Professional Documents
Culture Documents
CHAPTER 8 BUDGETING
Fixed administration and maintenance cost of the entire facility is Rs. 4.5
million per year.
The average cost of master print of a Hollywood film is Rs. 4 million while the
cost of master print of a Bollywood film is Rs. 6.5 million.
Two cinema houses are dedicated for Hollywood films which show the same
film at the same time while one cinema house will show Bollywood films.
Each Bollywood film is displayed for 6 weeks and the average occupancy level
is 70%. Each Hollywood film is displayed for 4 weeks and the average
occupancy level is 65%. On weekdays, there are 2 shows while on weekends
(Sat and Sun), 3 shows are displayed. Ticket price has been fixed at Rs. 350.
Variable cost per show is Rs. 35,000 and setup cost of each film is Rs.
500,000.
No films would be shown during 8 weeks of the year.
Theatre is rented to production houses at Rs. 60,000 per day. Each play
requires setup time of 2 days while rehearsal time needs 1 day. Each play is
staged 45 times. One show is staged on weekdays whereas two shows are
staged on weekends.
There is an interval of 2 days whenever a new play is to be staged. No plays
are staged during the month of Ramadan and first 10 days of Muharram.
The construction costs of theatre and cinema houses are to be depreciated
over a period of 15 years.
Assume 52 weeks in a year and 30 days in a month.
operations are as follows:
Required:
Prepare budgeted profit and loss account for the first year. (16)
Beta (Private) Limited (BPL) deals in manufacturing and marketing of bed sheets. The
management of the company is in the phase of preparation of budget for the year 20X3-
X4. BPL has production capacity of 4 million bed sheets per annum. Currently the factory
is operating at 68% of the capacity. The results for the recently concluded year are as
follows:
Rs. in million
Sales 3,400
Cost of goods sold
Material (1,493)
Labour (367)
Manufacturing overheads (635)
Gross profit 905
Selling expenses (60% variable) (287)
Administration expenses (100% fixed) (105)
Net profit before tax 513
No. of units
Retail price range
Men 1,200,000 Rs. 1,000 4,000
The previous pattern of sales indicates that 60% of units are sold at the
minimum price; 10% units are sold at the maximum price and remaining 30% at
a price of Rs.2,000 and Rs. 1,200 per footwear for men and women
respectively.
It has been estimated that 30% of the units would be sold through distributors
who are offered 20% commission on retail price. The remaining 70% will be
sold through company operated retail outlets.
The company operates 22 outlets all over the country. The fixed costs per
outlet are Rs. 1.2 million per month and include rent, electricity,
maintenance, salaries etc.
(iv) Sales through company outlets include sales of cut size footwears which are
sold at 40% below the normal retail price and represent 5% of the total sales of
the retail outlets.
(v) The company keeps a profit margin of 120% on variable cost (excluding
distributors commission) while calculating the retail price.
(vi) Fixed costs of the factory and head office are Rs. 45 million and Rs. 15 million
per month respectively.
Required:
Prepare budgeted profit and loss account for the year 20X0 20X1. (16)
During the year ending June 30, 20X1 Abdul Habib Company Limited has planned to
launch a new product which is expected to generate a profit of Rs. 9.3 million as shown
below:
Rs. in 000
Sales revenue (24,000 units) 51,600
Rupees
C&F value of each electronic kit 9,500
Estimated cost of import related expenses, duties etc. 900
Variable cost of local value addition for each set 3,500
Variable selling and admin expenses per set 900
Annual fixed production expenses 12,000,000
Annual fixed selling and admin expenses 9,000,000
Fixed production overheads are allocated on the basis of budgeted production which is
5,000 units.
The present supply chain is as follows:
i) The company sells to distributors at cost of production plus 25% mark-up.
(ii) Distributors sell to wholesalers at 10% margin.
(iii) Wholesalers sell to retailers at 4% margin.
(iv) Retailers sell to consumers at retail price i.e. at 10% mark-up on their cost.
Performance of the division had not been satisfactory for the last few years. A
business consulting firm was hired to assess the situation and it has
recommended the following steps:
(a) Reduce the existing supply chain by eliminating the distributors and
wholesalers.
(b) Reduce the retail price by 5%.
(c) Offer sales commission to retailers at 15% of retail price.
(d) Provide after sales services.
(e) Launch advertisement campaign; expected cost of campaign would be around
Rs. 5 million.
It is expected that the above steps will increase the demand by 1,500 sets. The
average cost of providing after sales service is estimated at Rs. 450 per set.
Required:
(a) Compute the total budgeted profit:
(i) under the present situation; and
(ii) if the recommendations of the consultants are accepted and implemented.
(b) Briefly describe what other factors would you consider while implementing
the consultants recommendations. (20)
A B
No. of units sold 5400 3600
Labour hours required per unit 5 6
Other information is as follows:
(i) 20% of B was sold to a corporate buyer who was given a discount of 10%.
The buyer has agreed to double the purchases in 20X9 and Mr. Rameez has
agreed to increase the discount to 15%.
(ii) In view of better margins in B, Mr. Rameez has decided to promote its sale at a
cost of Rs. 250,000. As a result, its sales to customers other than the corporate
customer, are expected to increase by 30%. However, the production capacity
is limited. He intends to reduce the production/sale of A if necessary. Mr.
Rameez has ascertained that 90% capacity was utilized during the year ended
November 30, 20X8 whereas the time required to produce one unit of B is 20%
more than the time required to produce a unit of A.
(iii) 2.4 kgs of the same raw material is used for both brands but the process of
manufacturing B is slightly complex and 10% of all raw material is wasted in
the process. Wastage in processing A is 4%.
(iv) The price of raw material has remained the same for the past many years.
However, the supplier has indicated that the price will be increased by 10%
with effect from March 1, 20X9.
(v) Direct labour per hour is expected to increase by 15%.
(vi) 40% of production overheads are fixed. These are expected to increase by 5%.
Variable overheads per unit of B are twice the variable overheads per unit of A.
For 20X9, the effect of inflation on variable overheads is estimated at 10%.
(vii) Selling and administration expenses (excluding the cost of promotional
campaign on B) are expected to increase by 10%.
Required:
Prepare a profit forecast statement for the year ending November 30, 20X9. (22)
The management is interested in distinguishing between the fixed and variable portion
of the overheads.
Required:
Using the least square regression method, estimate the variable cost per direct labour hour
and the total fixed cost per month. (07)
Required:
Prepare a production cost budget for the quarter ended 30 September 20X1. (04)
8 . 1 0 CASH BUDGET
Zinc Limited (ZL) is engaged in trading business. Following data has been extracted
from ZLs business plan for the year ended 30 September 20X2:
(i) Cash sale is 20% of the total sales. ZL earns a gross profit of 25% of sales and
uniformly maintains stocks at 80% of the projected sale of the following month.
60% of the debtors are collected in the first month subsequent to sale
whereas the remaining debtors are collected in the second month following
sales.
80% of the customers deduct income tax @ 3.5% at the time of payment.
In January 20X2, ZL paid Rs. 2 million as 25% advance against purchase of
packing machinery.
The machinery was delivered and installed in February 20X2 and was to be
operated on test run for two months. 50% of the purchase price was agreed to be
paid in the month following installation and the remaining amount at the end of
test run.
Creditors are paid one month after purchases.
Administrative and selling expenses are estimated at 16% and 24% of the
sales respectively and are paid in the month in which they are incurred. ZL had
cash and bank balances of Rs. 100 million as at 29 February 20X2.
Required:
Prepare a month-wise cash budget for the quarter ending 31 May 20X2. (10)
CHAPTER 8 BUDGETING
313,920,000
Expenses
174,718,800
Variable costs of films [98, 780,000(W-2)+75,938,800(W-2)]
Depreciation on Cinema and Theatre houses (30m1 5 ) 2,000,000
Fixed administration and maintenance cost 4,500,000
181,218,800
No. of weeks 52 52
No. of cinemas C 2 1
Hollywood Bollywood
film film
500,000 500,000
Setup cost Rs.
Show cost [35,000128/96(G from W-1)] Rs. 4,480,000 3,360,000
8,980,000 10,360,000
Variable cost per film Rs.
11 7.33
Total number of films in a year (E from W-1)
Total variable costs Rs. 98,780,000 75,938,800
Rs.in million
Sales (1,400 3,400,000) 4,760.00
Less: sales commission (W-1)
(63.50)
Cost of goods sold (W2) 4,696.50
Gross profit (3,170.70)
Selling expenses 1,525.80
Distribution expenses (1.08 1.25 85m)
(114.75)
Selling expenses -Variable [(287 60% 85m) 1.04 1.25]
(113.36)
Selling expenses - Fixed [(287 40%) 1.05] (120.50)
(348.61)
Administration expenses
Admin expenses - other than depreciation [(105 18)m 1.05]
Admin expenses - depreciation (18 1)m (91.40) (17.00)
(108.40) 0.30
Other income (Gain on sale of asset) (1.8 1.5)m
Net profit / (loss) 1,068.49
W-1: Sales commission
Units to Commission Commission
No. of Avg. unit
Categories Ratio be sold % (Rs.0 0 0 )
persons sale/person
(A) (B) ABRs. 1,400
A 33.33% 1,133,333 20 56,667 1.75% 27,767
B 33.33% 1,133,333 30 37,778 1.25% 19,833
C 33.33% 1,133,334 40 28,333 1.00% 15,867
100% 3,400,000 90 63,467
W-2.1: Depreciation
Price Units A m o u n t ( R s . 0 0 0 s )
Rs. 000s
Sales revenue gross (1,920,0000 + 545,000) 2,465,000
Less : Commission to distributors 20% 30% of above 147,900
Cut size discount 40% (5% of 70%) 34,510
182,410
Sales net 2,282,590
100/220 of gross
Variable cost revenue 1,120,455
1,162,135
Less : Factory overheads 12 45m 540,000
Net profit
8. 4 CASH REQUIREMENTS
Cash Management
Qtr. 1 Qtr. 2
Particulars
--- R s . i n 0 0 0 ---
Purchase of machinery (60,000) -
Sale receipts
Cash sales (2,000 u 6,000 / 4 u 94%) 2,820 2,820
Receipts from credit sales as per working below 5,211 9,120
Cost of goods sold variable (37,500 x 80%) /1 2u2 and 3 (5,000) (7,500)
Variable cost of finished stock 30,000 / 24,000u 1,000 (1,250) -
Month Month
1s t Qtr. 2n d Qtr.
1 2 3 4 5 6
------------ R s . i n 0 0 0 ----------------------------------------------
Operating expenses
Total operating expenses given
Less: Variable cost per unit (105 u 24,000) Bad 4,800 (2,520)
debt expense (2,200 u 18,000 u 2%) Fixed (792)
operating expenses 1,488
Fixed cost
Fixed factory overheads 7,500
Less: Depreciation (60m 7.5m) / 15 (3,500)
Fixed operating overheads 1,488
5,488
Fixed cost per
month 457
(a) (i) Budgeted cost and sales price per set Rupees
C & F value 9,500
Import related costs and duties 900
Variable cost of local value addition
3,500
Variable cost per set
13,900
Fixed production overheads (Rs. 12,000,000/5,000 sets)
2,400
Budgeted cost of production per set
Add: Gross profit (Rs. 16,300 25%) 16,300
Budgeted sales price per set to distributor 4,075
20,375
Budgeted gross profit (Rs 4,075 5,000 sets) 20,375,000
Less: Admin & selling expenses
(4,500,000)
Variable (Rs. 900 5,000 sets)
(9,000,000)
Fixed
6,875,000
Budgeted annual profit
(b) In the light of the changes recommended by the consultant, the company will
have to consider whether it has the necessary infrastructure to:
(i) deal with a far larger number of retailers as against the present few
distributors.
(ii) produce and sell extra 30% t.v. sets.
(iii) attend to after sale activities on its own. The question is silent as to
who presently attends to this activity.
(iv) conduct effective advertisement campaign.
Fixed expenses related to manufacturing as well as selling and admin are
likely to increase but no such increase has been anticipated.
If only B is produced the company can produce 9,000 units (4,000 + 6,000 / 1.2).
Required production of B in the next year = (2,880 x 1.3) + (2 x 720) = 3744 +
1440 = 5,184 units
Remaining capacity can be utilised to produce 4,579 units of A [(9,000 - 5,184) x
1.2].
Rupees
252,000.00
378,000.00
48,600)) Rs. 993,582
A B Total
Ratio of variable overheads 1.00 2.00
Total units produced 5,400.00 3,600.00
Product (units)
(K) 5,400.00 7,200.00 12,600.00
Sellingandadministration expenses
(800,000 x 1.1) + 250,000 1,130,000.00
665,780.75
SMART LIMITED
Cash budget for the quarter October - December 20X9
October November December
Rupees in '000'
Opening cash and bank
2,500 1,476 1,428
balances
Cash receipts:
1,500
Cash sales 1,980 2,178
Collection from debtors5,800
5,800 6,960
7,300
Total receipts 7,780 9,138
9,800 9,256 10,566
Cash payments:
720
Cash purchases 792 727
5,400 6,480 7,128
Creditors
150 150 150
Marketing expenses Fixed
(300/2)
150 198 218
Marketing expenses -
Variable
204
Admin. Expenses (2% 208 212
increase per month)
1,700
Purchase of equipment
(2,000-300)
Total payments
8,324 7,828 8,435
Closing cash
1,476and bank 1,428 2,131
balances
Rupees in '000'
Sales (7,500+9,900+10,890) 28,290
Cost of goods sold:
Opening stock (80% of October sale of Rs. 7,500) 6,000
Purchases (7,200+7,920+7,273) 22,393
Goods available for sale 28,393
Closing stock (Purchases of Dec. 20X9) (7,273)
21,120
Gross profit 7,170
Admin. & Marketing expenses:
Marketing expenses - Fixed
450
Marketing expenses variable Note 3 566
Admin. Expenses
624
Depreciation Note 4 258
Loss on replacement of machinery {500-
(1,250*15%/12=1 6)-300} 184
2,082
NET PROFIT 5,088
for the quarter ending December 31, 20X9
Note 2 - Purchases:
Sales 7,500 9,900 10,890 10,000
Note 4 Depreciation
Rate is decreased to Rs. 3. Therefore, direct labour cost will be 21,450 x 3 = Rs.
64,350.
Rs. in 000
Mar Apr May
Opening balance 100,000 109,204 104,828
Collections 83,800 68,800 59,400
Payments:
Purchases (48,000)
(47,250) (44,250)
Selling expenses
(13,200 ) (14,400) (15,600)
Administrative expenses
(8,800) (9,600 ) (10,400 )
Packing machinery
(3,000 ) (3,000) -
Tax withheld by 80% of customers @ 3.5%
(2,346) (1,926 ) (1,663 )
(74,596 ) (73,176) (75,663)
Closing balance 109,204 104,828 88,565
Working notes:
85,000 95,000
W-1: Collections - Jan Sales
Mar Apr May
Feb Sales
55,000 60,000 65,000
Sales Gross
Collections: 11,000 12,000 13,000
Cash sales 45,600 26,400 28,800
1st month after sale 2nd 27,200 30,400 17,600
month after sale 83,800 68,800 59,400