BUDGETING: REVIEW QUESTIONS

ACC 222: COST AND MANAGEMENT ACCOUNTING II

CLASS: BAF II (BS & PS)
Discussion Questions
1. What is a budget? What is the budgetary control?
2. Discuss some of the major benefits to be gained from budgeting.
3. What is a master budget? Briefly describe its contents.
4. Why is the sales forecast the starting point in the budgeting?
5. The principal purpose of the cash budget is to see how much cash the company will
have in the bank at the end of the year.’’ Do you agree? Explain

Tutorial Question
QUESTION ONE
Mwanamboka Company makes a product that is very popular as a Mother’s Day gift. Thus,
peak sales occur in May of each year. These peak sales are shown in the Company’s sales
budget for the second quarter given bellow:
April May June Total
Budgeted sales………TZS 300, 0000 TZS 500,000 TZS 200,000 TZS 1,000,000
From past experience, the company has learned that 20% of a month’s sales are collected in
the month of sale, that another 70% is collected in the month following sale, and that the
remaining 10% is collected in the second month following sale. Bad debts are negligible
and can be ignored. February sales totaled TZS 230,000 and March sales totaled TZS
260,000.
Required
1. Prepare a schedule of expected cash collections from sales, by month and in total,
for the second quarter.
2. Assume that the company will prepare a budgeted balance sheet as of June 30.
Compute the accounts receivable as of that date.
QUESTION TWO
Down Ltd, has budgeted sales of its popular boomerang for the next four months
as follows:

sales in units
April 50,000
May 75,000
June 80,000
July 90,000

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 level must equal 10% of
following month’s sales. 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.

QUESTION THREE
Morasa and Phil Ltd manufacture one product line - Z. The sales of the product Z over the
next few months are to be as follows:
1. Demand
Units
 July 180,000
 August 240,000
 September 200,000
 October 180,000
Each Z product sells for TZS 3
2. Debtor receipts: Debtors are expected to pay as follows:
 70 per cent during the month of sale
 28 per cent during the following month
3. The remainder of debtors are expected to go (that is, to be uncollectible). Debtors
who pay in the month of sale are entitled to deduct a 2% discount from the invoice
price.
4. Finished goods stocks. Stocks of finished goods are expected to be 40000 units at 1
July. The business’s policy is that, in future, the stock at the end of each month
should equal 20% of the following month’s panned sales requirements.
5. Raw materials stock. Stocks of raw materials are expected to be 40000 kg on 1
July. The business’s policy is that, in future, the stock at the end of each month
 should equal 50% of the following month’s planned production requirements. Each
product Z requires 0.5 kg of raw material, which costs TZS 1.5/kg. Raw materials
purchases are paid in the month after purchase
6. Labor and overheads. The direct labour cost of each product Z is TZS 0.50. The
variable overhead element of each product Z is TZS 0.30. Fixed overheads, including
depreciation of TZS 25000, is TZS 47000 per month. All labour and overheads are
paid during the month in which they arose.
7. Cash in hand. At 1 august the business plans to have a bank balance (in funds) of TZS
20000.

Required
Prepare Cash budget for august and September.

QUESTION FOUR
You have been asked to prepare a December cash budget for Mweni company, a distributor
of exercise equipment. The following information is available about the company’s
operations;
a. The cash balance on December 1 will be TZS 40,000
b. Actual sales for October and November and expected sales for December are as
follows:

October November December

Cash sales TZS 65,000 TZS 70,000 TZS 83,000
Sales on account TZS 400,000 TZS 525,000 TZS 600,000

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 uncollectable.
c. Purchases of inventory will total TZS 280,000 for December. Thirty percent of a
months of inventory purchases are paid during the month of purchase. The account
payable remaining from November’s inventory purchases total TZS 161,000, all of
which will be paid in December.
d. Selling and administrative expenses are budgeted at TZS 430,000 for December. Of
this amount, TZS 50,000 is for depreciation.
e. A new web server for the marketing department costing TZS 76,000 will be
purchased for cash during December, and dividend totaling TZS 9000 will be paid
during the month
f. The company must maintain a minimum cash balance of TZS 20,000. An open line of
credit is available from the company’s bank to bolster the cash position is needed.
Required
 1. Prepare a schedule of expected cash collections for December.
2. Prepare a schedule of expected cash disbursements for materials during December
to suppliers for inventory purchases.
3. Prepare a cash budget for December. Indicate in the financing section any
borrowing that will be needed during the month.

QUESTION FIVE
Herbal care corp., a distributor of herb-based sun screens, is ready to begin its third
quarter, in which peak sales occur. The company has requested a TZS 40,000, 90-day loan
from its bank to meet cash requirements during the quarter. Since Herbal Care has
experienced difficulty in paying off its loans 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. On July 1, the beginning of the third quarter, the company will have a cash balance of
TZS 44,500
b. Actual sales for the last two months and budgeted sales for the third quarter follow:
May (Actual) TZS 250,000
June (Actual) 300,000
July (Budgeted) 400,000
August (Budgeted) 600,000
September (Budgeted) 320,000

Past experience shows that 25% of a month’s sales are collected in the month of sale, 70%
in the month following sale, and 3% in the second month following sale. The remainder is
uncollectable.
c. Budgeted merchandise purchases and budgeted expenses for the third quarter are
given below:

July August September

Merchandise
Purchases TZS 240,000 TZS 350,000 TZS 175,000
Salaries and
wages 45,000 50,000 40,000
Advertising 130,000 145,000 80,000
Rent payments 9000 9000 9000
 Depreciation 10,000 10,000 10,000

Merchandise Purchases are paid in full during the month following purchase. Accounts
payable for merchandise purchases on June 30, which will be paid in July, total TZS180,000.
d. Equipment costing TZS 10,000 will be purchased for cash during July.
e. In preparing the cash budget, assume that the TZS 40,000 loan will be made in July
and repaid in September. Interest on the loan will total TZS 1,200.
Required
1. Prepare a schedule of expected 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 TZS 20,000 to start each month,
can the loan be repaid as planned.

QUESTION SIX
Marambau ltd, a quickly expanding crossbow supplier to retail outlets, is in the process of
formulating plans for the next year. Jojo Mleu, director of marketing, has completed her
sales budget and is confident that sales estimates will be met or exceeded. The following
budgeted sales figures show the growth expected and will provide the planning basis for
other corporate departments.

Budgeted sales
January TZS 1,800,000 July TZS 3,000,000
February 2,000,000 August 3,000,000
March 1,800,000 September 3,200,000
April 2,200,000 October 3,200,000
May 2,500,000 November 3,000,000
June 2,800,000 December 3,400,000

Gerson Mkizu, assistant controller, has been given the responsibility for formulating the
cash budget, a critical element during a period of rapid expansion. The following
information provided by operating managers will be used in preparing the cash budget.
a. Marambau has experienced an excellent record in account receivable collection and
expect this trend to continue. Sixty percent of billings are collected in the month
after the sale, and 40% in the second quarter after the sale.
b. The purchase of the crossbows is Marambau’s largest expenditure; the cost of these
items equals 50% of sales. Sixty percent of the crossbows are received one month
prior to sale and 40% are received during the month of sale.
c. Prior experience shows that 80% of account payable are paid by Marambau one
month after receipt of the purchased crossbows, and the remaining 20% are paid
the second month after receipt.
d. Hourly wages including fringe benefits depend on sale volume and are equal to 20%
of the current month’s sales. These wages are paid in the month incurred.
e. General and administrative expenses are budgeted to be TZS 2,640,000 for the year.
The composition of these expenses are is given below. All of these expenses are
incurred evenly throughout the year except the property taxes. Property taxes are
paid in four equal installments in the last month of each quarter;
Salaries TZS 480,000
Promotion 660,000
Property taxes 240,000
Insurance 360,000
Utilities 300,000
Depreciation 600,000
Total TZS 2,640,000
f. Income tax payments are made by Marambau in the first month of each quarter
based on the income for the prior quarter. Marambau’s income tax rate is 40%.
Marambau’s net income for the first quarter is projected to be TZS 612,000
g. Equipment and warehouse facilities are being acquired to support the company’s
rapidly growing sales. Purchases of equipment facilities are budgeted at TZS 28,000
for April and TZS 324,000 for May.
h. Marambau has a corporate policy for maintaining and end-month cash balance of
TZS 100,000. Cash is borrowed or invested monthly as needed, to maintain this
balance. Interest expense on borrowed funds is budgeted at TZS 8,000 for the
second quarter, all of which will be paid during June.
i. Marambau uses a calendar year reporting period.

Required
1. Prepare a cash budget for Marambau Corporation by month and in total for the
second quarter. Be sure that all receipt, disbursement and borrowing/investing
amounts are shown for each month. Ignore any interest income associated amount
invested.
2. Discuss why cash budgeting is particularly important for rapidly expanding
company such as Marambau Corporation.