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Additional Assessment Paper - Angelfirebrr777.angelfire.com/BudgetSelfTest.pdf1 Additional...
Transcript of Additional Assessment Paper - Angelfirebrr777.angelfire.com/BudgetSelfTest.pdf1 Additional...
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Additional Assessment Paper
Multiple choice questions
Select the most appropriate answer for each of the following questions.
1 The main purpose of a firm’s master budget is to:
a set limits on spending
b establish a standard against which to measure employee performance
c coordinate and formalise (in money terms) the firm’s goals and objectives
d eliminate uncertainty of future events
e all of the above
2 The control function of budgeting is achieved by:
a preparing only foolproof budgets
b allowing some flexibility in budgeted amounts
c comparing budgeted amounts with actual amounts
d basing budgeted amounts on the actual results of the last period
3 A budget that is updated regularly by adding a new incremental time period such as a
month, and dropping the period just completed, is a:
a rolling or continuous budget
b short-range budget
c long-range budget
d capital expenditure budget
4 A master budget is:
a a set of statements providing broad direction for the firm
b a budget prepared after the fact, showing what costs should have been
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c an integrated plan of action for the firm as a whole, quantifying details of
operations and resources
d an operating budget for a specific future period of time
5 Which of the following statements about a flexible budget is false?
a It is the same as a static budget.
b It covers a range of activity within which a firm may operate.
c It assists companies in controlling overhead costs.
d It provides the correct basis for comparison between actual and expected costs.
6 An inaccurate sales forecast will:
a not affect the accuracy of the other schedules comprising the master budget
b have an impact on the other schedules comprising the master budget
c influence only the sales figure on the income statement budget
d have no effect on any of the schedules comprising the master budget because
other differences will counterbalance the error
7 Which of the following is NOT a benefit of a budgeting system?
a It coordinates activities.
b It aids performance evaluation.
c It provides direction to the business.
d It automatically ensures profits will be achieved.
8 The income statement budget, balance sheet budget and cash budget:
a are the first step of the master budget
b are prepared after the sales forecast and before the remainder of the operational
budgets
c show the actual financial results of the organisation’s operations
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d are the final portions of the master budget
9 In preparing any budget, it is important that managers keep in mind the:
a budgeted net profit
b assumptions and predictions upon which the budget is based
c cash balance
d past year’s results
10 Which of the following is NOT true with regard to cash budgets?
a They forecast periods of cash shortage.
b They summarise the expected cash flows in and out of an organisation.
c They mirror the income statement for an operating period.
d They forecast cash surpluses and assist investment plans.
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Theory questions
1 Give some examples how general economic trends and international events may affect
sales forecasting in the tourism industry.
2 Who is likely to be responsible for the labour efficiency variance? Identify three
possible causes for this variance.
3 Is any budget ‘bullet proof’? What factors should be taken into account in framing a
budget?
4 What is a budget? How does the process of budgeting assist management?
5 Give some examples how general economic trends and actions of competitors may
affect sales forecasting in the motor vehicle manufacturing industry.
6 If an analysis discovers an unfavourable material price variance, what could be some of
the possible explanations? Is this necessarily something to be worried about?
7 Write short answers to the following questions:
a Define budgeting.
b Explain briefly the four main purposes of budgeting i.e. the areas in which
budgets can assist management.
c What is a rolling budget?
d List five factors which would normally be taken into consideration when
forecasting sales for a retail firm.
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Practical questions
Practical question 1
California Club Ltd produces spirits which it sells in two markets, wholesale and export.
Forecast sales for the first three months of 2006 are:
January 2000 bottles
February 2400 bottles
March 3000 bottles
Thirty percent of sales are to wholesalers, with the rest exported.
Anticipated selling prices to wholesalers are $20 in January, rising to $25 in February and
March. Export prices are always 10% lower.
Prepare a detailed sales budget for the three months showing details of revenue expected from
each of the two markets.
Practical question 2
Smellsweet manufactures and sells perfume. The production manager supplies you with the
following information:
Estimated sales are July 2800 bottles, August 3000 bottles, September 2500 bottles and
October 3000 bottles. Each bottle sells for $70.
The company sets its production rate to ensure that it makes sufficient to hold stocks at
the end of each month equal to 50% of the next month’s expected sales.
Each bottle requires 2 kg of flower petals costing $15 per kg.
It is the company’s policy to hold stocks of raw materials on hand at the end of each
month equal to 50% of the material needed for the following month’s production.
Stocks at the end of September are budgeted at 2500 kg.
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Prepare the following budget schedules for the three months ending 30 September:
a Production budget
b Raw materials budget showing details of usage and purchases
Practical question 3
Eastern Silk produces silk scarves and sells them to retailers in packs of five for $300 a pack.
The costs to produce each pack are:
Direct materials – 1.5 sq m fabric @ $60 sq m
Direct labour – 3 hrs @ $30 per hour
Variable overhead – $15
Fixed overheads average $1 080 000 per annum, and are allocated on the basis of direct
labour hours. Annual direct labour hours are estimated to be 120 000.
Other costs include fixed selling and administration costs of $40 000 per month, and variable
selling and administration costs of $5 per pack.
Opening stock of finished goods is 500 packs, and it is expected that closing inventory will be
700 packs. Estimated sales are 3000 packs.
Prepare the following for the quarter ended 31 March:
a Cost of production budget showing total costs and cost per pack
b Income statement budget
Practical question 4
The preparation of master budget information for Gastronomics Inc for January 2006 is
almost complete. Extracts of budget and actual information are provided below:
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Balances as at 31 December 2005 $
Cash at bank 73 000
Accounts receivable 50 000
Inventory – Finished goods 45 000
Inventory – Raw materials 25 000
Plant and equipment 310 000
Accumulated depreciation of plant and equipment 100 000
Accounts payable (materials) 19 000
GST payable to ATO 4 000
Capital, I. M. Aguts ?
The income statement budget for January 2006 is:
$ $
Sales 150 000
Less Cost of goods sold
Opening inventory finished goods 45 000
Add Cost of production 100 000
Less Closing inventory 60 000 85 000
Gross profit 65 000
Less Operating expenses 40 000
Net operating profit 25 000
Add Non-operating income
Profit on sale of plant and equipment 5 000
Net profit 30 000
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Additional information:
All sales are made on credit, with 80% collected in the month of sale and the remainder
in the next month. There are no bad debts.
Cost of production comprises: raw material usage at $65 000, direct labour at $20 000,
and overheads of $15 000 (including depreciation of $5 000 – the rest of the overheads
are cash expenses paid in the same month).
Purchases of raw materials are paid for 75% in the month of purchase and 25% in the
following month. Anticipated stocks of raw materials at the end of January are $30 000.
Equipment with an original cost of $20 000 will be sold for $10 000 cash (plus GST)
during January.
Operating expenses (which include wages of $9000) are generally paid as incurred,
except that $1000 of office expenses will be accrued at the end of January.
Drawings of $10 000 per month are budgeted for.
GST is accounted for on a cash basis, and is remitted monthly. All figures given in the
question are GST exclusive.
Prepare the following budgets for the month of January 2006:
a Cash budget
b Balance sheet budget
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Practical question 5
Angie’s Delicacies Ltd has the following overhead account balances for October:
Budget Actual
$ $
Depreciation of equipment 7 000 7 000
Electricity 9 500 9 000
Indirect labour 13 500 14 200
Repairs and maintenance 3 500 4 000
Insurance 2 000 1 800
a Prepare a simple variance report showing overhead expenses for the month. Show
variances as dollar amounts and percentages.
b What action should generally be taken once the performance report is prepared?
Practical question 6
Dylan’s Delights Inc provides the following information related to its activities for February:
Budgeted total sales for February (1000 units @ $20) $20 000
Actual total sales revenue (900 units @ $21) $18 900
Production cost budget for the month of February showed:
$
Direct materials 5
000
Direct labour 2
500
Supervisors’ salary 1
10
600
Workers’ compensation 123
Repairs and maintenance 1
250
Depreciation of equipment 500
Factory rent 1
300
Direct materials, direct labour and repairs and maintenance vary directly according to
production level. Workers’ compensation is 3% of total salary payments to staff.
Actual expenses are as follows:
$
Direct materials 4
700
Direct Labour 2
200
Supervisors’ salary 1
600
Workers’ compensation 114
Repairs and maintenance 1
400
Depreciation of equipment 500
Factory rent 1
450
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a Prepare an income statement performance report for the month of February calculated
on flexible budgeting principles. Indicate clearly both the flexible budget/spending and
volume/activity variances.
b Comment on the results.
Practical question 7
Bush’s Weapons Ltd manufactures chemicals using the following budgeted cost per 100 litre
drum:
Direct materials 50 kg of A at $1 per kg
10 kg of B at $6 per kg
Direct labour 2 hours per drum at $15 per
hour
Variable overhead $10 per drum
Fixed overhead $4000 per month
The budgeted monthly production is 400 drums and the actual production was 500 drums.
Actual costs for the month were:
Direct materials 24 000 kg of A at a total cost of $26
400
4800 kg of B at a total cost of $29
280
Direct labour 980 hours at a total cost of $15 680
Variable overhead $5000
Fixed overhead $4650
Prepare a report analysing the variances.
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Practical question 8
Paula Bennett of Sadi Ltd is pleased when she sees the results for her department for January.
The departmental profit is higher than she budgeted for.
The budget details for the month were:
$
Sales 40
000
Cost of sales 24
000
Selling expenses (all variable) 7
500
Administration expenses (half variable, half fixed) 4
000
Financial expenses (all fixed) 1
000
Profit 3
500
The profit details reported by the accountant were:
$
Sales 48
000
Cost of sales 30
000
Selling expenses (all variable) 9
000
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Administration expenses (half variable, half fixed) 4
200
Financial expenses (all fixed) 1
100
Profit 3
700
Prepare a report for Paula, explaining whether the actual profit was as good as it appears to be
on the surface.
Practical question 9
Happy Washing Days Ltd produces clotheslines which it sells in two states, South Australia
and Victoria. Forecast unit sales for the first three months of 2005 are:
January 870
units
February 920
units
March 990
units
Forty percent of sales are made in South Australia and the rest in Victoria.
Anticipated selling prices in South Australia are $190 in January rising to $200 in February
and March. Prices in Victoria are always $10 higher.
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Prepare a detailed sales budget for the three months showing details of revenue expected from
each of the two states.
Practical question 10
Ice Confections manufactures and sells frozen ice blocks in packs of 10. The production
manager supplies you with the following information:
Estimated sales are for July 12 000 packs, August 15 000 packs and September 12 500
packs. Each pack sells for $3.
The company plans to produce sufficient packs to have 50% of the next month’s sales
in stock at the end of the previous month. Opening stocks for July will be 6000 packs
and closing stocks at the end of September are expected to be 7000 packs.
Each pack requires 2 kg of raw materials costing $0.40 per kg.
It is the supply manager’s policy to hold stocks of raw materials on hand at the end of
each month equal to 25% of the materials needed for the following month’s production.
Assume that stock on hand at start of July is 6500 kg of raw material with 7500 kg to
be on hand at 30 September.
Prepare the following budget schedules for the three months ending 30 September:
Production budget
Raw materials budget showing details of usage and purchases
Practical question 11
Andy’s Software produces computer games under licence and sells them to retailers for $145
each. The costs to produce each game are:
Direct materials – $12
Direct labour – 2 hours @ $25 per hour
Variable overhead – $5
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Fixed overheads are $900 000 per annum and are averaged across estimated annual
production of 90 000 units
Other costs include fixed selling and administration costs of $10 000 per quarter and variable
selling and administration costs of $6 per game.
Production expected for the quarter ended 31 March is 25 000 games with expected sales of
24 000. Andy has 2000 games on hand at the start of the quarter ($77 each).
Prepare the following for the quarter ended 31 March:
Cost of production budget showing total and unit costs
Income statement budget
Practical question 12
Actual and budgeted information for Speedicars Ltd is provided below:
Balances as at 30 June 2005 $
Cash at bank 130
000
Accounts receivable 100
000
Inventory – Finished goods 70
000
Inventory – Raw materials 50
000
Plant and equipment 620
000
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Accumulated depreciation of plant and equipment 240
000
Accounts payable (materials) 40
000
GST payable to ATO 10
000
Retained profits 290
000
Share capital 390
000
The income statement budget for the month of July 2005 was:
$ $
Sales 105 000
Less Cost of goods sold
Opening inventory finished goods 70 000
Add Cost of production 70 000
Less Closing inventory 80 000 60 000
Gross profit 45 000
Less Expenses
Loss on sale of equipment 1 000
Operating expenses 32 500 33 500
Net profit 11 500
Additional information:
All sales are made on credit with 70% collected in the month of sale and the remainder
in the next month. There are no bad debts.
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Cost of production comprises: raw material usage at $40 000, direct labour at $20 000
and overheads of $10 000 (including depreciation of $2500 – the rest of the overheads
are cash expenses paid in the same month).
Purchases of raw materials are expected to be $65 000. Purchases are paid for 60% in
the month of purchase and 40% in the following month.
Equipment with a historic cost of $10 000 will be sold for $3000 cash on 31 July.
Operating expenses are generally paid as incurred except that $500 of advertising
expense will still be unpaid at the end of July. Included in the operating expenses are
wages and salaries of $12 500.
A cash dividend of $15 000 is due to be declared and paid in July.
All figures provided are GST exclusive. GST is calculated on a cash basis and remitted
monthly.
Prepare the following for the month of July 2005:
Cash budget
Balance sheet budget
Practical question 13
Kage Ltd has the following account balances for February:
Budget Actual
$ $
Sales 50 000 60
000
Cost of goods sold 20 000 25
000
Selling expenses 3 500 4 000
Administration 10 000 11
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expenses 000
Financial expenses 2 000 1 800
Prepare a simple variance report showing financial performance for the month. Show
variances as dollar amounts and percentages.
If the firm concentrates on variances greater than 10%, which variances need
explaining? Is there any logical explanation for any of these variances?
Practical question 14
Italia Pasta Products provides the following information related to its sales:
$
Budgeted total sales revenue for September 100
000
Actual total sales revenue 95 000
Selling expenses budgeted for the month of September are:
$
Wages 3
000
Commission 1
000
Payroll tax 160
Vehicle maintenance 200
Depreciation of vehicles 500
Advertising 1
500
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Commission, advertising and vehicle maintenance vary directly according to sales. Payroll tax
is 4% of total salary payments to staff.
Actual expenses are as follows:
$
Wages 3
200
Commission 950
Payroll tax 166
Vehicle maintenance 150
Depreciation of vehicles 500
Advertising 1
400
Prepare a selling expenses performance report for the month of September calculated
on flexible budgeting principles. Indicate clearly both the flexible budget/spending and
volume/activity variances.
Explain why such a breakdown of variances is normally performed.
Practical question 15
F Company manufactures ammunition using the following budgeted cost per case of product:
Direct materials: 5 kg of X at $125 per kg
20 kg of Y at $40 per kg
Direct labour: 12 hours per case at $15 per
hour
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The budgeted monthly production is 200 cases and the actual production and sales were 200
cases. Actual costs were:
Direct materials: 1050 kg of X at a total cost of $135
000
3980 kg of Y at $41 per kg
Direct labour: 2500 hours at a total cost of $40 000
Prepare a report analysing the variances.
Practical question 16
Andrew Carey, manager of the Football Division of Sporting Prowess Co, is puzzled that the
accountant’s report shows a smaller profit for his division than what he thinks it should be.
The budgeted profit for the month was:
Number of footballs to be produced 200
$
Total selling price 10 000
Costs: Material 5 500
Labour 2 000
Overhead (all fixed) 1 000
Profit 1 500
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The number of footballs actually made and sold for the month was 250 so Carey expected a
profit of $1875 ($7.50 per football) but the profit shown was:
$
Total selling price 12 500
Costs: Material 7 500
Labour 2 400
Overhead (all fixed) 1 150
Profit 1 450
Prepare a report for Mr Carey explaining why the actual profit was lower than expected.
Practical question 17
Le Marais Ltd sells imported French cheeses to restaurants in Melbourne. The estimated
monthly sales for the total market, for the quarter ending September 2005, are as follows:
Camembert Brie
kg kg
July 15 000 6 000
August 12 000 5 000
September 15 000 5 000
Le Marais expects its market share to be 30%. Selling prices are currently $15 per kg for
Camembert and $18 per kg for Brie. Due to currency fluctuations, it is expected that the price
for Camembert will have to be increased by 10% and Brie by 5% at the beginning of August.
Prepare a sales budget, by month and by product, for the quarter ending 30 September 2005
and for the quarter as a whole.
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Practical question 18
Mitch’s Marine is a retailer of fishing rods. The firm sells two models, Basic and Superior, for
$40 and $75 respectively. Their major markets are in Brisbane and Sydney.
Sales last year were as follows:
Basic Superior
Brisbane April 150 200
May 100 160
June 90 125
Sydney April 200 300
May 170 225
June 130 180
A major marketing campaign is planned for May and June, which is expected to boost sales of
Basic by 10% and Superior by 20%. In addition, the price of Superior will be decreased to
$70 on 1 May. The price of the Basic model will not change.
Prepare a sales budget, by product, area and month, for the three months ending 30 June.
Practical question 19
Paris Underground Ltd is a wholesaler of CD records.
As at 1 October 2005, the following information applies to the company:
The business has an overdraft of $12 500.
25% of its sales are for cash with the rest being on credit.
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The company allows its credit customers a 2% discount if they pay by the end of the
month following the month of sale. 70% of debtors take up this offer with the rest
paying during the following month.
Actual and forecast sales (net of GST) are as follows:
August $250 000
September $270 000
October $300 000
November $412 000
December $490 000
The company buys all its stock on credit, paying for it in the month following purchase.
Actual and forecast purchases are as follows:
September $190 000
October $220 000
November $360 000
December $185 000
Regular monthly operating expenses are a combination of fixed $20 000 (including
depreciation $5500) and variable 10% of sales. These expenses are paid in the month
they are incurred.
New furniture is budgeted to be purchased for $50 000 cash in November.
A dividend to shareholders is due for payment in October $8000.
All payments except wages and dividends are subject to GST of 10%.
Prepare a cash budget on a month-by-month basis for the three months ending 31 December
2005. Show any supporting workings. Determine whether the firm will be able to eliminate its
overdraft. If not, suggest three actions the directors could take.
Note: You must show the effects of GST of 10% where applicable. The company uses the
cash system of accounting for GST and submits a BAS quarterly.
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Practical question 20
Joe’s Organic Farm Products, a retail fruit and vegetable shop, had the following budgeted
figures for revenue and expense for the financial year ending 30 June:
$
Sales 180
000
Cost of produce 80 000
Salaries 35 000
Rent 10 000
Interest on loans 2 000
Advertising 3 500
Electricity 4 500
Depreciation of equipment 1 000
At the end of the year, the accounts showed the following actual figures:
$
Sales 206
000
Cost of produce 98 000
Salaries 36 500
Rent 10 000
Interest on loans 2 000
Advertising 4 000
Electricity 4 200
Depreciation of equipment 1 000
Prepare an income statement performance report and comment on the year’s performance.
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Practical question 21
The Martindale Medical Centre provides a 24-hour medical service to the local community.
Following are some details for the coming quarter:
a The number of patients expected to be treated is 1900 in January, 2200 in February and
2450 in March.
b On average, 80% are standard consultations and 20% are long consultations.
c 70% of patients are bulk-billed, so the centre receives $25.05 Medicare rebate in cash
for each standard consultation and $47.60 for each long consultation.
d The other 30% who are privately billed are charged $35 for a standard consultation and
$60 for a long one. However, these fees are planned to be increased by 10% on 1
March.
Prepare a revenue budget for each month of the coming quarter, showing the breakdown of
earnings for each category of patient. Calculate amounts to the nearest dollar.
Note: There are no GST effects in this assessment.
Practical question 22
Doohan Brothers’ Hardware store has a need to prepare a cash budget to assess its likely cash
position.
The following items appear in the balance sheet of at 31 December:
$
Accounts receivable 25 000
Accounts payable 27 000
GST owing 18 000
Cash at bank 70 800
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The shop sells for cash to the public but also supplies the building trade on credit on the basis
of net 30 days. Generally, 80% of credit sales are paid for in the month of sale, with the
balance in the following month. All sales are subject to GST.
All of Doohan’s purchases are on credit, and suppliers offer a 4% discount for payment
within 21 days. Due to different billing dates, only 80% of accounts are paid for in the month
of purchase, with the balance paid in the following month – but the discount is claimed on all
of them.
Actual and budgeted income and expenses are as follows:
December January February
(actual) (estimated) (estimated)
$ $ $
Cash sales 180 000 186 000 196 000
Credit sales 125 000 130 000 150 000
Purchases 135 000 125 000 180 000
Wages 20 000 30 000 15 000
Other
expenses
84 000 85 000 95 000
The figures above for ‘Other expenses’ include a monthly amount of $5000 depreciation.
Expenses are paid in the month they occur.
All payments are subject to GST except wages.
New shop fittings of $65 000 (plus GST) are to be bought for cash in January, and the
Doohan brothers take drawings of $10 000 each month.
Prepare a cash budget for the months of January and February.
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Note: In this question, you must show the effects of GST where applicable. The business uses
the cash system of accounting for GST and submits a BAS quarterly.
Practical question 23
Scott’s Gardening Service had the following budgeted details for the financial year ended 30
June:
Expected income – 32 hours work per week for 50 weeks @ $40 per hour
Cost of gardening supplies $12 500
Hire of equipment to average $100 per week
Depreciation of own equipment $3400 per annum
Advertising 3% of forecast income
Motor vehicle expenses $6500 per annum
Interest on bank loan $2000 per annum
At the end of the year, the accounts showed the following actual figures:
Worked 1200 hours @ $40 per hour and 600 hours @ $35 per hour
Gardening supplies cost $13 000
Hire of equipment totalled $4800
Depreciation was $3400
Spent $1800 on advertising
Motor vehicle expenses totalled $7100
Interest on loan was $2000
Prepare an income statement performance report and comment on the year’s performance.
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Answers to Additional Assessment Paper
Multiple choice questions
1 c
2 c
3 a
4 c
5 a
6 b
7 d
8 d
9 b
10 c
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Theory questions
1 Points could include:
whether the economy is growing or in recession will affect spending power of
consumers
taxing policies of the government could affect affordability of holidays
labour laws could make employment of staff more expensive, with consequent
passing on of costs to travellers
overseas or local events such as war, terrorism, epidemics, airline accidents, etc
could affect confidence of travellers.
2 The labour efficiency variance would primarily be the responsibility of the staff in
charge of personnel and the manufacturing process within the factory e.g. under the
leadership of the production manager. Possible causes for the variance would include:
using inappropriately skilled personnel
changes in the production process which may increase or decrease the labour
component
changes in the level of productivity
faulty equipment or material, material shortages, or machine breakdowns which
halt work.
3 Discussion required around the fact that all budgets are based on assumptions which
may or may not eventuate. As a budget looks into the future, events cannot be
accurately predicted, especially influences which are outside the firm’s control. Factors
to be considered in framing a budget include:
possible over-reliance on past activity and results as a basis for preparation of the
budget
the appropriateness of basing a price increase on previous years’ increases
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complacency about past and current levels of performance (e.g. could they
improve on the response rate of six days?)
how much communication and negotiation has there been with other departments
(e.g. has there been discussion about common goals and objectives for the
firm?).
4 A budget is a written forecast of activity for an organisation for a coming period,
expressed in dollars. It is the quantitative representation of policies, objectives and
plans for the future, providing specific detail of expected income, expenses, cash flows,
etc. The budgeting process assists management in four main ways – planning,
coordination, motivation, and control. Answers should briefly explain these or similar
points.
5 Points could include:
whether the economy is growing or in recession will affect spending power and
confidence of buyers
if the price of petrol is increasing, this could affect buyers’ willingness to
commit to an expensive new car
changes to taxing policies could make new cars less attractive
competitors could begin an aggressive marketing campaign to increase market
share
competitors could introduce new models which capture the public’s imagination
(e.g. a more efficient electric car).
6 An unfavourable material price variance could be due to:
unanticipated price increases on the part of suppliers
changes in exchange rates if materials sourced from overseas
poor negotiation about supply terms and conditions
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need for rush purchase orders, extra quantities in small lots due to unexpectedly
high production demands, etc.
How seriously such a variance is viewed will depend on the size of the variance and the
cause for it. The first step is to decide whether it is worth investigating. If so, the
approach should be to find the reason, not to attach blame. In many cases, it may be
outside the control of the responsible person, or it may be the result of inappropriate
assumptions being made at the budgeting stage. If the latter is the case, the forthcoming
budgets should be revised.
7 a Budgeting is the process of developing a series of written plans which
summarise in quantitative terms, the firm’s planned activities for a coming
period.
b The four main purposes of budgeting are:
planning
organising
leading/motivating
controlling.
A brief explanation of each would be required.
c A rolling budget is one which is always showing a specified time frame ahead
e.g. if it is a six month expense budget, once the first month is finished, the
details are dropped from the budget, and another month’s details added at the
end.
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d Factors to consider when forecasting sales:
past patterns of sales for the firm and the industry
general economic conditions
market share
product prices
planned advertising
actions of competitors.
33
Practical questions
Practical question 1
California Club Ltd sales budget for the quarter ending 31 March
January February March Quarter
Total quantity 2 000 2 400 3 000 7 400
Wholesale
Quantity (bottles) 600 720 900 2 220
Price ($) 20.00 25.00 25.00
Total sales ($) 12 000 18 000 22 500 52 500
Export
Quantity (bottles) 1 400 1 680 2 100 5 180
Price ($) 18.00 22.50 22.50
Total sales ($) 25 200 37 800 47 250 110 250
Combined total sales ($) 37 200 55 800 69 750 162 750
Practical question 2
Smellsweet production budget for the quarter ending 30 September
July August September Quarter
Estimated sales 2 800 3 000 2 500 8 300
Add Closing inventory 1 500 1 250 1 500 1 500
Total needs 4 300 4 250 4 000 9 800
Less Opening inventory 1 400 1 500 1 250 1 400
Production (bottles) 2 900 2 750 2 750 8 400
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Smellsweet raw materials budget for the quarter ending 30 September
July August September Quarter
Production (bottles) 2 900 2 750 2 750 8 400
Raw materials per bottle (kg) 2 2 2 2
Total material (kg) 5 800 5 500 5 500 16 800
Add Closing inventory (kg) 2 750 2 750 2 500 2 500
Total needs (kg) 8 550 8 250 8 000 19 300
Less Opening inventory (kg) 2 900 2 750 2 750 2 900
Material purchases (kg) 5 650 5 500 5 250 16 400
Material price per kg ($) 15 15 15 15
Material purchase cost ($) 84 750 82 500 78 750 246 000
Practical question 3
Eastern Silk cost of production budget for the quarter ending 31 March
Unit cost Total cost
$ $
Direct materials 90 288 000
Direct labour (3 hours) 90 288 000
Variable overhead 15 48 000
Fixed overhead ($9 per hour) 27 86 400
Total cost of production 222 710 400
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Eastern Silk income statement budget for the quarter ending 31 March
$ $
Sales (3000 @ $300) 900 000
Less Cost of goods sold
Opening inventory (500 @ $222) 111 000
Cost of production 710 400
Goods available for sale 754 800
Less Closing inventory (700 @ $222) 155 400 666 000
Gross profit 234 000
Less Expenses
Fixed selling and administration expenses 120 000
Variable selling and administration expenses 15 000 135 000
Net profit 99 000
Practical question 4
Gastronomics Inc cash budget for January 2006
$ $ $
Opening cash balance 73 000
Add Estimated receipts
Collections from accounts receivable:
December 50 000
January (80% sales) 120 000 170 000
Sale of equipment 10 000
180 000
GST collected 10% 18 000 198 000
Total cash available 271 000
36
Less Estimated payments
Payments subject to GST
Purchases of materials:
Accounts payable December 19 000
January (75% purchases) 52 500 71 500
Overheads 10 000
Operating expenses 30 000
111 500
GST payable 10% 11 150 122 650
Payments not subject to GST
GST paid to ATO 4 000
Direct labour 20 000
Operating expenses (wages) 9 000
Drawings 10 000 43 000
Total cash payments 165 650
Closing cash balance 105 350
Gastronomics Inc balance sheet budget as at 31 January 2006
$ $
Current assets
Cash at bank 105 350
Accounts receivable (20% sales) 30 000
Inventory – Finished goods 60 000
Inventory – Raw materials 30 000 225 350
Non-current assets
Plant and equipment 290 000
Less Accumulated depreciation 90 000 200 000
37
Total assets 425 350
Current liabilities
Accounts payable: raw material purchases 17 500
Office expenses 1 000
GST payable to ATO 6 850
Total liabilities 25 350
Net assets 400 000
Owners’ equity
Capital, I. M. Aguts 380 000
Add Net profit 30 000
Less Drawings 10 000
Total owners’ equity 400 000
Practical question 5
a Angie’s Delicacies Ltd overhead performance report for October
Budget Actual Variance Variance
$ $ $ %
Depreciation 7 000 7 000
Electricity 9 500 9 000 500 F 5.3 F
Indirect labour 13 500 14 200 700 U 5.2 U
Repairs and maintenance 3 500 4 000 500 U 14.3 U
Insurance 2 000 1 800 200 F 10.0 F
Total overheads 35 500 36 000 500 U 1.4 U
b Policies should be in place, under the concept of management by exception, which
provide guidance about which variances should be investigated e.g. those which are
38
over 5% above or below budget. Discovery of the causes will then guide the action
which follows. If the variance was controllable, corrective action should be taken to
prevent it happening again. If it is not controllable, or if the variance is the result of
poor estimation, budgets may need to be revised. Alternately, if the reason for the
difference is acceptable in the circumstances, no action may be required.
Practical question 6
a Dylan’s Delights Inc performance report for February
Static
budget
1000 units
Activity/
volume
variance
Flexible
budget
900 units
Spending
variance
Actual
900 units
$ $ $ $ $
Sales 20 000 2 000 U 18 000 900 F 18 900
Direct material 5 000 500 F 4 500 200 U 4 700
Direct labour 2 500 250 F 2 250 50 F 2 200
Supervisors salary 1 600 1 600 1 600
Workers’ compensation 123 12 F 111 3 U 114
Repairs and maintenance 1 250 125 F 1 125 275 U 1 400
Depreciation of equipment 500 500 500
Factory rent 1 300 0 1 300 150 U 1 450
Total costs 12 273 887 F 11 391 578 U 11 964
Gross profit 7 727 1 113 U 6 614 322 F 6 936
b Even though the number of units produced and sold was lower than budget, the
increased selling price per unit resulted in a $900 better sales figure than if the original
selling price per unit had been attained. The gross profit showed a $791 unfavourable
variance compared to the original budget, but a more meaningful comparison with the
39
flexible budget, based on the actual number of units sold, reveals the firm performed
$322 better than expected. The largest individual variance related to overspending on
repairs and maintenance which would be worthy of investigation.
Practical question 7
Bush’s Weapons Ltd
Direct material variances
Material A
Direct material usage variance = (25 000 – 24 000) x $1 $1 000 F
Direct material price variance = $26 400 – (24 000 x $1) $2 400 U
Material B
Direct material usage variance = (5 000 – 4 800) x $6 $1 200 F
Direct material price variance = $29 280 – (4 800 x $6) $480 U
Total direct material variance $680 U
Direct labour variances
Direct labour efficiency variance = (1 000 – 980) x $15 $300 F
Direct labour rate variance = $15 680 – (980 x $15) $980 U
Total direct labour variance $680 U
Factory overhead variances
Variable overhead spending variance = $5000 – (500 x $10) Nil
Variable overhead capacity variance = (500 – 400) x $10 $1 000 F
Fixed overhead spending variance = $4 650 – $4 000 $650 U
Total factory overhead variance $350 F
40
Practical question 8
Sadi Ltd financial performance report for January
Static
budget
Activity/
volume
variance
Flexible
budget
Spending
variance
Actual
$ $ $ $ $
Sales 40 000 8 000 F 48 000 48 000
Cost of goods sold 24 000 4 800 U 28 800 1 200 U 30 000
Selling expenses 7 500 1 500 U 9 000 9 000
Administration expenses –
variable
2 000 400 U 2 400 300 F 2 100
Administration expenses –
fixed
2 000 2 000 100 U 2 100
Financial expenses 1 000 1 000 100 U 1 100
Total costs 36 500 6 700 U 43 200 1 100 U 44 300
Profit 3 500 1 300 F 4 800 1 100 U 3 700
Although Paula’s profit is $200 higher than budgeted, it could have been $1300 higher,
potentially, given the level of sales attained. If variable costs had retained their relationship to
sales, and fixed costs remained the same, profit would have been $4800. The major reason
this was not achieved was an increase of 5% in the cost of sales.
41
Practical question 9
Happy Washing Days Ltd sales budget for the quarter ending 31 March
January February March Quarter
Total quantity 870 920 990 2 780
South Australia
Quantity 348 368 396 1 112
Price ($) 190 200 $200
Total sales ($) 66 120 73 600 79 200 218 920
Victoria
Quantity 522 552 594 1 668
Price ($) 200 210 210
Total sales ($) 104 400 115 920 124 740 345 060
Combined total sales ($) 170 520 189 520 203 940 563 980
Practical question 10
Ice Confections production budget for the quarter ending 30 September
July August September Quarter
Estimated sales 12 000 15 000 12 500 39 500
Add Closing inventory 7 500 6 250 7 000 7 000
Total needs 19 500 21 250 19 500 46 500
Less Opening inventory 6 000 7 500 6 250 6 000
Production (packs) 13 500 13 750 13 250 40 500
42
Ice Confections raw materials budget for the quarter ending 30 September
July August September Quarter
Production (packs) 13 500 13 750 13 250 40 500
Raw materials per pack (kg) 2 2 2 2
Total material (kg) 27 000 27 500 26 500 81 000
Add Closing inventory (kg) 6 875 6 625 7 500 7 500
Total needs (kg) 33 875 34 125 34 000 88 500
Less Opening inventory (kg) 6 500 6 875 6 625 6 500
Material purchases (kg) 27 375 27 250 27 375 82 000
Material price per kg ($) 0.40 0.40 0.40 0.40
Material purchase cost ($) 10 950 10 900 10 950 32 800
Practical question 11
Andy’s Software cost of production budget for the quarter ending 31 March
Unit cost Total cost
$ $
Direct materials 12 300 000
Direct labour (2 hours) 50 1 250 000
Variable overhead 5 125 000
Fixed overhead 10 250 000
Total cost of production 77 1 925 000
Andy’s Software income statement budget for the quarter ending 31 March
$ $
Sales (24 000 @ $145) 3 480 000
Less Cost of goods sold
Opening inventory (2000 @ $77) 154 000
43
Cost of production 1 925 000
Goods available for sale 2 079 000
Less Closing inventory (3000 @ $77) 231 000 1 848 000
Gross profit 1 632 000
Less Expenses
Fixed selling and administration expenses 10 000
Variable selling and administration expenses 144 000 154 000
Net profit 1 478 000
Practical question 12
Speedicars Ltd cash budget for July 2005
$ $ $
Opening cash balance 130 000
Add Estimated receipts
Collections from accounts receivable:
June 100 000
July (70% sales) 73 500 173 500
Sale of equipment 3 000
176 500
Add GST collected 10% 17 650 194 150
324 150
Less Estimated payments
Payments subject to GST
Purchases of materials:
Accounts payable June 40 000
July (60% purchases) 39 000 79 000
44
Overheads 7 500
Operating expenses 19 500
Subtotal 106 000
Add GST paid 10% 10 600
Total 116 600
Payments not subject to GST
Direct labour 20 000
Operating expenses (wages & salaries) 12 500
GST payment to ATO 10 000
Cash dividend 15 000
Total 57 500
174 100
Closing cash balance 150 050
Speedicars Ltd balance sheet budget as at 31 July 2005
$ $ $
Current assets
Cash at bank 150 050
Accounts receivable (30% sales) 31 500
Inventory – Finished goods 80 000
Inventory – Raw materials 75 000 336 550
Non-current assets
Plant and equipment 610 000
Less Accumulated depreciation 236 500 373 500
Total assets 710 050
Current liabilities
45
Accounts payable: Raw material purchases 26 000
Advertising 500
GST payable to ATO 7 050 33 550
Net assets 676 500
Owners’ equity
Share capital 390 000
Add Retained profits:
Opening balance 290 000
Add Net profit 11 500
301 500
Less Dividend paid 15 000 286 500
Total owners’ equity 676 500
Practical question 13
Kage Ltd financial performance report for February
Budget Actual Variance Variance
$ $ $ %
Sales 50 000 60 000 10 000 F 20.0 F
Less Cost of goods sold 20 000 25 000 5 000 U 25.0 U
Gross profit 30 000 35 000 5 000 F 16.7 F
Less Expenses
Selling expenses 3 500 4 000 500 U 14.3 U
Administration expenses 10 000 11 000 1 000 U 10.0 U
Financial expenses 2 000 1 800 200 F 10.0 F
Total expenses 15 500 16 800 1 300 U 8.4 U
Net profit 14 500 18 200 3 700 F 25.5 F
46
The major variances are for sales, cost of goods sold and selling expenses. The other expenses
are on, or below, the limit of reporting by exception. As sales were considerably higher than
budgeted, one would expect cost of sales to also be higher, although it is by a greater degree.
Nevertheless, there is still a positive effect on gross profit.
The increase in selling expenses is not necessarily bad, as it is likely that increased effort in
this area is what has led to the favourable increase in sales. As administration and financial
expenses would be partly fixed costs, it is reasonable to see these increase by a lower
percentage than the accompanying increase in sales level.
Practical question 14
Italia Pasta Products selling expenses performance report for September
Static
budget
Activity/
volume
variance
Flexible
budget
Spending
variance
Actual
costs
$ $ $ $ $
Wages 3 000 3 000 200 U 3 200
Commission 1 000 50 F 950 950
Payroll tax 160 2 F 158 8 U 166
Vehicle maintenance 200 10 F 190 40 F 150
Depreciation vehicles 500 500 500
Advertising 1 500 75 F 1 425 25 F 1 400
Total selling expenses 6 360 137 F 6 223 143 U 6 366
It is more meaningful to identify the size and direction of individual variances on the basis of
activity and spending, rather than to simply compare the original (static) budget figures with
actual spending.
47
In this case, the difference in the total was only $6, but the analysis shows that with many of
them being variable, the total should have been lower than budget. The fact that it was not is
reflected in the spending variances, especially for wages, although this is partly balanced by
savings in maintenance and advertising.
Practical question 15
F Company
Direct material variances – Material X
Direct material usage variance = (1050 – 1000) x $125 $6 250 U
Direct material price variance = $135 000 – (1050 x $125) $3 750 U
Direct material variances – Material Y
Direct material usage variance = (3980 – 4000) x $40 $800 F
Direct material price variance = ($41 – $40) x 3980 $3 980 U
Total direct material variance $13 180 U
Direct labour variances
Direct labour efficiency variance = (2500 – 2400) x $15 $1 500 U
Direct labour rate variance = $40 000 – (2500 x $15) $2 500 U
Total direct labour variance $4 000 U
48
Practical question 16
Sporting Prowess Co financial performance report for the month of…
Static
budget
(200 units)
Activity/
volume
variance
Flexible
budget
(250 units)
Spending
variance
Actual costs
(250 units)
$ $ $ $ $
Sales $10 000 2 500 F $12 500 $12 500
Less Production costs
Direct materials 5 500 1 375 U 6 875 625 U 7 500
Direct labour 2 000 500 U 2 500 100 F 2 400
Overhead 1 000 1 000 150 U 1 150
Total costs 8 500 1 875 U 10 375 675 U 11 050
Profit 1 500 625 F 2 125 675 U 1 450
Because the level of production and sales was higher, income was $2500 higher than the
original budget. At a higher volume, the variable costs i.e. materials and labour, would have
been expected to be higher – this is reflected in the column ‘Flexible budget’. As overheads
were fixed, these should not have changed. However, there was overspending on material
costs and overheads, which reduced the potential profit from $2125 to $1450.
Practical question 17
Le Marais Ltd sales budget for the quarter ending 30 September 2005
July August September Quarter
Camembert
Quantity (kg) 4 500 3 600 4 500 12 600
Price per kg ($) 15.00 16.50 16.50
49
Sales value ($) 67 500 59 400 74 250 201 150
Brie
Quantity (kg) 1 800 1 500 1 500 4 800
Price per kg ($) 18.00 18.90 18.90
Sales value ($) 32 400 28 350 28 350 89 100
Total sales ($) 99 900 87 750 102 600 290 250
Practical question 18
Mitch’s Marine sales budget for the quarter ending 30 June
Quantity Price Total
$ $
April
Brisbane
Basic 150 40 6 000
Superior 200 75 15 000
Total 350 21 000
Sydney
Basic 200 40 8 000
Superior 300 75 22 500
Total 500 30 500
Combined total 850 51 500
May
Brisbane
Basic 110 40 4 400
Superior 192 70 13 440
Total 302 17 840
50
Sydney
Basic 187 40 7 480
Superior 270 70 18 900
Total 457 26 380
Combined total 759 44 220
June
Brisbane
Basic 99 40 3 960
Superior 150 70 10 500
Total 249 14 460
Sydney
Basic 143 40 5 720
Superior 216 70 15 120
Total 359 20 840
Combined total 608 35 300
Quarter
Brisbane
Basic 359 14 360
Superior 542 38 940
Total 901 53 300
Sydney
Basic 530 21 200
Superior 786 56 520
Total 1 316 77 720
Combined total 2 217 131 020
51
Practical question 19
Paris Underground Ltd schedule of collections from accounts receivable for the quarter
ending 31 December 2005
Credit sales August September October November December
$ $ $ $ $ $
Sales 250 000 270 000 300 000 412 000 490 000
August 187 500 128 625 56 250
September 202 500 138 915 60 750
October 225 000 154 350 67 500
November 309 000 211 974
December 367 500
Total collected 195 165 215 100 279 474
Paris Underground Ltd cash budget for the quarter ending 31 December 2005
October November December GST totals
$ $ $ $
Opening cash balance (12 500) 18 732 15 372
Add Estimated receipts
Cash sales 75 000 103 000 122 500
Collections from accounts receivable 195 165 215 100 279 474
Total receipts 270 165 318 100 401 974
Add GST received 27 017 31 810 40 197 99 024
Total cash available 284 682 368 642 457 543
Payments subject to GST
Purchases (accounts payable) 190 000 220 000 360 000
Fixed operating expenses 14 500 14 500 14 500
Variable operating expenses 30 000 41 200 49 000
52
Purchase of furniture 50 000
GST paid 23 450 27 570 42 350 93 370
GST owing to ATO 5 654
Payments not subject to GST
Dividend to shareholders 8 000
Total payments 265 950 353 270 465 850
Closing cash balance 18 732 15 372 (8 307)
The firm will still have an overdraft of almost $9000 at the end of the year. They also have a
GST debt that will need to be paid in January of $5654.
In order to assist, the directors could:
defer the purchase of the furniture
arrange for payment of the furniture in instalments over a few months
speed up its collection from debtors by offering a larger discount for cash.
Practical question 20
Joe’s Organic Farm Products income statement performance report for the year ended
30 June
Budget Actual Variance
$ $ $
Sales 180 000 206 000 26 000 F
Less Cost of produce 80 000 98 000 18 000 U
Gross profit 100 000 108 000 8 000 F
Less Expenses
Salaries 35 000 36 500 1 500 U
Rent 10 000 10 000
53
Interest on loans 2 000 2 000
Advertising 3 500 4 000 500 U
Electricity 4 500 4 200 300 F
Depreciation of equipment 1 000 1 000
Total expenses 56 000 57 700 1 700 U
Net profit 44 000 50 300 6 300 F
Either the volume of sales has been higher than forecast, or the unit prices for the produce
were higher, resulting in greater sales and also a better gross profit figure. The increase in cost
of produce would be a flow-through from the increased sales. In addition, salaries increased
as did advertising (which may have resulted in the increased sales) but there was a small
saving in electricity costs.
Even though the increased costs partly offset the favourable gross profit variance, the end
result was a net profit which was $6300 better than budget.
Practical question 21
Martindale Medical Centre income budget for the quarter ending 31 March
Number Amount $
January
Bulk
Short consultation 1 064 25.05 26 653
Long consultation 266 47.60 12 662
Total 1 330 39 315
Private
Short consultation 456 35.00 15 960
Long consultation 114 60.00 6 840
54
Total 570 22 800
Total 1 900 62 115
February
Bulk
Short consultation 1 232 25.05 30 862
Long consultation 308 47.60 14 661
Total 1 540 45 523
Private
Short consultation 528 35.00 18 480
Long consultation 132 60.00 7 920
Total 660 26 400
Total 2 200 71 923
March
Bulk
Short consultation 1 372 25.05 34 369
Long consultation 343 47.60 16 327
Total 1 715 50 696
Private
Short consultation 588 38.50 22 638
Long consultation 147 66.00 9 702
Total 735 32 340
Total 2 450 83 036
Quarter
Bulk
Short consultation 3 668 91 884
Long consultation 917 43 650
55
Total 4 585 135 534
Private
Short consultation 1 572 57 078
Long consultation 393 24 462
Total 1 965 81 540
Total 6 550 217 074
Practical question 22
Doohan Brothers’ Hardware cash budget for January and February
January February
$ $
Receipts
Collections from accounts receivable
December sales 25 000
January sales 104 000 26 000
February sales 120 000
Total receipts from accounts receivable 129 000 146 000
Cash sales 186 000 196 000
GST collected 31 500 34 200
Total receipts 346 500 376 200
Payments subject to GST
Payments to accounts payable
December purchases 25 920
January purchases 96 000 24 000
February purchases 138 240
Total payments for purchases 121 920 162 240
Other expenses 80 000 90 000
56
Shop fittings 65 000
GST paid 26 692 25 224
Payments not subject to GST
Wages 30 000 15 000
GST payment for December quarter 18 000
Drawings 10 000 10 000
Total payments 351 612 302 464
Increase/decrease in cash for the month (5 112) 73 736
Opening cash balance 70 800 65 688
Closing cash balance 65 688 139 424
Practical question 23
Scott’s Gardening Service income statement performance report for the year ended 30
June
Budget Actual Variance
$ $ $
Fees income 64 000 69 000 5 000 F
Less Operating expenses
Gardening supplies 12 500 13 000 500 U
Hire of equipment 5 000 4 800 200 F
Depreciation of equipment 3 400 3 400
Advertising 1 920 1 800 120 F
Motor vehicle expenses 6 500 7 100 600 U
Interest on loan 2 000 2 000
Total expenses 31 320 32 100 780 U
Net profit 32 680 36 900 4 220 F
57
Scott had a better year than forecast, with profit exceeding budget by $4220. This was
achieved, however, by working an additional 200 hours and also reducing his hourly rate for
some of the work. Expenses were fairly well controlled, with gardening supplies and motor
vehicle expenses exceeding budget, but this would be explained by the increased level of
activity.