Budgeting Questions and Answers Grade 12

Budgeting Questions and Answers Grade 12 The process of calculating how much money you must earn or save during a particular period of time, and of planning how you will spend it.

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 2015	70 000
     May 2015	78 750

   • 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
     February	31 500	11 970
     March	10 500	a	3 990
     April	14 000		8 064	b
     May	c
     			18 018	12 054

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:

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.

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:

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)

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 2013	FEB 2013
   RECEIPTS
   Cash sales	96 000	84 000
   Collection from debtors	70 000	?
   Interest on fixed deposit (7% p.a.)	?	0
   Fixed deposit: Magic Bank maturing on 1 Feb. 2013	0	42 000
   Commission income	?	?
   Rent income	8 500	8 800
   PAYMENTS
   Salary and wages	15 000	16 800
   Stationery	1 000	1 000
   Telephone	?	?
   Payment to creditors	71 250	D
   Cash purchase of stock	C	52 500
   Repayment of existing loan		100 000
   Furniture bought on credit	30 000
   Delivery expense for delivery of hardware to customers	?	11 200
   Training of staff	2 000	2 000
   Advertising	1 600	1 400
   Depreciation	12 500	12 500
   Sundry expenses	3 500	3 600
   Drawings by owner	?	?
   Vehicle expenses	0	500

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:

J. Information from the Projected Income Statement:

K Incomplete Cash Budget for 2018:

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)

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)

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

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.

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

3.5 Complete the Debtors’ Collection Schedule for February 2013.

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.

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

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

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.