answer: 175,000 kg
(9) A company manufactures a single product, M. Budgeted production output of

product M during August is 200 units. Each unit of product M requires 6 labour hours for
completion and PR Co anticipates 20 percent idle time. Labour is paid at a rate of $7
per hour.
What is the direct labour cost budget for August?
Direct Labour does not include idle hours = 200 units x 6 hrs x $7 = $8,400
Total Labour Hours = 100%

Total Labour Hours = Productive Hours / Productive %
Total Labour Hours = 200 units x 6 hrs / 0.80 = 1,500 hrs
Total Labour Cost = 1,500 hours x $7 = $10,500
(10) A local Authority is preparing a cash budget for its refuse disposal department.
Which of the following items would NOT be included in the cash budget?
o Operatives’ wages
o Capital cost of a new collection vehicle
o Fuel for the collection vehicles
o Depreciation of the refuse incinerator
Answer: D
(11) Which of the following control actions could be taken to help eliminate an
adverse direct labour efficiency variance?
1. Employ more highly skilled labour
2. Ensure stricter supervision of labour workers
3. Ask employees to work paid overtime
A. 2 and 3 B. 1 and 2 C 1,2 and 3 D. 1 and 3
Answer: B
(12)
Production = 18,000 + 11,400 – 15,000 / 0.90 = 16,000 units

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(13)
Production (units) = 36,800 + 7,600 – 3,000 / 0.92 = 45,000 units
Direct Labour Hours = 45,000 units x 5 hours = 225,000 hours
(14)
Answer: D
(15)
Answer: B
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(16)
Answer: B
(17)
Answer: D
(18)
Answer: B
(19)
Answer: B
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(20)
Answer: C
(21)
Production (units) = 10,000 + (5% x 10,000) – 600 units / 0.90 = 11,000 units
(22)
Answer: C
(23)
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Answer: C
(24)
Answer: C
(25)
Answer: A
(26)
Answer: B
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(27) The following details have been extracted from the receivables collection records of
C Co.
Invoices paid in the month after sale 60%
Invoices paid in the second month after sale 25%
Invoices paid in the third month after sale 12%
Bad debts 3%
Invoices are issued on the last day of each month.
Customers paying in the month after sale are entitled to deduct a 2% settlement
discount.
Credit sales values for June to September are budgeted as follows.
June July August September
$35,000 $40,000 $60,000 $45,000
What is the amount budgeted to be received from credit sales in September?
A $46,260 B $49,480 C $50,200 D $50,530
September
$
August = 60,000 x 60% x 98% = 35,280
July = 40,000 x 25% = 10,000
June = 35,000 x 12% = 4,200
Total Receipts = 49,480
Answer: B

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1

SBCS Global Learning Institute

ACCA MA/FIA FMA

Lecturer: Nanda Maharaj

Study School Day 1

The Budgetary Process

The budget manual is a collection of instructions governing the responsibilities of

The co-ordination and administration of budgets is usually the responsibility of a budget

Functions of the budget committee:

 Co-ordination of the preparation of budgets, which includes the issue of the

The budget process is as follows:

2 Identification of the principal budget factor

3 Preparation of sales budget

4 Finished goods, production, resources, overheads, raw material inventory, raw

7 Final acceptance of budgets and preparation of master budget

8 On-going review of budgets

Format: Cash Budget

(2) Production Budget = ( Closing Inventory + Sales – Opening Inventory)

(3) Material Usage Budget = ( Production Units x kgs per unit)

(6) Material Purchases Budget = (closing inventory + production – opening

(7) Closing Trade Receivables = Opening Receivables + Sales – Receipts

(8) Closing Trade Payables = Opening Payables + Purchases - Payments

Questions: The Budgetary Process

(2) Which of the following is NOT a functional budget?

Production (units) = 24,000 + {125% x 2,000} – 2,000 = 24,500 units

Production (kg) = 60,000 + 3,000 – 2,000 x 3 kg = 183,000 kg

Purchases (kg) = 183,000 + 7,000 - 15,000 = 175,000 kg

(9) A company manufactures a single product, M. Budgeted production output of

Total Labour Hours = 100%

Production = 18,000 + 11,400 – 15,000 / 0.90 = 16,000 units

Production (units) = 36,800 + 7,600 – 3,000 / 0.92 = 45,000 units

Direct Labour Hours = 45,000 units x 5 hours = 225,000 hours

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