NATIONAL DIPLOMA IN BUSINESS LEVEL 6 SEMESTER ONE 2012 UNIT STANDARD 1857 Prepare and use budgets and

d cash flow forecasts Financial management Version 4 And credits 5

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4492

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Answer 1: a) Sales budget for 2012-13 is tabulated in dollars is given below,

Product Light Coil Heavy Coil

Units 60000 40000

Rate/Price($) 70 100

Sales($) 4200000 4000000 8200000 $

Total sales Budget for 2012-13

Calculation: 60000*70=4200000 4200000+4000000=8200000

b) Production budget for 2012-13 in Units is tabulated below,

Product Light Coil Heavy Coil

Sales units 60000 40000

Opening stock (-) Closing stock (+) Production(Units) 20000 8000 25000 9000 65000 41000 106000 Units

Total production Budget for 2012-13

Calculation: 60000+(25000-20000)=65000Units 65000+41000=106000 Units

c) Direct material purchase budget for 2012-13 in quantities is tabulated below,

Material used in light Coil: Product Sheet Metal Copper Wire Production(Units) 65000 65000 Unit(Kg) 4 2 Total(Quantities) 260000 130000 390000

Material used in Heavy Coil: Product Sheet Metal Copper Wire platform Production(Units) 41000 41000 41000 Unit(Kg) 5 3 1 Unit Total(Quantities) 205000 123000 41000 369000

Product Sheet Metal Copper Wire platform

Closing Inventories(+) Opening Inventories(-)Total(Quantities) 32000 Kg 29000 Kg 6000 units 36000 Kg 32000 Kg 7000 units 461000 250000 40000 751000

Direct Material purchase Budget for 2012-13 in quantities

Calculation: (320000-36000)+(260000+205000)=461000

d) Direct material purchases budget for 2012 -13 (in dollars) is tabulated below,

Product Sheet Metal Copper Wire

Purchase(Quantity) 461000 250000

Price/rate($) 8 5

Total($) 368000 125000

platform

40000

120000 613000 $

Direct material purchases budget for 2012 -13 (in dollars)

e) Direct Labor budget for 2012 -13 (in dollars) is tabulated below,

Product Light Coil Heavy Coil

Production(Units) Hours per Unit 65000 41000 2 3

Rate per Hour 15 20

Total ($) 1950000 2460000 4410000 $

Direct Labor budget for 2012 -13 (in dollars)

Answer 2: a) schedule of collection from debtors Particulars Sales Credit sales Collection From Debt For that month Collecting From That month Collecting From Previous month Collection From Debtor 27048 18933.60 7761.60 26695.20 32340 22638.00 3339.89 25977.89 39396 27577.20 3993.34 31570.54 April 46000 27600 May 55000 33000 June 67000 40200

Schedule of Payment to creditors cannot be done because only cash purchase took place.

b) Cash budget for the quarter ending June.

Particulars Opening Cash

April 10000

May 15095.20

June 17573.09

Receipts: Cash Sales Collection From Debtor Debtors 30 days

45095.20 18400 26695.20

47977.89 22000 25977.89

58370.54 26800 31570.54

Payments: Cash Purchases Expenses - Cash Equipment Purchase Dividends

40000 33000 7000

45500 36000 7000

60700 39700 7000 14000

2500

Closing Balance

15095.20

17573.09

15243.63

Answer 3: Production budget for the four months (July October) is tabulated below, Particulars Sales Opening Stock(+) Closing Stock(-) 4500 3000 6000 4500 5000 6000 5000 5000 July(units) August(Units) September(Units) October(Units) 30000 45000 60000 50000

Production budget for the four months(July October) 31500 46500 59000 50000

Calculation: 30000+(1500)=31500 60000+(-1000)=59000 Question 4: What is a Budget? Discuss some of the Major benefits of Budgeting? Ans: Budget is a formal written statement of managements plan for specified future time period, Expressed in financial terms. There are many advantages of doing budgeting for an organization The major advantages of budgeting is, the planning and organizing of organizational activities will be up-to-date and can implement the same. As an outcome of this the efficiency of the work and system will improve and prevent the waste. Both planning and organizing are connected each other. The plan of the organization can be executed by organizing in it the day to day activities. This will save more time and money directly. Question 5: Distinguish between forecast and Budget Ans: Forecast and budgets looks so similar in many ways but principally both have got far different use in organizations. Budgets generally shows the targets of an organization in financial language but forecast is the prediction of things going to happen by considering the actual facts and situation

Budgets generally not prepare all the times but forecast are good if you prepare it in regular basis to see the actual scenario. Question 6: Briefly highlight and discuss the features of an effective budget system Ans: The main features of budgeting are, Controlling operations. Evaluating performance. Both are the main features of budgeting which are used by the organizations for its activities. Controlling activities are used to control the unnecessary expenses in a project or an operation scenario of any organization. Not only it reduces expenses, it will give an idea what to do next and how much fund flow required for a certain period of time. Organizing will be much easy with an effective budgeting system. All together quality is what the whole work is going to achieve. For example: Effective Budget of a manufacturing company will help the day to day activities of the factory like Labor wages, carrying costs, administrative expenses etc. The people deal with it knows how much exactly we need to spend daily to meet the organizational targets. Further more an effective Budget can be uses in evaluating the performance of a running work or operations. This can be done by just matching it with the expenses and the budget prepared earlier. If both are going parallel then the performance of that work or operation is up to the mark. The company may have profits with that specific task. organization. Question 7: Explain responsibility centers. Ans: There are mainly 3 types of responsibility centers 1. Cost centre 2. Profit centre 3. Investment centre Cost centre only have expenses for the business no income/revenue generates for the business directly. For example corporate offices of a manufacturing/ Production Company, Some Head office of bank it directly not generates income. Its subsidiaries like factories, stores etc generate revenue By this way budgeting is crucial for an

for the organization directly. Performance is evaluated by the managers by comparing the actual controllable cost and budgeted data. Profit centers also incur costs but it generates revenue for the business directly. For Example factory outlets, Retail and whole sale shops, Branch offices o Banks etc generates profit and also have its on expenses. Performance is evaluated by the managers Here direct fixed costs are controllable but Indirect fixed cost are UN controllable Investment centers have expenses, profits and control over investment funds available for use. Managers evaluated on Profitability of centre, Rate of return earned on invested funds.

Answer 8: Complete the Tabulations: Particulars Financial Performance : Sales Opening Stock Purchases Available Closing Stock Cost of Sales Gross Profit Expenses Cash 85000 50000 50000 15000 95000 115000 130000 45000 45000 13500 40000 40000 12000 55000 55000 16500 70000 60000 60000 18000 0 70000 70000 21000 $ $ $ 80000 95000 60000 $ $ $ Jan Feb Mar Apr May June

100000 90000 95000 40000 85000 55000

110000 120000 140000 115000 130000 70000 0 70000 0

Expenses Allocation Net Profit

5000 30000

5000 26500

5000 23000

5000 33500

5000 37000

5000 44000

Cash Budget:

Receipts: Cash Sales Debtors Current Debtors 30 days Debtors 60 days Total 44000 71600 20000 24000 18000 21600 32000 16000 19200 28800 20000 84000 22000 26400 25600 18000 24000 28800 35200 16000 28000 33600 38400 22000

560000 104000 122000

Payments: Cash Purchases Creditors Current Creditors 30 days Expenses - Cash Total 15000 43800 12000 16800 16500 23100 11200 13500 64300 18000 25200 15400 12000 70600 21000 29400 16800 16500 83700 0 0 19600 18000 37600 0 0 0 21000 21000

Answer 8: a) Particulars Sales( units) Revenue profit Master budget 2000 50000 8000 Flexible Budget 1900 41800 0 Actual result 1900 41800 0

Flexible budget: 50000/2000=25 1900 Unit* 25 per unit cost=47500

Variance=master-actual 50000-47500= 2500

B) 1. Budget should be flexed because if sale increase automatically production and other costs accordingly. 2. In master budget it was 50000 and after calculating the actual it is 47500 so the variance is 2500. Answer 9:

Calculation in Excel Sheet attached.

Answer- 10.1 (A) Method Formula Payback Period Payback Period=A+(NOC-C)/D

Decision Rule

Accept the project has less payback period as compare to other projects.

Advantages

Provides an indication of a project's risk and liquidity

Disadvantages

Ignores time Value of money.

Answer- 10.1 (B) Project A Initial Cash Outlay 40000 Project B 40000 Project C 40000

Project A Year 1 2 3 4 5 Cash inflow 3000 7000 11000 15000 27000 Cumulative 3000 10000 21000 36000

In the 5th year $ 4000 required from $ 19000 Payback period= 4 Years+ (4000/27000) = 4 Years + .148 = 4.15 years

Project B Year 1 2 3 4 5 Cash inflow 16000 13000 10000 7000 4000 Cumulative 16000 29000 390000

$ 1000 required in the 4th year Payback Period = 3 Years + (1000/7000) = 3 years + .14 = 3.14 years

Project C Year 1 2 3 4 Cash inflow 12000 12000 12000 12000 Cumulative 12000 24000 36000

12000

$ 4000 required from $ 12000 in the year 4th Pay Back period = 3 years + (4000/ 12000) = 3 years + .33 = 3.33 years

Answer-10.2 (B) NPV Project (A) Year 1 2 3 4 5 S.V. Inflow 3000 7000 11000 15000 19000 8000 PVF @ 10% 0.909 0.826 0.751 0.683 0.621 0.621 Total PV Present Value 2727 5782 8261 10245 11799 4968 43782

NPV = Total PV of cash inflow Total PV of cash outflow = 43782 40000 NPV = $3782

Project (B) Year 1 2 3 4 5 S.V. Inflow 16000 13000 10000 7000 4000 PVF @ 10% 0.909 0.826 0.751 0.683 0.621 0.621 Total PV 40057 Present Value 14544 10738 7510 4781 2484

NPV = Total PV of Cash inflow Total PV of cash outflow = 40057 40000 NPV = $57 Project (C) Year 1 2 3 4 5 S.V. Inflow 12000 12000 12000 12000 12000 2000 PVF @ 10% 0.909 0.826 0.751 0.683 0.621 0.621 Total PV Present Value 10908 9912 9012 8196 7452 1242 46722

NPV = 46722 40000 NPV = 6722 Answer- 10.2 (a) 3200 * 0.877 = 2806.4

10.3 (A) Method Formula Internal Rate of return

0
Type equation here.

Decision Rule

Accept the project which internal rate of return is high as compare to other projects.

Advantages

This method considers the time value of money and is therefore more realistic than the Accounting Rate of Return (ARR) method.

Disadvantages

The IRR could be difficult to find if we want to calculate it by using trial and improvement.

Answer-10 .3(B) Project A B C

Year 0 1 2 3 4 5 5 40000 3000 7000 11000 15000 19000 8000 40000 16000 13000 10000 7000 4000 0 40000 12000 12000 12000 12000 12000 2000

IRR

12%

10%

16%