Tutorial 1

Question 1
PJ has budgeted sales for the next two years of 144,000 units per annum spread evenly
through out each year. The estimated closing inventory at the end of this year is 6,500 units.
PJ wants to change its inventory policy so that it holds inventory equivalent to one month’s
sales. The change in inventory policy will take place at the beginning of next year and will
apply for the next two years.
Each unit produced requires two hours of direct hours of direct labour. The budgeted direct
labour rate per hour is $15. It is anticipated that 80 per cent of the production will be paid at
the budgeted rate and the remainder at a overtime rate of time and a half. PJ treats overtime
costs as part of the direct labour costs
Required:
Calculate the direct labour cost budget for the next year.
Question 2
CH is a building supplies company that sells products to trade and private customers.
Budget data for each of the six months to March are given below:

Oct Nov Dec Jan Feb Mar

$000 $000 $000 $000 $000 $000
Credit sales 250 250 250 260 260 280
Cash sales 60 60 65 75 80 90
Credit purchases 170 180 180 200 200 200
Other operating expenses (exclude 90 90 90 122 123 123
depreciation)

Eighty per cent of the value of credit sales is received in the month after sale, 10 per cent
two months after sale and 8 per cent three months after sale. The balance is written off as a
bad debt.
Seventy five per cent of the value of credit purchases is paid in the month following the
purchases and the remaining 25 per cent is paid two months after purchase.
All other operating costs are paid in the month they are incurred.
CH placed an order for four new forklifts that will cost $25,000 each. The scheduled
payment date is February .
The cash balance at 1 January is estimated to be $15,000.
Required:
Prepare a cash budget for each of the three months of January, February and March.
Question 3
Scottish Designs has a department that makes high-quality leather cases for IPods. Consider
the following data for a recent month:
Budget
Formula per
Unit Various Levels of Output
Units 6,000 7,000 8,000
Sales $15 $ ? $ ? $ ?
Variable costs:
Direct material $ ? $39,000 $ ? $ ?
Hand labor 4 $ ? $ ? $ ?
Fixed costs:
Depreciation $ ? $19,000 $ ?
Salaries $ ? $ ? $34,000

Question 4
The budgeted prices for materials and direct labour per unit of finished product are $11 and
$5, respectively. The production manager is delighted about the following data:
Is the manager’s happiness justified? Prepare a report that might provide a more detailed
explanation of why the static budget was not achieved. Good output was 5,800 units.

Static Actual
Budget Costs Variance
Direct materials $77,000 $72,000 $5,000 F
Direct labor 35,000 31,000 4,000 F
Output 7000 5800

Question 5
The following statement relates to James Bump Inc.’s attempt to compare the actual
performance for the quarter which has just ended with the budget:

Budget Actual Variance

Number of units sold ('000 units) 640 720 80
$'000 $'000 $'000
Sales 1,024 1,071 47
Cost of sales (all variable)
Materials 168 144
Labour 240 288
Overhead 32 36
440 468 28
Fixed labour cost 100 94 6
Selling and distribution costs 200 250 50
Administration costs 250 200 50
 Net profit 34 59 25

Following the publication of the statement, you have managed to obtain the following
additional information:

As percentage of total cost Budget Actual

Selling and distribution costs
Fixed 30% 20%
Variable 70% 80%
100% 100%
Administration costs
Fixed 75% 85%
Variable 25% 15%
100% 100%
Required
(a) Identify three weaknesses of the existing statement as a management report.
(b) Using a flexible budgeting approach, redraft the operating statement so as to provide a
more realistic indication.
(c) Comment briefly on the possible reasons (other than inflation) why they have occurred.
(d) Discuss the problems associated with the forecasting of figures that are to be used in the
flexible budgeting.
Round your answers to the nearest $.

Question 6
Contract Production Ltd is evaluating the performance of product ATP6 to determine if its
product manager, Sundram has met his performance targets for the year. The budget data
relating to sales/production levels of 12,000 units for 2015 are shown below:

Sales price $72.00 per unit

Variable costs:
Manufacturing $36.00 per unit
Administrative $9.00 per unit
Selling $3.00 per unit
Fixed costs:
Manufacturing $18.00 per unit
Administrative $3.00 per unit

Sundram’s performance targets are (1) to meet the budgeted sales units for 2015 with a unit
profit margin of 5%; and (2) ensure that costs variances do not exceed 5% of budgeted
amounts. The actual sales figure for 2015 was $989,100 for 13,800 units of product ATP6 sold.
All actual fixed costs were equal to budgeted amounts. The total actual variable
manufacturing, administrative and selling costs were $495,600, $125,000 and $42,300
respectively.
Required:
(a) Prepare a flexible budget report that includes the variance for each revenue/cost item for
product ATP6 for 2015. Label your variance as favourable (F) or unfavourable (U) where
appropriate
(b) Do you think Sundram has performed well in 2015? Explain.
(c) Comment if your answer in part (b) would be different if you knew that Sundram
participated in the budgeting exercise and had a significant influence on the setting of his
performance targets for 2015? Explain.
(d) Does a manager like Sundram, have total control over all revenue and costs? Discuss.

Question 7
Sunrise Inc. manufactures a single product, which has the following standard revenue and
cost data:

Selling Price $11.00 per unit

Materials 2 kg per unit at $2.08 per kg.

Labour $2 per unit

Direct expenses $1.12 per unit

Sales in June 2021 and July 2021 are forecasted to be 15,000 units in each month. As a
result of direct marketing expenditure of $72,000 in August 2021, sales are expected to
grow by 15% in August 2021 and thereafter to increase by 1,500 units in each month from
September 2021 to December 2021. Sales after December 2021 are expected to remain
constant.
20% of sales are on cash terms and 80% of sales are expected to be collected in the month
following the sale. Inventory of finished goods at the end of each month are required to
meet 25% of the expected sales for the following month. Inventory of materials at the end
of each month are required to be equal to 40% of the materials required for the following
month’s production.
Materials are paid for in the month following purchase. All other costs are paid for in the
month in which they occur. Overheads for production and admin will be $17,600 per month,
excluding $8,000 of depreciation per month.
Sunrise Inc. has a $600,000 bank loan at 8% interest per annum, on which it pays interest
twice per year, in March and September. The cash balance at the end of June 2021 is
expected to be $65,000. Sunrise Inc. has a policy of maintaining at least $40,000 in its bank
balance at the end of each month.
Required:
Prepare and construct the following monthly budgets for Sunrise Inc. for the three months
from July 2021 to September 2021:
(a) Production budget in units.
(b) Cash budget.
(c) Does the cash budget reveal any issue that Sunrise Inc. may face? Suggest two (2)
possible ways for Sunrise Inc. to improve its cashflow.