PRACTICE QUESTION 1

The SA Company uses the following information to prepare their annual budget:

1. Financial position as at 30 June 2022

R
Cash 72 000
Debtors 225 000
Net fixed assets 240 000
Inventory:
Direct material 287 640
Work in progress 145 000
Finished goods 441 000
Share capital 600 000
Retained income 648 640
Creditors 162 000

2. Basis on which the budget is prepared: Units

(a) Quarterly sales estimate:

3rd Quarter 15 000
4th Quarter 12 000
1st Quarter 12 000

(b) Selling price per unit R125,00

(c) Inventory policy:

Finished goods - 30% of the following quarter’s demand must be in stock at the
end of each quarter.
Direct material - 40% of the following quarter’s demand must be in stock at the
end of each quarter.

(d) Manufacturing overheads (per unit) R

Direct material 51

2 kg material A 36
1 kg material B 15

Direct labour (2 hours) 24

Overheads 23

Variable 16
(Based on direct labour hours)
Fixed 7
(Based on a normal monthly activity of 5 000 units)

(e) Administrative and marketing costs:

Advertisements R12 000 per quarter

Commission R6,25 per unit
Administrative R90 000 per quarter
 (f) Cash payment policy:

All direct materials are purchased on credit. 65% of these purchases is paid
during the quarter in which they are made, and the rest is paid during the following
quarter. All other payments are made as the expenses occur.

(g) Experience of debtors’ collections:

25% of the sales is cash sales and the rest is sales on credit. 50% of the credit
sales are paid during the month in which the sales occur and the rest during the
following month (assume equal monthly sales in each quarter).

(h) Additional information:

i) Prices, costs and the manufacturing process remain unchanged.

ii) Income tax rate: 50%
iii) Depreciation is provided for at 20% per annum on the reducing balance
method and is included in the fixed manufacturing overheads.
iv) The company is planning to purchase and install new equipment to the
value of R10 000 at the end of September 2022
v) The value of the work in progress remains unchanged during the year.
vi) Variances in production costs are written off against the cost of sales and
inventories are always valued at standard costs.

YOU ARE REQUIRED TO:

(a) prepare the following budgets:

i) Sales budget (3rd and 4th quarter);

ii) Production budget in units (3rd and 4th quarter);
iii) Material purchases budget (3rd quarter);
iv) Cash budget (3rd quarter).

(b) to prepare the projected income statement for the third quarter
PRACTICE QUESTION 1 (SUGGESTED SOLUTION)

(a) i) Sales budget

3rd 4th
quarter quarter

Sales (units) 15 000 12 000

Selling per unit R125 R125
Budgeted sales R1 875 000 R1500 000

ii) Production budget (units)

3rd 4rd
quarter quarter

Budgeted sales 15 000 12 000

Add: Required closing inventory (30%) 3 600 3 600
18 600 15 600
Less: Opening inventory 4 500 3 600
Production budget 14 100 12 000

iii) Material purchases budget

(3rd quarter only)
Material Material
A B
Kg Kg
Production requirements
14 100 x 2kg 28 200
14 100 x 1kg 14 100

Required closing inventory:

40% (12 000 x 2kg) 9 600
40% (12 000 x 1kg) 4 800
37 800 18 900
Less: Opening inventory 11 280 5 640
Quantities which have to be purchased 26 520 13 260
Purchase price R18 R15
Budgeted purchases R477 360 R198 900
Workings:

Direct labour budget 3rd

quarter

Production (units) 14 100

Direct labour hours per unit 2
Total labour hours 28 200
Labour rate R12
Budgeted labour costs R338 400

Overhead’s budget: R
Variable overheads (28 200 x R8) 225 600
Fixed overheads (3x5000xR7) 105 000
Total budgeted overheads 330 600

iv) Cash budget (3rd quarter)

R
Opening balance 72 000
Receivable:
Opening balance, debtors 225 000
Sales 1 640 625
Cash sales (25%xR1 875 000) 468 750
Credit sales 1 171 875

Total 1 406 250

Less: Outstanding balance* 234 375

1 937 625
Less: Payments 1 464 319

Opening balance, creditors 162 000

Material purchases
(65% x R676 260) 439 569
Labour 338 400
Overheads (R330 600 - R12 000) 318 600
Marketing (R12 000 + R93 750) 105 750
Administration 90 000
New equipment 10 000

Closing balance 473 306

* 50% x R1 406 250  3 months

 Depreciation: R240 000 x 20%  4 quarters
(b) i) Budgeted income statement
R
Sales (15 000 x R125) 1 875 000
Less: Cost of sales 1 476 300*

Opening balance (4 500 x R98) 441 000

Production (14 100 units) 1 388 100

Materials: 28 200 x R18 507 600

14 100 x R15 211 500
Labour 338 400
Overheads 330 600

1 829 100
Less: Closing inventory
(3 6000 x R98) 352 800

Gross profit 398 700

Less: Marketing & administration 195 750

Advertisements 12 000
Commission (15 000 x R6,25) 93 750
Administration 90 000

Net profit before taxation 202 950

* Overhead variance [(15 000 - 14 100) x R7 = R6 300] can be calculated

and written off against the cost of sales.
PRACTICE QUESTION 2 (30 Marks)

Richie Rich is the Chief Financial Officer (CFO) of a mining and exploration company RR. The
company is involved in performing drilling and excavation services for a number of large
Namibian mines including the likes of DeBeers, NAMDEB and Swakop Uranium. The year
end of the company is 31 March.

The company invoices large sums of money during the financial year and good cash
management is an essential part of managing the company’s finances.

Richie Rich is a great businessman. He, however, has difficulty in preparing budgets which
are essential to monitor expected cash flows. Richie Rich wants to undertake a large amount
of projects in the next financial year which will require a large amount of capital expenditure
and a budget thus has to be prepared to ensure that there is sufficient cash for these purposes.

Richie Rich has approached you for assistance in preparing the cash budget for the next
financial year and has presented you with the following information:

All contracts with the mines are on an account basis due to the large sums of money involved.

Estimated sales over the next 4 Quarters of the 2023 financial year end are:

Q1 Q2 Q3 Q4
N$’000 N$’000 N$’000 N$’000
Apr – Jun 90 000
Jul – Sep 90 000
Oct – Dec 120 000
Jan – Mar 70 000

Clients are expected to settle 1/3 of the contract as up-front payment in the quarter that the
sale is made, the remaining 2/3 will be received in the following quarter when all work is
expected to be completed.

Salaries and wages are estimated at N$6,5 million per month and are paid in cash every
month. Production bonuses are paid in December and are estimated at 2 x monthly salary
charges.

The company uses expensive TLB’s and other excavation equipment which is very expensive.
Machines have a useful life of 5 years. Depreciation will be written off on these machines. At
31 March 2017 accumulated depreciation represents inter alia 80% of the cost of one of the
assets. At the end of their useful lives each machine can be realized for N$10 000 000 cash.

Costs to operate these machines including diesel and oil is N$ 30 000 000 per quarter.

The main material that is used in the services provided to the mines is metal rods. These items
are purchased cash on delivery. The Q1 and Q2 expected cost is N$ 3 million per quarter.
This cost is expected to increase by 10% in Q3. The Q4 cost is budgeted as 10% less then
that of Q2.

All other materials used on the mines are purchased on credit and must be paid in the quarter
following the one in which they are purchased, to retain cash in the company for as long as
possible, but without damaging the company’s reputation for long overdue payments.
PRACTICE QUESTION 2 (Continued)

Estimated purchases of materials are:

N$ ‘000
Q1 5 000
Q2 5 000
Q3 8 000
Q4 4 000

Extracts from the Balance sheet at 31 March 2022:

N$’000
Cash 3 000
Debtors 46 666
Fixed Assets – cost 300 000
Accumulated Depreciation 150 000
Trade Creditors 100 000

The company wishes to maintain a cash balance of N$3 000 000 at the end of each quarter
and will borrow funds from Bank Windhoek to facilitate this. The funds will be borrowed at the
beginning of the quarter and interest of 13,5% per quarter will be paid at the beginning of the
next quarter on the balance outstanding. No capital will be repaid in the budgeted financial
year.

Opening creditors will be repaid 50% in Q1 with a 10% discount on that and the balance to be
repaid in Q2.

Vending Machines:

Richie Rich is planning on purchasing vending machines to be placed on the sites of his mine
workers so that they can drink coffee and have a snack on site to increase productivity.

RR has two choices in this regard. They can rent or purchase the machines.

Sales are expected to increase by 10% because of the machines.

If the machines are purchased, the cost will amount to N$1 million. The machines will have to
be maintained at a cost of N$10 000 per month.

Under the lease, the maintenance will be done by the lessor and total monthly lease cost are
estimated to be N$60 000 per month.

REQUIRED:
(a) Describe and explain six purposes of budgets. (6)

(b) Assist Richie Rich in preparing the cash budget for the financial year ending 31 March
2023.
(Ignore the effects of the vending machines.) (18)

(c) Write an e-mail to the CFO in which you advise him if he should lease or buy the vending
machines by applying short term-decision making principles. Also discuss the
correctness of this approach. (6)
PRACTICE QUESTION 2 (SOLUTION) (30 MARKS)

a) (6 Marks)

1. Planning annual operations.

(1)
2. Co-ordinating activities for harmonization in the enterprise.
(1)
3. Communicating plans to responsible staff.
(1)
4. Motivating managers to achieve organizational goals.
(1)
5. Controlling activities.
(1)
6. Evaluating the performance of managers.
(1)

b) (18 Marks)

Cash budget for the year ended 31 March 2023

N$’000 N$’000 N$’000 N$’000
Q1 Q2 Q3 Q4

Opening Balance (1) 3000 3000 3000 26645 1P

cash

Receipts Opening debtors 46 666 1

Sales 30000 60000 60000 80000 1
Sales 30000 40000 23333 1
Proceeds from 10000 1
assets

Payments Salaries (19500) (19500) (19500) (19500) 2

Bonus (13000) 1
Depreciation 0 0 0 0 1
Operation Costs (30000) (30000) (30000) (30000) 1
Rods (3000) (3000) (3300) (2700) 2
Creditors opening (45000) (50000) 1
Other creditors (5000) (5000) (8000) 2

Interest on loan (2813) (5555) (5555) 1

Loan 20834 20313 0 0 1P

Closing balance 3000 3000 26645 74223

Cash
c) (6 Marks)

To: CFO
From: CA Student
Date: 31/03/2022

Subject: Option to Buy or Lease Vending Equipment

Dear Sir,

Kindly see below my workings and recommendations on the proposed options for your
perusal.

Please do not hesitate to contact me if you have any questions.

Kind Regards,
CA Student

Increase in sales is irrelevant as it is common to both decisions

(1)

Purchase:

Cost N$ 1 000 000

Maintenance N$ 120 000 (N$10 000 x 12months)

Total cost p.a. N$1 120 000

(1)

In each of the following years the expense = N$120 000 p.a. which is maintenance cost (1)

Lease:

Maintenance -
Lease charge N$ 720 000
Total cost p.a. N$ 720 000

Also consider the reliability of the company leasing from and their reputation. (1)

These two options are not comparable over the short term, because time value of money
should be considered, because it is a long-term decision. (2)