Accounting Grade 12Budgeting Questions and Answers | Accounting Grade 12

Budgeting Questions and Answers | Accounting Grade 12

Budgeting Questions and Answers | Accounting Grade 12

QUESTIONS

ACTIVITY 1:

The information provided below relates to Brakpan Stationers.

REQUIRED:
1.1 Explain the importance of comparing budgeted figures with actual figures achieved for the same period. (2)
1.2 Calculate the missing amounts (indicated by a, b and c) in the Debtors’ Collection Schedule for the budgeted period March to May 2015. (4)
1.3 Calculate the following budgeted figures:
1.3.1 Total sales for March 2015. (2)
1.3.2 Payments to creditors during May 2015. (4)
1.3.3 Salaries of the shop assistants for April 2015. (3)
1.3.4 The % increase in the salary of the manager expected in May 2015. (3)
1.3.5 Amount of the additional loan expected to be acquired on 1 April 2015. (3)
1.4 An official of the local municipality has offered to recommend Brakpan Stationers supply the municipality with stationery to the value of R500 000.
However, he will only do this if he receives a cash payment of R20 000 from the owner.
What advice would you offer? State TWO points. (4)
1.5 The owner’s wife is angry that he has not been adhering to the cash budget. The owner says that he deliberately did not keep to the budget because he wanted to improve the overall results of the business.

  • Identify THREE over-payments in April. Provide the figures to support your answer.
    Provide a valid reason for each over-payment to support the owner’s decisions. (6)
  • Explain how the difference of opinion with his wife can be avoided in future. (2)
  • State TWO other strategies that the owner and his wife could consider in future to improve the results of the business. (2)

INFORMATION

  1. Sales and debtors’ collection:
    • TOTAL sales for April 2015 and May 2015 have been estimated as follows:
      April 201570 000
      May 201578 750
    • 80% of all sales are cash sales. The rest of the sales are on credit.
    • Debtors are expected to pay as follows:
      • 60% within the month of sale, subject to a 4% discount.
      • 38% in the month following the month of sale.
      • 2% of debts are written off in the second month following the month of sale.
    • Debtors’ collection schedule:
      CREDIT SALES R MARCH  R APRIL  R MAY R
      February31 50011 970
      March10 500 a3 990
      April14 0008 064b
      Mayc
      18 01812 054
  2. Purchase of merchandise and payments to creditors:
    • A fixed-stock base is kept, i.e. the stock sold is replaced at the end of that month.
    • The business uses a mark-up of 75% on cost.
    • 70% of all merchandise is purchased on credit.
    • Creditors are paid in full in the month following the month of purchase.
  3. Salaries:
    Shop assistants

    • The business has 12 shop assistants who are employed on equal pay in March 2015.
      Nine of the shop assistants are entitled to a bonus equal to 80% of the monthly salary in April 2015.
    • All shop assistants will receive a general increase in May 2015.
  4. Loan:
    An additional loan will be taken from Atlantic Bank on 1 April 2015. The interest rate is 14% p.a.
  5. Extract from the Cash Budget for the three months ending 31 May 2015:
RECEIPTSMARCHAPRIL MAY
BudgetedBudgetedActualBudgeted
 Cash sale of stock 42 000 56 000 59 200 63 000
 Collections from debtors 18 018 12 054 12 800 ?
 Rent income 5 600 6 160  6 160 6 160
 Additional loan acquired 0 ? ? 0
 PAYMENTS
 Cash purchase of stock 9 000 12 000 28 000 13 500
Payment to creditors58 50021 00021 000?
Salaries of shop assistants102 000??110 160
Salary of manager16 00016 00040 00019 200
Interest on loan (14% p.a.)6 3007 1757 1757 175
Delivery expenses to customers9 2009 20009 200
Insurance (paid annually)027 00027 000
Advertising00020 000
Purchase of vehicle00180 0000
Vehicle expenses004 0004 000
Sundry expenses5 3005 3005 3005 800

ACTIVITY 2:

You are provided with a partially completed Projected Income Statement for Dawn Distributors for the period 1 October 2015 to 31 December 2015. It was prepared by the bookkeeper.

REQUIRED:
2.1 List TWO items on the Projected Income Statement,that would not appear on a Cash Budget. (2)
2.2 Fill in the missing amounts denoted by A to E on the Projected Income Statement. (16)

2.3 Take the following additional information into account and calculate the following:

2.3.1 The percentage increase in the wages of cleaners in December 2015. (4)
2.3.2 The monthly salary due to the sales manager in December 2015. (4)
2.3.3 Total credit sales expected in December 2015. (3)
2.3.4 The balance of the loan on 1 November 2015. (3)

INFORMATION:

  1. The business uses a mark-up percentage of 60% on cost.
  2. Credit sales comprise 75% of total sales.
    Sales are expected to increase by 10% per month and by 20% during December.
  3. The business employs a sales manager and an administration manager. The sales manager earns R300 more than the administration manager (per month). The managers are entitled to an increase of 8% p.a. from 1 December 2015.
  4. R20 000 of the loan is repayable on 30 November 2015. Interest on loan at 9% p.a. is payable every quarter. The next payment is due on 1 January 2016.
  5. Advertising expense per month is budgeted at a fixed percentage of total sales.
  6. Income tax is estimated to be 30% of the net profit before tax.

G. INFORMATION FROM THE PROJECTED INCOME STATEMENT FOR OCTOBER TO DECEMBER 2015.

OCTOBERNOVEMBERDECEMBER
BUDGETEDACTUALBUDGETEDBUDGETED
Sales120 00098 400132 000?
Cost of sales75 00058 800B99 000
Gross profitA??
Other income20 70018 20020 70021 200
Rent income10 00010 00010 00010 000
Discount received1 2001 0001 2001 200
Commission income9 5007 2009 50010 000
Gross operating income
Operating expenses48 300??
Salaries (managers)17 10017 10017 100D
Wages (cleaners)3 2003 2003 2003 376
Maintenance4 0001 6504 0004 000
Telephone2 0004 2802 0002 500
Insurance1 8001 8001 8001 800
Advertising2 4001 900C3 168
Depreciation6 2008 0006 2008 000
Trading stock deficit06800500
Stationery3 1503 1003 2003 250
Sundry operating expenses8 4508 4208 5008 550
Operating profit17 400??
Interest income225200200200
Profit before interest expense17 625
Interest expense585585585435
Net profit before income tax???
Income tax???
Net profit after taxE??

ACTIVITY 3:

Below is information relating to DIY Hardware. The business is owned by John Temba. His inexperienced bookkeeper, Mabel, has prepared a Cash Budget.

REQUIRED:
3.1 Identify TWO items that Mabel has incorrectly entered in the Cash Budget. (4)
3.2 Apart from the items mentioned above, name TWO other items in the Payments Section of the Cash Budget that would NOT appear in a Projected Income Statement. (4)
3.3 After correcting all the errors John has identified the following:

JAN 2013FEB 2013
Cash deficit for the month(14 950)(52 400)
Cash at the beginning of the month35 350
Cash at the end of the monthAB

Identify or calculate A and B. Indicate negative figures in brackets. (3)
3.4 Identify or calculate the missing figures C and D in the extract from the Cash Budget. (7)
3.5 Complete the Debtors’ Collection Schedule for February 2013. (10)
3.6 Calculate the percentage increase in salary and wages from 1 February 2013. (2)
3.7 Calculate the interest on the fixed deposit for January 2013. (2)
3.8 John pays Speedy Deliveries to deliver hardware to his customers free of charge. He budgets for this at a rate of 8% of total monthly sales.
3.8.1 Calculate the delivery expense figure budgeted for January 2013. (2)
3.8.2 John is of the opinion that the delivery service is costing him too much.
Which TWO points should John consider before deciding on whether or not to discontinue this service? (4)
3.9 On 31 January 2013 you identified the figures below. Explain what you would say to John about each of the following items at the end of January 2013. Give ONE point of advice in each case. (9)

JANUARY 2013
BUDGETEDACTUAL
Advertising1 6000
Stationery1 0004 400
Staff training2 000700

3.10 John will have a problem with replacing his old computers and cash registers in March 2013. The cost of these items amounts to R150 000 and he expects them to last 5 years. However, he does not have cash available to pay for this. His options are:

  • Raise a new loan at an interest rate of 14% p.a. to be repaid over 36 months.
  • Hire (Lease) the assets from IT Connect Ltd at R5 100 per month.
  • Invite his friend James to become an equal partner in the business and provide capital of R150 000.
    John realizes that all three options have the advantage of not requiring the R150 000 outlay in March 2013.

Consider each of these options and explain ONE other advantage and ONE disadvantage of each option. Provide figures to support your answer. (6)

INFORMATION:

  1. Sales, purchase of stock and cost of sales:
    • Total sales for November 2012 to February 2013 were as follows:
      • November: R150 000
      • December: R200 000
      • January: R160 000
      • February: R140 000
    • 60% of all sales are cash sales; the rest is credit sales.
    • The mark-up is 33.3% on cost of sales at all times.
    • Stock is replaced on a monthly basis.
    • 50% of all purchases are cash, the rest is on credit.
  2. Debtors’ collection:
    Debtors are expected to pay as follows:

    • 30% of debtors pay their accounts in the month of sale (current).
    • 50% pay in the month following the sales transaction month (30 days).
    • 8% pay in the second month (60 days).
    • 2% are written off.
  3. Creditors’ payment:
    Creditors are paid in the month after purchases, so as to receive a 5% discount.
  4. EXTRACT FROM THE CASH BUDGET FOR JANUARY AND FEBRUARY 2013
    JAN 2013FEB 2013
    RECEIPTS
    Cash sales96 00084 000
    Collection from debtors70 000?
    Interest on fixed deposit (7% p.a.)?0
    Fixed deposit: Magic Bank maturing on 1 Feb. 2013042 000
    Commission income??
    Rent income8 5008 800
    PAYMENTS
    Salary and wages15 00016 800
    Stationery1 0001 000
    Telephone??
    Payment to creditors71 250D
    Cash purchase of stockC52 500
    Repayment of existing loan100 000
    Furniture bought on credit30 000
    Delivery expense for delivery of hardware to customers?11 200
    Training of staff2 0002 000
    Advertising1 6001 400
    Depreciation12 50012 500
    Sundry expenses3 5003 600
    Drawings by owner??
    Vehicle expenses0500

ACTIVITY 4: (40 marks; 25 minutes)

4.1 Explain why:
4.1.1 Depreciation and bad debts will not appear in a Cash Budget. (2)
4.1.2 A cash budget is different from a Projected Income Statement. (2)

4.2 KIT KAT DISTRIBUTORS LTD
You are provided with information for the budget period November and December 2018.

REQUIRED:
4.2.1 Complete the Debtors’ Collection Schedule. (12)
4.2.2 Calculate the missing amounts in the Cash Budget denoted by (i) to (iv). (20)
4.2.3 Comment on the internal controls on collection from debtors and payment to creditors. Provide TWO points. (4)

INFORMATION:
A. Cash sales amount to 40% of total sales.
Goods are marked-up by 25% on cost.
B. Debtors are granted credit terms of 30 days. The actual collection trend revealed that:

  • 50% of debtors pay in the month of the sale to receive a 5% discount.
  • 30% is received in the month following the month of sales.
  • 18% is collected in the second month after the sale.
  • 2% of debtors is written off.

C. Stock is replaced in the month it was sold, i.e. a base stock is maintained.
D. 80% of stock is bought on credit. Creditors are paid in full in the month following the month the purchase was made.
E. Salaries and wages are expected to remain the same for the budget period. Staff members on leave in December will receive their pay in November – the total amount is R35 600.
F. A loan will be received from a director, Thabo, on 1 November 2018, at 13% interest p.a. Interest is not capitalised. A fixed monthly instalment and interest will be paid at the end of each month.
G. The company will pay an interim dividend in December. H Rent increased by 8% on 1 November 2018.
I. Incomplete Debtors’ Collection Schedule:

MONTHCREDIT SALESNOVEMBERDECEMBER
September180 00032 400*
October186 00055 800*
November*92 625*
December210 000*
TOTAL**

J. Information from the Projected Income Statement:

NOVEMBER 2018
Sales325 000
Cost of sales260 000
Commission income24 800
Depreciation12 600
Interest expense1 625

K Incomplete Cash Budget for 2018:

RECEIPTSNOVEMBERDECEMBER
Cash sales130 000(i)
Cash from debtors
Commission income24 80026 000
Rent income(ii)19 710
Loan from director Thabo150 0000
TOTAL RECEIPTS
PAYMENTS
Cash purchases of stock52 00056 000
Payments to creditors(iii)208 000
Directors fees20 00020 000
Salaries and wages180 600(iv)
Loan instalment (including interest)13 625(v)
Interim dividends086 500
Sundry expenses15 87516 510
TOTAL PAYMENTS

ANSWERS

ACTIVITY 1: BRAKPAN STATIONERS

1.1 Explain the importance of comparing budgeted figures with actual figures achieved for the same period.
One valid explanation

  • Deviations can be determined and remedial measures can be put in place.
  • Establish whether the budgeting was realistic.
  • To identify trends of mismanagement of cash. (2)

1.2 Calculate the missing amounts (indicated by a, b and c) in the Debtors’ Collection Schedule for the budgeted period March to May 2015 (4)

a6 048
b5 320
c15 750

1.3.1 Calculate budgeted total sales for March 2015. (2)

  • 10 500 x 100/20 = 52 500

1.3.2 Calculate the amount budgeted for payments to creditors during May 2015. (4)

  •        40 000
    70 000 x 100/175 x 70% = 28 000 any one part correct
    or
    12 000/30 x 70 = 28 000

1.3.3 Calculate the budgeted salaries of the shop assistants for April 2015. (3)

  • 102 000/12 = 8 500 8 500 x 3 = 25 500
    15 300 x 9 = 137 700
    25 500 + 137 700 = 163 200 any one part correct
    OR: 102 000 one mark + 61 200 one mark = 163 200
    (102 000 X 80% X 9/12)

1.3.4 Calculate the % increase in the salary of the manager expected in May 2015. (3)

  • 3 200 (1 mark)
    (19 200 – 16 000) /16 000 = 20% any one part correct

1.3.5 Calculate the amount of the additional loan expected to be acquired on 1 April 2015. (3)

  • 875 x (100 x12) /14 = 75 000 any one part correct

1.4 An official of the local municipality has offered to recommend that Brakpan Stationers supply the municipality with stationery to the value of R500 000. However, he will only do this if he is paid R20 000 in cash.
Give advice in this regard. State TWO points.
Any two suggestions (4)

  • This is actually a bribe, which is unethical.
  • If this information is made public, it will have a negative effect on the business.
  • The owner must submit a formal tender to secure a contract through the normal processes.

1.5 Identify THREE over-payments made in April. Provide figures to support your answer. Provide a valid reason for each over-payment to support the decision taken. (6)

Over-payment with figures
Item and figure
Valid reason
1The bonus paid to the manager in February 2015 (R24 000) was not taken into account.He has retained the services of a valuable employee.
2Purchase of vehicle (R180 000).The difference between  motor vehicle expenses and delivery expenses is R5 200 per month.
3Cash purchase of merchandise (R28 000) was significantly higher than the budgeted figure (R12 000).Possibly to take advantage of discounts on bulk purchases.

1.6 Explain how this difference of opinion with his wife can be avoided in future.

  • They should have a specific meeting to determine the budget jointly and the owner should consult his wife before spending on unbudgeted items.

State TWO other strategies that the owner and his wife could consider in future to improve the results of the business.
Any two valid points:

  • Advertise monthly. / Reduce the number of shop assistants.
  • Reinstate deliveries to customers. / Negotiate longer credit terms with suppliers.

ACTIVITY 2 : DAWN DISTRIBUTORS

2.1 Identify TWO items that Mabel has incorrectly entered in the Cash Budget.
Any TWO

  • Cost of sales / Discount received / Depreciation / Trading stock deficit

2.2

AGross profit120 000 – 75 000 = 45 000
BCost of sales132 000 x 100/160 = 82 500
Or
132 000 x 62,5% or 132 000 – (132 000 x 37,5%)
CAdvertising2 400/120 000 = 2%
132 000 x 2% = 2 640
DSalaries17 100 x 108% = 18 468
Or
17 100 + 1 368 = 18 468
ENet Profit after tax17 040
(17 625 – 585) x 30% = 5 112
17 040 – 5 112 = 11 928

2.3.1 The percentage increase in wages that the cleaners will receive in December 2015.

  •          176
    (3 376 – 3 200) x 100 = 5,5% (one part correct)
    3 200

2.3.2 The monthly salary due to the Sales Manager in December 2015.

  • (17 100 – 300) = 8 400 (8 400 + 300) x 108% = 9 396 (one part correct)
    2

2.3.3 Total credit sales expected in December 2015.

  • (99 000 x 160% ) x 75% = 118 800 (one part correct)
    OR
    132 000 X 120% = 158 400 X 75% = 118 800

2.3.4 The balance of the loan on 1 November 2015.

  • 585 x 1200/9 = 78 000 (one part correct)

ACTIVITY 3: DIY HARDWARE

3.1 Identify TWO items that Mabel has incorrectly entered in the Cash Budget.
Two items

  • Depreciation
  • Furniture bought on credit

3.2 Apart from the items above, name TWO other items in the Payments Section of the Cash Budget that would NOT appear in a Projected Income Statement.
Any two items
Expected responses:

  • Payment to creditors / Repayment of loan / Purchase of vehicle / Drawings Cash purchases of stock

3.3 Identify or calculate A and B. Indicate negative figures in brackets.

AR35 350
B(R17 050)

3.4 Identify or calculate the missing figures C and D in the extract from the Cash Budget

C160 000    x 100/133⅓      = 120 000;  120 000 x 50%      = R60 000
D60 000    x 95%      = 57 000    any one part correct

3.5 Complete the Debtors’ Collection Schedule for February 2013.

Credit salesFebruary collections
DecemberR80 00014 400
JanuaryR64 00032 000
FebruaryR56 00016 800
TOTAL operation63 200

3.6 Calculate the % increase in salary and wages with effect from 1 February 2013.

  • 1 800 /15 000 x 100 = 12 %

3.7 Calculate interest on the fixed deposit for January 2013.

  • 42 000 x 7% / 12 = R245

3.8.1 Calculate delivery expenses for January 2013.

  • R160 000 x 8% = R12 800

3.8.2 John is of the opinion that the delivery service is costing him too much. Which TWO points should John consider before deciding whether or not to discontinue this service?
Two factors

  • Whether his competitors are offering the service or not.
  • What the reaction from his customers will be should he withdraw the service.
  • The possibility of charging customers for the delivery service.
  • The possibility of finding a cheaper delivery service.
  • The possibility of using his own vehicle instead of sub-contracting this service.

3.9 Explain what you would say to John about each item at the end of January 2013. Give ONE point of advice in each case.

CommentAdvice
AdvertisingAs he did not spend any money on Advertising, this will probably mean that he will not  achieve budgeted sales.Make sure that he utilises the advertising budget fully each month. (It is there for a purpose.)
StationeryHe spent significantly more than the budgeted figure.Ensure that there is no wastage of stationery. / Keep unused stationery secured. / Find a cheaper supplier.
Staff trainingHe under-spent on the budget, which means that staff might not be interacting well with customers.He must consider that staff training affects the manner in which staff interact with customers. This leads to efficiency and goodwill.

3.10 Consider each of the options below and explain ONE other advantage and ONE disadvantage related to each option.

Other AdvantageDiadvantage
Option 1: Raise a new loan to be repaid over 36 months. The interest rate is 14% p.a..He will own the assets and they could last longer  than five years if he takes good care of them.He has to pay interest of R1 750 per month + R4 167 per month to repay the loan.
Option 2: Hire (lease) the assets from IT Connect Ltd at R5 100 per month.He does not have to raise a loan. / He does not have to pay interest on the loan./ He will not have to pay repair costs.The lease charges are expensive, at R5 100 per month (R306 000 over the expected life span of five years.) / He never owns the assets and so continues to pay.
Option 3: Invite his friend James to become an equal partner in the business and to provide capital of R150 000.He will have the necessary funds to purchase the assets which will then belong to, the business / They will share the workload and their skills.He will have to share half his profits with his new partner.

ACTIVITY 4 :

4.1 Explain why:
4.1.1 Depreciation and bad debts will not appear in a Cash Budget.
Any valid explanation.

  • Non-cash items are not included in a cash budget.
  • A cash budget only includes cash receipts and cash payments.

4.1.2 A cash budget is different from a Projected Income Statement.
Any valid explanation.

  • A cash budget includes receipts and payments and shows plans for cash management. It shows the surplus/ deficit and the bank balance.
  • The PIS shows income and expenses (including non-cash items) and projects the profit or loss per month (for the budget period).

4.2 KIT KAT DISTRIBUTORS LTD
4.2.1

MONTHSCREDIT SALESNOVEMBERDECEMBER
September180 00032 400
October186 00055 80033 480
November195 00092 62558 500
December210 00099 750
Total collection from debtors180 825191 730

4.2.2 Calculate:

  1. Cash sales for December:
    210 000 X 40/60 = 140 000
  2. Rent income amount for November:
    19 710 x 100/108 = 18 250
  3. Payments to creditors for November:
    186 000 x 100/60 = 310 000
    310 000 x 100/125 = 248 000
    248 000 x 80%
    = 198 400
  4. Salaries and wages for December:
    180 600 – 35 600 – 35 600
    = 109 400
  5. Loan instalment (including interest) for December:
    138 000 
    (13 625 – 1 625) + (150 000 – 12 000) x 13% x 1/12
    12 000                                1 495 (three marks)
    = 13 495

4.2.3 Comment on the internal controls for collection from debtors and payments to creditors. Provide TWO points.
Any TWO valid points.

  • Only 50% of the debtors comply with the credit terms.
  • The cash from debtors does not cover the payments to creditors every month.
  • 80% of stock is bought on credit. / Only 20% is cash purchase of stock.
  • As cash sales is a greater percentage of total sales, it may be wise to increase the percentage of cash purchases.
  • Taking advantage of short-term credit is only beneficial if it eases cash-flow problems.

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Originally posted 2024-02-22 12:34:10.

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