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When you have completed this chapter, you should be able to:
Asset s
Equi t y
Li abi l i t i es
Asset s (at t h e en d
of t h e peri od)
Asset s
Li abi l i t i es
Equi t y
Hint
arising from
normal
When you have completed this chapter, you should be able to:
Tot al cost
Fi x ed cost
Fi x ed cost
Sal es reven ue per un i t
Fi x ed cost
Target pro t
Hint
When you have completed this chapter, you should be able to:
When you have completed this chapter, you should be able to:
Can you think of any reason why most businesses prepare detailed budgets for the
forthcoming year, rather than for a shorter or longer period?
Which method of budgeting do you think is likely to be more costly and which method
is likely to be more beneficial for forward planning?
Can you think of any ways in which a manufacturers short-term shortage of production
facilities might be overcome?
The third on the above list of the uses of budgets (motivation) implies that managers are
set stated tasks. Do you think there is a danger that requiring managers to work towards
such predetermined targets will stifle their skill, flair and enthusiasm?
The fourth on the above list of the uses of budgets (control) implies that current
management performance is compared with some yardstick. What is wrong with comparing actual performance with past performance, or the performance of others, in an
effort to exercise control?
Source
Source
Source
Source
Source
Practices in UK SMEs
Source
1
2
3
4
5
6
Jan
000
Feb
000
Mar
000
Apr
000
May
000
June
000
Jan
000
Feb
000
Mar
000
Apr
000
May
000
June
000
Receipts
Payments
Looking at the cash budget of Vierra Popova Ltd, what conclusions do you draw and
what possible course of action do you recommend regarding the cash balance over the
period concerned?
Vierra Popova Ltd (Example 9.1) now wishes to prepare its cash budget for the second
six months of the year. The budgeted income statements for each month of the second
half of the year are as follows:
July
000
Aug
000
Sept
000
Oct
000
Nov
000
Dec
000
The business will continue to allow all of its customers one months credit.
It plans to increase inventories from the 30 June level by 1,000 each month until, and
including, September. During the following three months, inventories levels will be
decreased by 1,000 each month.
Inventories purchases, which had been made on one months credit until the June
payment, will, starting with the purchases made in June, be made on two months credit.
Salaries, wages and other overheads will continue to be paid in the month concerned. Electricity is paid quarterly in arrears in September and December.
At the end of December, the business intends to pay off part of some borrowings.
This payment is to be such that it will leave the business with a cash balance of 5,000
with which to start next year.
Prepare the cash budget for the six months ending in December. (Remember that any
information you need that relates to the first six months of the year, including the cash
balance that is expected to be brought forward on 1 July, is given in Example 9.1.)
July
000
Receipts
Payments
Aug
000
Sept
000
Oct
000
Nov
000
Dec
000
Jan
000
Feb
000
Mar
000
Apr
000
May
000
June
000
Jan
000
Feb
000
Mar
000
Apr
000
May
000
June
000
Jan
000
Feb
000
Mar
000
Apr
000
May
000
June
000
Have a go at preparing the trade receivables budget for Vierra Popova Ltd for the six
months from July to December (see Activity 9.8 and Example 9.2).
July
000
Aug
000
Sept
000
Oct
000
Nov
000
Dec
000
Have a go at preparing the trade payables budget for Vierra Popova Ltd for the six
months from July to December (see Activity 9.8 and Example 9.2). (Hint: Remember that
the trade payables payment period alters from the June purchases onwards.)
July
000
Aug
000
Sept
000
Production
units
Oct
000
Nov
000
Sales
units
Dec
000
Required:
The answer to this question can be found at the back of the book, in Appendix B.
Source
Budget
Actual
Can you see any problems in comparing the various items (sales, raw materials and so
on) for the budget and the actual performance of Baxter Ltd in order to draw conclusions as to which aspects were out of control?
Flexed budget
Original budget
Flexed budget
Actual
What will be the loss of profit arising from the sales volume shortfall, assuming that
everything except sales volume was as planned?
Compare the sales revenue, raw materials and labour values between the flexed budget
and the actual results and reconcile the original budget and the actual profit for Baxter
Ltd. Remember that the sales volume variance is also part of the difference.
If you were the chief executive of Baxter Ltd, what attitude would you take to the
overall variance between the budgeted profit and the actual one?
How would you react to the five individual variances that are the outcome of the
analysis shown in the solution to Activity 9.13?
What Next?
BA at the controls
Sources
Source
Accounting Practices
variance
Required:
Sales units
Required:
Expense
Expense
Required:
Assets
Share capital
2
3
7
8
Required:
May
000
Notes:
1
2
3
4
5
6
7
June
000
July
000
Aug
000
Sept
000
Oct
000
Nov
000
Required
not
When you have completed this chapter, you should be able to:
ARR
100%
Hint
Hint
PV of t h e cash ow of year n
r) n
maximum
Hint
1
1
Hint
When you have completed this chapter, you should be able to:
Hint
Sparkrite Ltd
Income statements for years ended 30 September last year and this year
+
+
+
+
+
+
+
+
+
=
=
=
=
=
=
=
=
+
+
+
+
Chase trade receivables
Reduce inventories
and
Job costing
Process costing
Batch costing
Opt i on 1
Opt i on 2
Opt i on 3
Pl ayer opt i on
Risk
Matching
Cost
Flexibility
Doing nothing
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645
0.614
0.585
0.557
0.530
0.505
0.481
0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.327
0.284
0.247
0.215
0.187
0.163
0.141
0.123
0.862
0.743
0.641
0.552
0.476
0.410
0.354
0.305
0.263
0.227
0.195
0.168
0.145
0.125
0.108
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.074
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Appendix E
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
0.826
0.683
0.564
0.467
0.386
0.319
0.263
0.218
0.180
0.149
0.123
0.102
0.084
0.069
0.057
0.820
0.672
0.551
0.451
0.370
0.303
0.249
0.204
0.167
0.137
0.112
0.092
0.075
0.062
0.051
0.813
0.661
0.537
0.437
0.355
0.289
0.235
0.191
0.155
0.126
0.103
0.083
0.068
0.055
0.045
0.806
0.650
0.524
0.423
0.341
0.275
0.222
0.179
0.144
0.116
0.094
0.076
0.061
0.049
0.040
0.800
0.640
0.512
0.410
0.328
0.262
0.210
0.168
0.134
0.107
0.086
0.069
0.055
0.044
0.035
0.794
0.630
0.500
0.397
0.315
0.250
0.198
0.157
0.125
0.099
0.079
0.062
0.050
0.039
0.031
0.787
0.620
0.488
0.384
0.303
0.238
0.188
0.148
0.116
0.092
0.072
0.057
0.045
0.035
0.028
0.781
0.610
0.477
0.373
0.291
0.277
0.178
0.139
0.108
0.085
0.066
0.052
0.040
0.032
0.025
0.775
0.601
0.466
0.361
0.280
0.217
0.168
0.130
0.101
0.078
0.061
0.047
0.037
0.028
0.022
0.769
0.592
0.455
0.350
0.269
0.207
0.159
0.123
0.094
0.073
0.056
0.043
0.033
0.025
0.020
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15