PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

Review Questions on Budgeting

Question 04
Plan Co ltd is preparing its budget for the year ending 31December , year 10
The following information has been collected to facilitate the budgeting exercise

Sales
The company manufactures and sells two products Product A and Product B. During the
forthcoming budget period the company expects the demand for Product A to be 10,000units and
the demand for product B to be 7,500units

The unit selling prices for Product A and B are shs 600 and sh 700 respectively
Production
Material requirements per unit of output

Product Material X Material Y Material Z

Kg litres Units
A 3 1.5 -
B 5 3 2

Cost 24 per kg 16 per litre 20 per unit

Labor hrs requirement per unit of output

Product A Department 1 Department 2
Unskilled labor 4 2
Semi skilled labor 1 1

Product B
Unskilled labor 5 3
Semiskilled labor 1 2

Labor rate per hour

Unskilled labor 20/=
Semiskilled labor 30/=

Production overhead
Variable production overhead are absorbed at the following rates
Department 1 10/= per Direct labor hour
Department 2 8/= per Direct labor hour

Fixed production overheads are absorbed at a rate of 5/= per direct labor hour

Other overheads all fixed amount to sh 1,200,000p.a

Beginning and Ending inventories

Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T),
& Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc(Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 / 769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 1
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

The following inventory levels are expected

Anticipated Target
Beginning inventories Ending inventories
Materials
X 1000 1200
Y 500 500
Z 2000 1100

Work in progress

Both beginning and ending inventories 100% complete for materials 50% converted
Product A 0 0
Product B 1200 500

Finished goods
Product A 100 450
Product B 1,200 500

You are required to prepare an operating budget with supporting schedules for the period ending
31 December Year 10

Question 05 (Man Power Planning)

Suppose in addition to the details in the preceding question 4 we had the following additional
information. We could prepare manpower budget for unskilled labor

Labor efficiency 95%

Absentee rate 7.5%
Number of working weeks per year 46
Number of working days per week 5
Number of working hours per day 8
Planned overtime
Department 1 0
Department 2 1,120 hours

Required:
Prepare man power budget for unskilled labour.

Question 06 (Cash Budgeting)

Tanzania glass company is preparing its cash budget for the first quarter of year . The use of the
company’s main manufacturing equipment is characterized by frequent stoppages to let it cool
down to operating temperatures a remainder that the equipment is due for replacement the resulting
slow pace of production has led to the incurrence of previously unplanned overtime costs and other
overheads

The following information has been collected to facilitate the budgeting exercise
Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T),
& Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc(Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 / 769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 2
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

Sales (actual or estimated) over the last quarter of year 4 and the first quarter of year 5 are as shown
below
October year 4 150,000(actual)
November year 4 145,000(actual)
December year 4 145,000(estimated)
January year 5 130,000(estimated)
February year 5 175,000(estimated)
March year 5 250,000(estimated)
The company plans to buy and install a new machine in January year 5 this will cost shs 604,500
all of which will be paid in January

Wages which are paid in the month in which they are incurred are expected to fall from the shs
40,000 december year 4 level to shs 30,000 in January and to shs 20,000 in subsequent months

Purchases of materials in each month amount to 30% of that months planned sales value, suppliers
for materials allow 1 month’s credit and the company fully avails itself of this credit facility
Fixed overhead have been at shs 70,000 (including 20,000 for depreciation). Except for the
monthly depreciation charge which is expected to increase by shs 5000 in january, following the
installation of the new machine this is the level anticipated for the foreseeable future
50% of the sales of each month result in cash being collected in the month of sale , 30% of sales
lead to cash being collected in the month following the month of sale and the remaining balance
is collected in the second month after the month of sale
There are no bad debts and discounts allowed
The cash balance as at 30 November year 4 is shs 5000

Required:
(a) Prepare a cash budget for the first quarter of year 5
(b) If the company plans to meet any cash deficit by obtaining an overdraft and it is expected that
the march year 5 level of activity is going to be maintained for the foreseeable future in what
month will the company be able to complete repayment of the overdraft (Ignore taxation and
interest payments)

Question 11 (Flexible Budgeting)

A company’s master budget tailored to a level of 1,000 units is shown below

Volume of activity 1000units

Shs ‘000
Sales 70,000
Direct materials (15,000)
Direct labor (10,000)
Variable production overhead (2,500)
Fixed production overhead (5,000)
Fixed marketing cost (12,550)
Fixed administrative cost (13,000)

Operating profit 11,950

Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T),
& Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc(Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 / 769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 3
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

The actual results for the period covered by the budget were as follows

Volume of activity 1,200units

Shs ‘000
Sales 70,000
Direct materials (19,200)
Direct labor (11,400)
Variable production overhead (3,120)
Fixed production overhead (4,500)
Fixed marketing cost (12,000)
Fixed administrative cost (14,000)

Operating profit 5,780

Prepare an operating statement showing the variances that arose during the period

Question 12
The budgeted and actual results of Macheni Company Limited for the month of June 2015 were
as follows:-
The company uses a marginal costing system. There was no opening or closing stocks.

Fixed Budget Actual Difference

Sales and production 1000 units 700 units
Shs. Shs. Shs Shs. Shs.
.
Sales 20,000 14,200 5,800(A)
Variable cost of sales
Direct materials 8,000 5,200 2,800(F)
Direct labour 4,000 3,100 900(F)
Variable overhead 2,000 14,000 1,500 9,800 4,200(F)
Contribution 6,000 4,400 1,600(A)
Fixed costs 5,000 5,400 400(A)
Profit 1,000 (1,000) 2,000(A)

Prepare an operating statement showing and explaining the variances that arose during the period.

Question 14 NBAA Adapted

ADI Nursery School has a total of 150students in 5 classes with 30 students per class. The school
plans for a picnic during the weekend to places such as Dar zoo, Kunduchi Wet and Wild,
Bagamoyo Historical Sites etc. A private transport operator has come forward to lease out busses
for taking the students. Each bus will have a maximum capacity of 50 (excluding 2 seats reserved
for teachers accompanying students). The school will employ two teachers for each bus paying
them allowances of Tsh 5,000per teacher. It will also lease out the required number of busses. The
following are other costs estimates
Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T),
& Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc(Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 / 769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 4
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

Variable Cost Cost per students Tshs

Breakfast 500
Lunch 1000
Tea 300
Entrance fee at zoo 200
Fixed and Semi Variable
Cost Tshs
Rental 65,000 per bus
Special permit fee 5,000 per bus
Block entrance fee at the site 25,000
Prizes to students for games 25,000

No other costs incurred in respect of accompanying teachers.

Required
(a) Prepare flexible budget estimating the total costs for 30, 60 and 150 students (each item of costs
should be indicated separately. (13.5 marks)
(b) What will your conclusion regarding the break even level of students if the school proposes to collect
Tsh 4,500 per students (6.5 marks)

Question 17 (Uncertainties in Budgeting)

XYZ ltd manufactures a single product, Apple and it is in the process of preparing its operating
budget for the year ending 31st December 2005. However XYZ is not sure about how many apples
it can sell during the budget period. It has however gathered some information as to the likely
events under three different conditions and noted that if conditions are favorable as many as 2,000
apples will be sold. On the other hand the company is worried that demand may be as low as 1,200
units. However the most likely demand level will be 1,700 apples

The following data have been collected

• Selling price per apple is shs 150
• Variable cost of manufacturing per apple
Direct materials 40
Direct labor 30
Variable overhead 30
Total 100
• Other variable overhead comprise of selling and distribution costs of sh 10 per apple
• Fixed costs for the year are expected to be
Production cost 10,000
Administrative costs 35,000
Selling & Distribution costs 7,000

Required:

Prepare a three-level operating budget for the year ending 31st December 2005
Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T),
& Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc(Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 / 769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 5
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

Question18
Al Hamza Ltd is a company that prepares its budget by considering the worst possible and best
possible values for key parameters

The following data have been collected in relation of the next budget period
Demand (units)
High 15,000
Low 10,000
Selling price per unit shs 250
Variable costs per unit
High 100
Low 75
Fixed costs
High 250,000
Low 175,000
Required: Prepare a two-level budget (ie Worst outcome and Best outcome budget)

Question 19 (Probabilistic Budget)

Suppose the company made the following estimates of profitability for a given budget under
consideration:
Profit/Loss Probabilty
Worst possible outcome Shs. (220,000) 0.3
Most likely outcome 300,000 0.6
Best possible outcome 770,000 0.1
Required: Calculate the expected value (EV) of profit.

Question 20
The accounting of MB ltd is preparing documents for a forthcoming meeting of the budget
committee. Currently selling price per unit is Shs 50, variable cost per unit is shs 20 and total fixed
costs are Shs 1,000,000 per annum
The company uses a historical cost accounting system. There is concern that the level of costs may
rise during the ensuing year and the chairman of the budget committee has expressed interest in a
probabilistic approach to an investigation of the effect that this will have on historical cost profits.
The accountant is attempting to prepare documents in a way which will be most helpful to the
committee members. He has obtained the following estimates from his colleagues
Average inflation Rate over ensuring year Probability
Pessimistic 10% 0.4
Most likely 5% 0.5
Optimistic 1% 0.1
1.0
Demand in units Probability
Pessimistic 25,000 0.3
Most likely 37,000 0.6
Optimistic 50,000 0.1
1.0
Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T),
& Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc(Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 / 769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 6
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

It is considered that the company can adjust its selling prices in line with the inflation rate without
affecting customer demand

Some of the company’s fixed costs are contractually fixed and some are apportionments of past
costs of the total fixed cost, an estimated 85% will remain constant irrespective of the inflation
rate

You are required to

(i) Analyse the foregoing information in a way which you consider will assist management with
its budgeting problem
(ii) Calculate
(a) The probability of at least breaking even
(b) The probability of achieving a profit of at least shs 500,000

Question – 15 (NBAA Adapted)

Rise Talk Company Ltd manufactures standards and specialized video conferring equipment.
Production of specialized units is generally performed under contract while standards units are
produced in accordance with marketing projections. Maintenance of customer equipment is an
essential service provided by Rise Talk, and accounts for a significant portion of revenue, Recent
economic conditions have caused a decline in Rice Talk’s business. Below is rising Talk’s
Statement of Income for the fiscal just ended.

Rise Talk Ltd

Statement of Income (Tshs in million)
For the Year Ended June 30th June 2010
Tshs
Equipment Sales 6,000
Revenue from maintenance 1,800
Total sales 7,800
Cost of sale 4,600
Customer maintenance expense 1,000
Selling Expenses 600
Administration Expense 900
Interest Expenses 150
Total Expense 7,250
Profit before Taxes 550
Corporate Tax 220
Profit after Taxes 330

Rises Talk’s return on sales before interest and taxes was 9% for the year just ended, while the
industry average was 12%. The company’s total assets turnover was three (3) times and its return
on average assets before interest and taxes was 27%both well before industry average. To improve
performance and raise these ratios nearer to or above industry average, the director General of the
company has established the following goals for the coming year.

Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T),
& Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc(Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 / 769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 7
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

• 11% return on sales before interest and taxes.

• 4times total asset turnover
• 35% return on total assets before interest and taxes.

To achieve these goals, Rise Talk’s Management team took into consideration to growing
international video-conferencing market and proposed the following actions for the coming year.
• Increase sales prices for equipment by 10%
• Increase selling expenses by Tshs 250,000,000 but hold administration expenses to the same
level as the year just ended.
• Increase the cost of each unit sold by 3% for the needed technology and quality improvement.

It is expected that these actions will increase equipment unit sales by 6% with a corresponding 6%
growth in maintenance contracts.

REQUIRED:
Increase maintenance inventory by Tshs 250,000,000 at the beginning of the year and add two
maintenance technicians at a total cost of Tshs 130,000,000 to improve customer service and
response. The increase inventory will be financed by a loan at an annual interest of 12% no other
borrowing or reductions is contemplated during the coming year. All other assets will be held to
the same level as the year ended.
(a) Prepare a Pro Forma Statement of Income for Rise Talk for the fiscal year ending June 30th
2011 on the assumption that the proposed actions are complemented as planned and that
the increased sales objectives will be met. (Assume a 40% effective tax rate)
(b) Determine if the Director General goals will be achieved by calculating the following
ratios for the year ending June 30th 2011.
(i) Return on sales before interest and taxes
(ii) Total assets turnover (use year-end total assets)
(iii) Return on total assets before interest and taxes (6 marks)

(c) Discuss the limitations and difficulties that can be encountered in using ration analysis
particularly when making comparison to industry averages

Question 21 (Activity Based Budgeting)

JPCL manufactures three standard products which it sells to several large wholesale chains.
Production (which is highly automated) occurs in large batches, and goods are shipped to
customers in slightly smaller batches. Details of a typical month’s output are as follows

Product A B C Total
Units of product 100,000 200,000 450,000 750,000
Production machine hours PMH per unit of output 0.3 0.2 0.4
Production batch size units 2500 4000 7500
Shipment batch size units 2000 2000 5000
Two types of indirect labour are employed, namely, 4 quality control inspectors (at a cost of €4,000
each per month) and 9 administrators (at a monthly cost of €3,500 each). Each employee works a
standard 180 hours per month. The role of the quality control staff is to inspect a sample from each
Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T),
& Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc(Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 / 769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 8
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

batch of output produced; this takes a standard 3 hours inspection time per batch produced. The
administrators perform two tasks, namely, shipment processing work (which takes 2 hours per
batch shipped) and monitoring of production (at the rate of one hour of administrator time for
every 600 units of output). In addition to the production machinery (which has a capacity of
225,000 production machine hours [PMH] per month) there are two additional types of specialized
machinery which perform automated production setup and automated shipment loading
procedures. Details of these two machines are:
Production setup machinery Shipment loading machinery
Monthly capacity 650hours 400hours
Usage rate 4 hours per batch produced 1.5 hours per batch shipped

Required:
Determine the operational phase of the Activity Based Budgeting (ABB) and provide necessary
comments

Question 29 (NBAA Adapted)

In a move towards improving customer service level, Government Central Pharmacy (GCP)
requested her esteemed customers to submit annual projected demand during several stake holder’s
meeting which were in Moshi, Mwanza and Mbeya during the current financial year.

The submitted figures turned to be very unrealistic as the forecast values could not match with the
funds allocated to the respective health facilities. Most were above 200% of their budgets.

To get a turnaround from the scenarios, the Management of GCP in March 2011; endorsed
implementation of the Budget Ordering (BBO) system to capture data that are based on the
2010/11 budget allocation, from the government.
BBO is the establishment of annual demand based on medicine prioritization criteria and matched
with the expected funds allocation for the Health Facility from the government. Facility will later
on use the information to place their order with GCP.

For the data collection exercise to succeed, a team was formed and asked to complete exercise by
June 2011 to enable summarization and uploading into the computer system ready for tendering
by August 201.

Data collection
The exercise is expected to cover 163 customers from both Government and private hospitals. The
implementation plan is expected to be as follows:
1. April – May 2011 data collection in the fields
2. June 2011 – Data Summarized and uploading

The data collection has been categorized in 3 groups each with a team of three officers and one
driver.
(i) Group 1 for 49 customers failing within 2 GCP zones of Tabora and Mwanza and 34
Administrative, District. 57 days are expected to suffice to support the capturing of data
within the zone. The group will travel 3,000 kilometer.

Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T),
& Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc(Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 / 769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 9
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

(i) Group 2, will cover 57 customers also are falling in 3 GCP zones of Dodoma, Kilimanjaro
and Tanga. The customers are also failing in34 Administrative Districts. Visits within this
zone expect to be accomplished after 61 days traveling 2,500 kilometers.

(iii) Group 3, this group comprises 45 customers who are failing within 50 Administrative
District and 3 GCP zones of Iringa, Mbeya and Monduli. Visits within the group are
anticipated to be accomplished within 47 days, traveling 2,220 kilometers.
The following resources are expected to be utilized in order to facilitate the implementation
of the exercise:
• 3 vehicles – existing Land Cruisers with engine capacity of 6 kilometers per litre each.
• 3 laptops for data inputting on site each costing Tshs 2 million
• 20 man days to upload the data in the system each man day cost Tshs 100,000
• General overheads for the whole exercise are limited to be 5% of total costs of total
subsistence allowances.

Additional Information
• Daily subsistence allowances rate is Tshs 100,000 and Tshs 50,000 for officers and drivers
respectively.
• Price of fuel is Tshs 1,400 per litre

REQUIRED:
(a) Prepare a comprehensive budget for the project for management deliberation and approval.
(b) Give your answer comments on the methodology adopted to collect demand forecast.

Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T),
& Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc(Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 / 769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 10