Question bank: Objective test and long-form questions

CHAPTER 8 BUDGETING

8.1 BUDGETED PROFIT AND LOSS ACCOUNT

Cinemax Limited has recently constructed a fully equipped theatre and 3 cinema
houses at a cost of Rs. 30 million. The theatre has a capacity of 800 seats and each
cinema has a capacity of 600 seats. Information and projections for the first year of

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)

8.2 BUDGETED PROFIT AND LOSS ACCOUNT 2

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

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Other relevant information is as under:

(i) The raw material and labour costs are expected to increase by 5%, while
selling and distribution costs will increase by 4% and 8% respectively. All
overheads and fixed expenses except depreciation will increase by 5%.
(ii) Manufacturing overheads include depreciation of Rs. 285 million and other
fixed overheads of Rs. 165 million. During the year 20X3X4 major overhaul of
a machine is planned at a cost of Rs. 35 million which will increase the
remaining life from 5 to 12 years. The current book value of the machine is Rs.
40 million and it has a salvage value of Rs. 5 million. At the end of 12 years,
salvage value will increase on account of general inflation to Rs. 9 million. The
company uses straight line method for depreciating the assets.
(iii) Variable manufacturing overheads are directly proportional to the production
volume of production.
(iv) Selling expenses include distribution expenses of Rs. 85 million, which are all
variable
(v) Administration expenses include depreciation of Rs. 18 million. During 20X3
X4, an asset having book value of Rs. 1.5 million will be sold at Rs. 1.8
million. No replacement will be made during the year. Depreciation for the
year 20X3-X4 would reduce to Rs. 17 million.
The management has planned to take following steps to increase the sale and
improve cost efficiency:
Increase selling price by Rs. 150 per unit.
The sales are to be increased by 25%. To achieve this, commission on sales will
be introduced besides fixed salaries. The commission will be paid on the entire
sale and the rate of commission will be as follows:

No. of units Commission % on total sales

Less than 35,000 1.00%

35,000 40,000 1.25%
40,000 50,000 1.50%

Above 50,000 1.75%

Currently the sales force is categorized into categories A, B and C. Number of
persons in each category is 20, 30 and 40 respectively. Previous data shows that
total
sales generated by each category is same. Moreover, sales generated by each
person in a particular category is also the same. The trend is expected to continue in
future.
The overall efficiency of the workforce can be increased by 15% if management
allows a bonus of 20%. Further increase in production can be achieved by hiring
additional labour at Rs. 180 per unit.
Required:
Prepare profit and loss budget for the year 20X3X4. (20)

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 Question bank: Objective test and long-form questions

8. 3 BUDGETED PROFIT AND LOSS ACCOUNT 3

Shahid Limited is engaged in manufacturing and sale of footwear. The company sells its
products through company operated retail outlets as well as through distributors. The
management is in the process of preparing the budget for the year 20X0-X1 on the
basis of following information:
(i) The marketing director has provided the following annual sales projections:

No. of units
Retail price range
Men 1,200,000 Rs. 1,000 4,000

Women 500,000 Rs. 800 2,500

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)

8.4 CASH REQUIREMENTS

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

Less: cost of goods sold 37,500

Gross profit 14,100
Less: operating expenses 4,800
Net profit before tax 9,300

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The following additional information is available:

(i) 75% of the units would be sold on 30 days credit. Credit prices would be 10% higher
than the cash price. It is estimated that 70% of the customers will settle their
account within the credit term while rest of the customers would pay within 60
days. Bad debts have been estimated @ 2% of credit sales. All cash and credit
receipts are subject to withholding tax @ 6%.
80% of the expenses forming part of cost of goods sold are variable. These are
to be paid one month in arrears.
(iii) The production will require additional machinery which will be purchased on July
1, 20X0 at a cost of Rs. 60 million. The machine is expected to have a useful life
of 15 years and salvage value of Rs. 7.5 million. The company has a policy to
charge depreciation on straight line basis. The depreciation on the machinery is
included in the cost of goods sold as shown above.
(iv) Variable operating expenses excluding bad debts are Rs. 105 per unit. These
are to be paid in the same month in which the sale is made.
(v) 50% of the fixed costs would be paid immediately when incurred while the
remaining 50% would be paid 15 days in arrears.
(vi) The management has decided to maintain finished goods stock of 1,000 units.
Required:
Calculate the cash requirements for the first two quarters. (17)

8.5 BUDGETED PROFIT

The home appliances division of Umair Enterprises assembles and markets television
sets. The company has a long term agreement with a foreign supplier for the supply
of electronic kits for its television sets.
Relevant details extracted from the budget for the next financial year are as follows:

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.

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 Question bank: Objective test and long-form questions

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)

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 Question bank: Objective test and long-form questions

8.6 PROFIT FORECAST STATEMENT

RS Enterprises is a family concern headed by Mr. Rameez. It is engaged in
manufacturing of a single product but under two brand names i.e. A and B. Brand B is
of high quality and over the past many years, the company has been charging a 60%
higher price as compared to brand A. As the company has progressed, Mr. Rameez
has felt the need for better planning and control. He has compiled the following data
pertaining to the year ended November 30,20X8:
Rupees Rupees
Sales 5,522,400
Production costs:
Raw materials 2,310,000
Direct labour 777,600
Overheads 630,000 3,717,600
Gross profit 1,804,800
Selling and administration 800,000
expenses
1,004,800

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)

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8.7 CASH BUDGET

Smart Limited has prepared a forecast for the quarter ending December 31, 20X9,
which is based on the following projections:
(i) Sales for the period October 20X9 to January 20X0 has been projected as
under:
Rupees
October 20X9 7,500,000
November 20X9 9,900,000
December 20X9 10,890,000
January 20X0 10,000,000
Cash sale is 20% of the total sales. The company earns a gross profit at 20%
of sales. It intends to increase sales prices by 10% from November 1, 20X9,
however since there would be no corresponding increase in purchase prices
the gross profit percentage is projected to increase. Effect of increase in sales
price has been incorporated in the above figures.
All debtors are allowed 45 days credit and are expected to settle promptly.
Smart Limited follows a policy of maintaining stocks equal to projected sale of
the next month.
All creditors are paid in the month following delivery. 10% of all purchases
are cash purchases.
(v) Marketing expenses for October are estimated at Rs. 300,000. 50% of these
expenses are fixed whereas remaining amount varies in line with the value of
sales. All expenses are paid in the month in which they are incurred.
(vi) Administration expenses paid for September were Rs. 200,000. Due to
inflation, these are expected to increase by 2% each month.
Depreciation is provided @ 15% per annum on straight line basis.
Depreciation is charged from date of purchase to the date of disposal.
(viii) On October 31, 20X9 office equipment having book value of Rs. 500,000
(40% of the cost) on October 1, 20X9 would be replaced at a cost of Rs.
2,000,000. After adjustment of trade-in allowance of Rs. 300,000 the
balance would have to be paid in cash.
(ix) The opening balances on October 1, 20X9 are projected as under:
Rupees
Cash and bank 2,500,000
Trade debts related to September 5,600,000
Trade debts related to August 3,000,000
Fixed assets at cost (20% are fully depreciated) 8,000,000
Required:
(a) Prepare a month-wise cash budget for the quarter ending December 31, 20X9.
(b) Prepare a budgeted profit and loss statement for the quarter ending
December 31, 20X9. (16)

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 Question bank: Objective test and long-form questions

8.8 REGRESSION METHOD

The records of direct labour hours and total factory overheads of IMI Limited over first
six months of its operations are given below:

Direct labour Hours Total factory Overheads

in 000 Rs. in 000

September 20X9 50 14,800

October 20X9 80 17,000

November 20X9 120 23,800

December 20X9 40 11,900

January 20X0 100 22,100

February 20X0 60 16,150

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)

8.9 PRODUCTION COST BUDGET

Following data is available from the production records of Flamingo Limited (FL) for the
quarter ended 30 June 20X1.
Rupees

Direct material 120,000

Direct labour @ Rs. 4 per hour 75,000

Variable overhead 70,000

Fixed overhead 45,000

The managements projection for the quarter ended 30 September 20X1 is as follows:
Increase in production by 10%.
Reduction in labour hour rate by 25%.
Decrease in production efficiency by 4%.
No change in the purchase price and consumption per unit of direct material.
Variable overheads are allocated to production on the basis of direct labour
hours.

Required:
Prepare a production cost budget for the quarter ended 30 September 20X1. (04)

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 Question bank: Objective test and long-form questions

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:

Sales Rs. 000

Actual:
January 20X2 85,000
February 20X2 95,000
Forecast:
March 20X2 55,000
April 20X2 60,000
May 20X2 65,000
June 20X2 75,000

Following information is also available:

(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)

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 Answers

CHAPTER 8 BUDGETING

8.1 BUDGETED PROFIT AND LOSS ACCOUNT

BUDGETED PROFIT AND LOSS STATEMENT

Revenues Rupees
295,680,000
Revenue from Cinemas [192,1 92,000(W-1 )+ 103,488,000(W-1)]
Rental income from theatre 18,240,000

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

Budgeted profit 132,701,200

W-1: Revenue from Cinemas

Hollywood Bollywood
film film

No. of weeks 52 52

No shows (8) (8)

No. of weeks during which show to be 44 44

displayed A
No. of weeks each film is displayed B 4 6

No. of cinemas C 2 1

Total no. of films D= A/B 11 7.33

No. of shows per week (25+32) F 16 16

Total shows per film G=BCF 128 96

Averaeg occupancy per show

(60065%,70%) H 390 420

Ticket price I 350 350

Revenue from Cinemas GHID 192,192,000 103,488,000

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 Answers

W-2: Variable costs

Hollywood Bollywood
film film

Cost per film Rs. 4,000,000 6,500,000

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

W-3: No. of days theater rented out.

No. of available days (3603010)

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 Answers

8 . 2 BUDGETED PROFIT AND LOSS ACCOUNT

Production capacity 4,000,000

Actual production (4,000,000 68% = 2,720,000 1.25) 3,400,000
Selling price / unit [(3,400 2.72) + 150] Rs. 1,400

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: Cost of goods sold

Rs. in million
Material (1,493 1.05 1.25) 1,959.6
Labour (W-2.2) 511.5
Variable overheads [(635-285-1 65)1.053,4002,720] 242.8
Overheads fixed - other than depreciation(165 1.05) 173.3
Overheads fixed - depreciation (W-2.1) 283.5
3,170.7

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 Answers

W-2.1: Depreciation

Existing depreciation 285.0

Less: depreciation on machine to be overhauled [(40 5)m 5] 7.0
278.0
Add: Depreciation on machine after overhauling [(40+359)m 12] 5.5
283.5

W-2.2: Labour Cost

Units Total cost

Cost of existing units (367 1.05) 2,720,000 385.4
15% increase in production by paying bonus @ 20%
408,000 77.1
(2,720,000 15%) (385.4 20%)
Existing labour cost with increased efficiency 3,128,000 462.5
Cost of remaining units by hiring additional labour 272,000 49.0
@ Rs. 180 (3,400,000 2,720,000 408,000)
3,400,000 511.5

8. 3 BUDGETED PROFIT AND LOSS ACCOUNT

Price Units A m o u n t ( R s . 0 0 0 s )

Men Women Men Women Men Women

Minimum 1,000 800 720,000 300,000 720,000 240,000
Maximum 4,000 2,500 120,000 50,000 480,000 125,000

Average 2,000 1,200 360,000 150,000 720,000 180,000

Total 1,200,000 500,000 1,920,000 545,000

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

Gross profit 622,135

Less : Admin overheads 12 15m 180,000
Cost of retail outlets 12 22 1.2m 316,800
496,800
125,335

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 Answers

Net profit

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 Answers

8. 4 CASH REQUIREMENTS

Cash Management

Sales Revenue (Rs. in 000) 51,600

Cash Selling price per unit 2,000
Credit selling price per unit 2,200

Total sales Units Weight Sales Ratio

Cash sales 25% 6,000 1.0 6,000
Credit sales 75% 18,000 1.1 19,800
24,000 25,800
Cash Requirement 2010 -11

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) -

Variable operating expenses (105 u 3 u 2,000) (630) (630)

Payment of fixed costs (457 u 2.5) / (457 u 3.0) (1,143) (1 ,372)
(59,992) 2,438

Month Month
1s t Qtr. 2n d Qtr.
1 2 3 4 5 6

------------ R s . i n 0 0 0 ----------------------------------------------

Working for credit

sales
Credit sales
3,300 3,300 3,300 3,300 3,300 3,300
(18,00012u2,200)
Settlement 70% 2,310 2,310 2,310 2,310 2,310
28% 924 924 924 924
Gross receipts 2,310 3,234 5,544 3,234 3,234 3,234 9,702
Tax @ 6% (333) (582)

Receipts net of tax 5,211 9,120

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 Answers

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

(ii) Computation of budgeted consumer price of each set

Budgeted sales price of the company 20,375.00

Add: distributor margin (Rs. 20,375 10/90)
2,263.88
Budgeted sales price of the distributor
22,638.88
Add: wholesaler margin (Rs. 22,638.88 4/96)
943.29
Budgeted sales price of wholesaler
23,582.17
Add: retailers markup (Rs. 23,582.17 10%)
2,358.21
Budgeted retail price
25,940.39

8.5 BUDGETED PROFIT

Revised retail price (Rs. 25,940.39

95%) 24,643.37
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 Answers

Revised profit forecast after consider ing consultants recommendation:

Rupees
Sales (6,500 sets Rs. 24,643.37) 160,181,905
Less: Cost of goods sold for 6,500 units
Electronic Kits @ Rs 9,500 61,750,000
Cost of import and duty @ Rs 900 5,850,000
Local value addition @ Rs 3,500 22,750,000
Fixed overhead cost 12,000,000
(102,350,000)
Gross Profit 57,831,905

Less: Selling & Admin expenses

Variable (6,500 sets Rs 900) 5,850,000
Fixed 9,000,000
Cost of advertisement campaign 5,000,000
Cost of after-sale service (6,500 Rs. 450) 2,925,000
Retailers commission (Rs. 160,181,905 15%) 24,027,285
(46,802,285)
Profit by implementing the proposal of consultant 11,029,620
Based on above results, management should accept the recommendation of the
consultant.

(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.

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 Answers

8.6 PROFIT FORECAST STATEMENT

Computation of Sales for 20X8

A B B Total
Normal Corporate
Ratio of sale price 1.00 1.60 1.44
Actual sale Qty 5,400.00 2,880.00 720.00
Ratio of sale value 5,400.00 4,608.00 1,036.80 11,044.80
Sales value 2,700,000.00 2,304,000.00 518,400.00 5,522,400.00
A B

C u r r e n t y e a r s p r oduction
(at 90% capacity) 5,400.00 3,600.00
Production at full capacity
6,000.00 4,000.00

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].

Computation of Sales for 20X9

Rupees
Sales of A (4,579 x 500) Sales of B (5,184 x 800) 2,289,500
4,147,200
Discount to Corporate customer (1,440 800 15%)
6,436,700
172,800
6,263,900

Consumption of Raw Material

Kgs
Consumption of raw material in 20X8 (A: 5,400 x 2.4 / 0.96) 13,500.00
Consumption of raw material in 20X8 (B: 3,600 x 2.4 / 0.90) 9,600.00
Total 23,100.00
Rupees
Price per kg of raw material ( 2,310,000 / 23,100) 100.00
Total expected consumption in 20X9 (A: 4,579 x 2.4 / 0.96)
Total expected consumption in 20X9 (B: 5,184 x 2.4 / 0.90) 11,447.50
Total consumption for 20X9 13,824.00
25,271.50
Average price for 20X9 ((100 x 3) + (110 x 9)) / 12 107.50

Total cost of raw material for

20X9 2,716,686.25

Emile Woolf International 18 The Institute of Chartered Accountants of Pakistan

 Answers

Computation of Direct Labour Hours

Labour hours used in 20X8 (A: 5,400 5) 27,000

Labour hours used in 20X8 (B: 3,600 6) 21,600
48,600

Labour hours forecast for 20X9 (A: 4,579 5) 22,895

Labour hours forecast for 20X9 (B: 5,184 6) 31,104
53,999

Increase in labour hours 5,399

Labour cost for 20X9 (1.15 x (777,600 x 53,999 /

Rupees
252,000.00

378,000.00
48,600)) Rs. 993,582

Production overheads for 20X8 :

Fixed overheads (40% x 630,000)

Variable overheads (630,000-252,000)

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

Total variable overheads (Rs.)

(L) 162,000.00 216,000.00 378,000.00

Per unit variable overheads (Rs.)

(L /K) 30.00 60.00

Emile Woolf International 19 The Institute of Chartered Accountants of Pakistan

 Answers

Production overheads for 20X9:

A B Total
Fixed overheads (1.05 x
252,000) (Rs.) 264,600.00
Per unit variable overheads
(Rs.) 33.00 66.00
Total units 4,579 5,184
Total variable overheads (Rs.) 151,107.00 342,144.00 493,251.00
Total overheads (Rs.) 757,851.00

Emile Woolf International 20 The Institute of Chartered Accountants of Pakistan

 Answers

PROFIT FORECAST STATEMENT FOR 20X9

Rupees
Sales 6,263,900.00
Material 2,716,686.25
Labour 993,582.00
Overheads 757,851.00 4,468,119.25
Gross margin 1,795,780.75

Sellingandadministration expenses
(800,000 x 1.1) + 250,000 1,130,000.00
665,780.75

8.7 CASH BUDGET

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

Emile Woolf International 21 The Institute of Chartered Accountants of Pakistan

 Answers

Profit & Loss Account

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 1 - Cash collection from sales:

Oct.X9 Nov.X9 Dec.X9 Jan.X0
Rs.000 Rs.000 Rs.000 Rs.000

Total sales 7,500 9,900 10,890 10,000

Cash sales (20% of total) 1,500 1,980 2,178

Credit sales (80% of total) 6,000 7,920 8,712
Cash from debtors:
2nd. fortnight of August 3,000

1st. fortnight of September (5,600/2) 2,800

2nd. fortnight of September (5,600/2) 2,800
1st. fortnight of October (6,000/2) 3,000
2nd. fortnight of October (6,000/2) 3,000
1st. fortnight of November (7,920/2) 3,960
5,800 5,800 6,960

Emile Woolf International 22 The Institute of Chartered Accountants of Pakistan

 Answers

Note 2 - Purchases:
Sales 7,500 9,900 10,890 10,000

Sale price increase 0% 10% 10% 10%

Sales excluding price
increase effect 7,500 9,900/1.10 10,890/1.10 10,000/1.10

7,500 9,000 9,900 9,091

Projected purchases 9,000*0.80 9,900*0.80 9,091*0.80

based on next month sales 7,200 7,920 7,273

Cash purchases 10% 720 792 727

Credit purchases 90% 6,480 7,128 6,545

Payment to creditors (Last (7,500*0.8*0.9)
months balance of creditors) 5,400 6,480 7,128

Note 3 - Variable marketing expenses:

Sales 7,500 9,900 10,890

300 / 2 -
Variable marketing expenses 150/7,500*9,900 150/7,500*10,890
150 198 218 -

Note 4 Depreciation

Oct.X9 Nov.X9 Dec.X9 Jan.X0

Fixed assets at cost 8,000 - - -

Less: Fully depreciated assets

20% - - - -
(1,600)
6,400 80 - - -

Disposals on Oct. 31 at cost

(500,000/40%) - - - -
(1,250)
5,150 - - - -

Add itions on October 31 at cost 2,000 - - - -

7,150 - 89 89 -

Emile Woolf International 23 The Institute of Chartered Accountants of Pakistan

 Answers

8.9 PRODUCTION COST BUDGET

Production Cost Budget

Actual (30-06-20X1) Budget (30-09-20X1)
8.8 REGRESSION METHOD
Rupees
Direct material cost 120,000 132,000
Direct labour cost 75,000 64,350
(W-1)
September 20X9
Prime Cost 196,350
October 20X9
Production Overhead:
November 20X9
Variable 70,000 80,080
December 20X9
Fixed 45,000 45,000
January 20X0
Total cost 310,000 321,430
February 20X0
W-1:
The labour hours will increase by 10%. Also there will be increase in labour hours as
production efficiency has decreased by 4%. Therefore, increased total labour hours
will be:

Rate is decreased to Rs. 3. Therefore, direct labour cost will be 21,450 x 3 = Rs.
64,350.

Emile Woolf International 24 The Institute of Chartered Accountants of Pakistan

 Answers

8 . 1 0 CASH BUDGET Month-wise

Cash Budget

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

W-2 Purchases: 75,000

Sales Gross (June)

Feb Mar Apr May

Sales Gross 95,000 55,000 60,000 65,000
Cost of sales [75% of sales] A 71,250 41,250 45,000 48,750
Less: Opening stock [80% of cost
of sale] B (57,000) (33,000) (36,000) (39,000)
Add: Closing stock [80% of next
months cost of sales] C 33,000 36,000 39,000 45,000
Purchases (A+CB) 47,250 44,250 48,000 54,750
Payment to creditors 47,250 44,250 48,000

Emile Woolf International 25 The Institute of Chartered Accountants of Pakistan

Answers