Tag (SQ): Budgeting
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- 1 Marks
Identifies Mintzberg’s managerial role performed by Sophia in scheduling and budgeting.
Question
Sophia’s job includes scheduling employees’ working hours and comparing actual salary costs with the budget. Which of Mintzberg’s managerial roles is Sophia performing?
AÂ Â Resource allocator
BÂ Â Negotiator
CÂ Â Liaison
DÂ Â Monitor
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- Tags: Budgeting, Management Roles, Mintzberg, Resource Allocator, Scheduling
- Level: Level 1
- Topic: Management and leadership
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- 20 Marks
Explain types of standards, purposes of standard costing, its problems, and calculate sales, material, wage, and overhead variances for NORGA LIMITED.
Question
NORGA LIMITED
Required:
(a) Explain the following types of standards, stating one advantage and one disadvantage of each:
(i) Basic cost standard
(ii) Ideal standards
(iii) Currently attainable standard
(b) State five purposes of standard costing
(c) State seven problems of standard costing in a modern manufacturing environment
(d) From the information provided, calculate the following:
(i) Sales price and sales volume variances
(ii) The total material variance
(iii) The total wage variances
(iv) Total manufacturing overhead variances
(v) Reconciliation of budgeted profit to actual profit
Additional Information:
The following additional information was extracted from the management accounts:
| GH₵ | |
|---|---|
| Budgeted net profit for the period | 200,000 |
| Actual profit | 45,000 |
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- 20 Marks
Redraft budget statement for APP Limited, identify behavioural issues, and suggest steps to improve budgeting system.
Question
APP LIMITED
APP Limited is a well-established book publishing company founded in the early 1950s, following the success of books published by Adio. The company has recently been acquired by Contemporary Publishing Group (CPG) – a multinational company operating across all continents.
Mr. Goodluck of CPG International has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by APP.
During his visit to all departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the last budget statement for the Advanced Education Notebook Production Department (AENP) for period III was presented to him.
The budget statement presented was as shown below:
Budget statement for period III
Department: AENP Department
| ACTUAL RESULTS GH₵’000 | BUDGET GH₵’000 | VARIANCES GH₵’000 | |
|---|---|---|---|
| Units produced | 37,500 | 36,000 | |
| Labour hours | 106,050 | ||
| Sales | 2,325 | 2,232 | 93 (F) |
| Material cost | 756 | 720 | (36) (A) |
| Labour cost | 369 | 360 | (9) (A) |
| Variable overhead | 237 | 216 | (21) (A) |
| Fixed overhead | 177 | 168 | (9) (A) |
| Other overhead | 123 | 120 | (3) (A) |
| Administration cost | 150 | 144 | (6) (A) |
| Total cost | 1,812 | 1,728 | (84) (A) |
| Profit | 513 | 504 | 9 (F) |
Mr. N. Kevin
Head of Department
Subsequent interaction with Mr. Kevin – AENP Department Manager, revealed that the budget statement presented was based on 36,000 units with a standard labour content of 2.85 hours per unit.
Mr. Goodluck observed that Kevin was not enthusiastic about the budget system. He saw it as a pressure system imposed by the company to penalize some managers. He pointed out that the system was hurriedly introduced by Sano Consult about twelve months ago. The consultant never took time to provide explanations that could assist users to understand the system. The experienced AENP Manager was doubtful about the competence of the consultant. He was of the opinion that the system introduced in APP Limited was either a ready-made one developed for another company or that the consultant did not understand the system well enough to give him the needed confidence to educate the users. He concluded by stating that he was sure his department made a loss as against the positive figure recorded in the report and there was the possibility of reporting a loss at another period when profit was actually made. The situation reported above cuts across virtually all departments, and so the need to address the situation became very urgent.
The task of making the budgeting system more useful and acceptable in a biased environment like this, no doubt, seems difficult, but your advice to Mr. Goodluck will assist tremendously in resolving the issue.
Required:
(a) Redraft the budget statement in a more informative manner.
(b) State the behavioural problems brought out in this situation.
(c) State the steps you think Mr. Goodluck should take.
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- 10 Marks
Calculate total materials cost variance for Tamale Chemicals and analyze into price, usage, yield, and mix components for GreenLube production.
Question
Tamale Chemicals, based in Tamale, has the following standard cost for producing 9 litres of GreenLube:
- 5 litres of Material X at GH₵0.70 per litre
- 5 litres of Material Y at GH₵0.92 per litre.
There are no inventories of materials, and all material price variances relate to materials used. Actual results showed that 100,000 litres of materials were used during a particular period as follows:
- 45,000 litres of Material X: cost GH₵36,000
- 55,000 litres of Material Y: cost GH₵53,350
During the period, 92,070 litres of GreenLube were produced.
Required:
Calculate the total materials cost variance and analyse it into its price, usage, yield, and mix components.
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- 20 Marks
Prepare an operating statement for Tarkwa Industries using standard absorption costing for Product Z, showing specific variances.
Question
Tarkwa Industries uses a standard absorption costing system. Standard data per unit of Product Z is as follows:
| GH₵ per unit | GH₵ per unit | |
|---|---|---|
| Standard sales price | 6.00 | |
| Direct labour cost | 0.64 | |
| Direct material cost | 3.00 | |
| Variable production overheads | 0.16 | |
| 3.80 | ||
| Contribution | 2.20 | |
| Fixed overheads | 0.20 | |
| Profit | 2.00 |
The budgeted production and sales volume for Product Z was 12,000 units. Budget for 2,400 direct labour hours (12,000 units):
- 5 units to be produced per hour
- Standard labour cost is GH₵3.20 per hour
- Standard material cost is GH₵1.50 per kilogram and each unit requires 2 kilos
- Budgeted fixed overheads GH₵2,400
- Budgeted variable overhead cost per direct labour hour = GH₵0.80.
Actual results for the same period:
- 11,500 units were manufactured
- 2,320 direct labour hours were worked, and cost GH₵7,540
- 25,000 kilos of direct material were purchased (and used) at a cost of GH₵1.48 per kilogram.
Other information:
- Inventory is valued at standard cost of production.
- Actual variable overheads were GH₵1,750
- Actual fixed overheads were GH₵2,462
- 10,000 units were sold for GH₵62,600.
Required:
Prepare operating statements for the period using:
(a) standard absorption costing.
To prepare the absorption costing operating statement, you should show the variable overhead expenditure and efficiency variances, and the fixed overhead expenditure and volume variances.
(b) standard marginal costing.
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- 15 Marks
Prepare a budgeted profit or loss statement for Kofi Limited for Q1, focusing on sales, inventory, and expenses.
Question
Kofi Limited retails fertilizer to farmers in Ghana. The company has approached its Bankers to provide funding for next year’s operations and a three-month master budget has been requested for review by the bankers.
You have been approached by the management as a consultant to prepare the 1st quarter budget for the banker’s consideration for its next year’s operations.
End of Accounting year December 20X9
| GH¢ | |
|---|---|
| Debtors | 23,000 |
| Bank balance | 55,000 |
| Non-current asset at cost | 698,000 |
| Provision for depreciation balance | 98,000 |
| Creditors Balance | 48,000 |
| Operating expenses for the month December | 60,000 |
| Sales for the month of December 20X9 | 400,000 |
| December Ending inventory | 20,000 |
| Retained earnings | 120,000 |
The following additional information was also provided to assist your work:
(i) Depreciation is provided at the rate of 5% on cost of non-current assets.
(ii) Closing inventory is expected to increase by GH¢2,000 in January from December levels. This is expected to increase by the same figure in February from the projected figure in January. It is expected that in March closing inventory is desired to be GH¢26,000.
(iii) The company makes a profit of 25% on its sales.
(iv) Operating expenses are expected to increase by 10% from that of December, and this is projected to increase at the same growth rate to March.
(v) Sales are projected to grow by 15% from December until March.
(vi) The Debtors figure is desired to be proportional to the sales values.
(vii) Creditors value for the three months are expected to be as follows: January – GH¢50,000; February – GH¢46,000; and in March – GH¢52,000.
You are required as a consultant for Kofi Company Limited to prepare for their Bankers:
(a) The budgeted statement of profit or loss for the three months.
(b) The budgeted statement of financial position for the three months.
(c) The cash budget for the three months.
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- 15 Marks
Prepare a budgeted profit or loss statement for a medical practice near Mount Adaklu based on patient mix, treatment charges, and costs.
Question
A private medical practice based near Mount Adaklu has five full-time doctors, five full-time assistants, and two administrators.
Each doctor treats 18 patients each day on average. The medical centre is open for five days each week, 46 weeks each year.
Charges for patients vary according to the age of the patient and the nature of the treatment provided.
Charges
| Adults below 65 years of age | Children and individuals aged 65 years and over | |
|---|---|---|
| No treatment: consultation only | GH¢50 | GH¢30 |
| Minor treatment | GH¢200 | GH¢120 |
| Major treatment | GH¢600 | GH¢280 |
The patient mix and the treatment mix are as follows:
Patients:
- Adults: 45%
- Children: 25%
- Over 65 years old: 30%
Treatment:
- No treatment: 20%
- Minor treatment: 70%
- Major treatment: 10%
The salary of each doctor is GH¢240,000, assistants earn GH¢100,000, and administrators earn GH¢80,000. In addition, everyone receives a 5% bonus at the end of the year.
The medical practice expects to pay GH¢414,300 for materials next year and other (fixed) costs will be GH¢733,600.
Required:
Using the information provided, present a statement of profit or loss for the medical practice for next year. (Ignore the effects of inflation.)
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- 15 Marks
Prepare a budgeted profit or loss statement for Mampong Delivery Co. for Year 2, considering revenue, salaries, fuel, and operational costs.
Question
A company operating out of Mampong provides three types of delivery service to customers: service A, service B, and service C. Customers are a mix of firms with a contract for service with the company, and non-contract customers.
The following information relates to performance in the year to 31st December Year 1:
| Service A | Service B | Service C | |
|---|---|---|---|
| Number of deliveries made | 350,000 | 250,000 | 20,000 |
| % of deliveries to contract customers | 60% | 60% | 80% |
| Price charged per delivery: | |||
| Contract customers | GH¢9 | GH¢15 | GH¢300 |
| Premium for non-contract customers | +30% | +50% | +20% |
The premium for non-contract customers is in addition to the rate charged to contract customers.
All employees in the company were paid GH¢45,000 per year and sundry operating costs, excluding salaries and fuel costs, were GH¢4,000,000 for the year.
The following operational data for the year relates to deliveries:
| Services A and B | Service C | |
|---|---|---|
| Average kilometres per vehicle/day | 400 | 600 |
| Number of vehicles | 50 | 18 |
| Operating days in the year | 300 | 300 |
For Year 2, the company has agreed a fixed price contract for fuel. As a result of this contract, fuel prices will be:
(a) GH¢0.40 per kilometre for Services A and B
(b) GH¢0.80 per kilometre for Service C.
Sales prices will be 3% higher in Year 2 than in Year 1, and salaries and operational expenses will be 5% higher. Sales volume will be exactly the same as in Year 1.
The number of employees will also be the same as in Year 1: 60 employees working full-time on Services A and B and 25 employees working full-time on Service C.
Required:
(a) Prepare a budgeted statement of profit or loss for the year to 31st December Year 2.
(b) Comment on vehicle utilisation.
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