Assessment Resource SITXFIN004

Questions

1 Define the following Budgeting Terms:

It can be defined as a report that is used by the management to predict the

Budgeted balance sheet levels of assets, liabilities, and equity based on the budget for the current
accounting period.

A cash flow budget can be defined as an estimate of all cash receipts and
Budgeted cash flow statement all cash expenditures that are expected to occur during a certain time
period.

A profit and loss budget is a one page summary of expected income and
Budgeted profit and loss statement expenses. It is usually prepared monthly, covers a twelve month period,
and is based on a financial year.

Cash shortage is defined as an inability of individuals or firms to obtain

Cash shortage
desired nominal balances of cash.

A cash surplus is the cash that exceeds the cash required for day-to-day
Cash surplus
operations.

Expenditure Budget shows the revenue and capital disbursements of

Expense budget various ministries/departments and presents the estimates in respect of
each under 'Plan' and 'Non-Plan'.

A favourable variance is one where revenue comes in higher than

Favourable variance
budgeted, or when expenses are lower than predicted.

Financing activities are transactions or business events that affect long-

Financing Activities
term liabilities and equity.

A fixed cost is a cost that does not change with an increase or decrease in
Fixed Costs
the amount of goods or services produced or sold.

The master budget is the aggregation of all lower-level budgets produced

Master budget by a company's various functional areas, and also includes budgeted
financial statements, cash forecast, and a financing plan.

A rolling budget is continually updated to add a new budget period as the

Rolling Budget
most recent budget period is completed.

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The schedule of accounts receivable is a report that lists all amounts

Schedule of collections
owed by customers.

A payment schedule defines agreements about the amounts to be paid by

Schedule of payments
payment period.

Top-down budgeting is a budgeting method in which senior management

Top-Down Budgeting
develops a high-level budget for the company.

Unfavourable variance is an accounting term that describes instances

Unfavourable variance
where actual costs are higher than the standard or projected costs.

In budgeting a variance is the difference between a budgeted, planned, or

Variance
standard cost and the actual amount incurred/sold.

A variance report is a document that compares planned financial

Variance report
outcomes with the actual financial outcome.

Zero-based budgeting (ZBB) is a method of budgeting in which all

Zero-based budgeting
expenses must be justified for each new period.

2 Describe the following types of budgets:

A cash flow statement provides data regarding all cash inflows a company
receives from its ongoing operations and external investment sources.
The cash flow statement includes cash made by the business through operations,
investment, and financing—the sum of which is called net cash flow. It includes
three sections which are:
Cash flow statement  The first section of the cash flow statement is cash flow from operations,
which includes transactions from all operational business activities.
 Cash flow from investment is the second section of the cash flow
statement, and is the result of investment gains and losses.
 Cash flow from financing is the final section, which provides an overview
of cash used from debt and equity.

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A cash budget is a company's estimation of cash inflows and outflows over a

specific period of time, which can be weekly, monthly, quarterly, or annually.
A company will use a cash budget to determine whether it has sufficient cash to
continue operating over the given time frame.
A cash budget will also provide a company with insight into its cash needs and
cash flow budgets
any surpluses, which help it determine an efficient use of cash.
Cash budgets can be viewed as short-term cash budgets, usually, a time frame of
weeks to months, or long-term cash budgets, which are viewed as years.
A company must manage its sales and expenses to reach an optimal level of cash
flows.

Departmental budgets refer to the money departments spend each year on things
such as public services, welfare and infrastructure investments. A departmental
budget is a department-level financial plan that lays out spending for the
upcoming quarter or fiscal year.
departmental budgets Departmental budgeting offers more control over spending at the department
level, allowing teams to analyse performance in a granular way. It helps in risk
management and seeing which areas are profitable and which are not. It can also
help teams’ spot bottlenecks much faster than they would work under one budget
for the entire organization.

An event budget is an estimation of the costs an event will incur based on
event budgets plans made as well as research. Whether you are planning a small event or a
large sophisticated one, your corporate event cannot exceed your budget.

The Project Budget is a tool used by project managers to estimate the total cost of
a project. A project budget template includes a detailed estimate of all costs that
are likely to be incurred before the project is completed. Large commercial
project budgets projects can have project budgets that are several pages long. Such projects often
have a large number of costs associated with them, such as labour costs, material
procurement costs, and operating costs. The Project Budget itself is a dynamic
document. It is continuously updated over the course of the project.

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A purchases budget contains the amount of inventory that a company must

purchasing budgets
purchase during each budget period. The amount stated in the budget is the
amount needed to ensure that there is sufficient inventory on hand to meet
customer orders for products.

A sales budget is management’s estimation of sales for a future financial period.

sales budgets
A company uses sales budgets in order to set department goals, estimate earnings
and forecast production requirements. The sales budget affects both other
operating budgets and the overall master budget of the company.

A wage expense is the cost incurred by companies to pay hourly employees. This
line item may also include payroll taxes and benefits paid to employees. Hence, a
wage budgets
wage budget contains the amount that a company will need to pay to the hourly
labour and employees. The amount stated in the budget is the amount needed to
ensure that there is sufficient labour on hand to meet customer orders for
products.

An organization budget provides an accurate picture of expenditures and

revenues and it also drives important business decisions such as whether
to increase marketing, cut expenses, hire staff, purchase equipment, and
whole of organisation
budgets improve efficiencies in other ways. It also outlines the organization's
financial and operational goals, so it may be thought of as an action plan
that helps us in allocating resources, evaluate performances, and
formulate plans.

3 Describe the 6 main pieces of information you will need in order to prepare a project budget

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4 Describe and explain the basic calculation used within direct labour (wage) budgets

The direct labour budget is used to calculate the number of labour hours that will be needed to produce the
units itemized in the production budget. This budget is useful for anticipating the number of employees who
will be needed to staff the manufacturing area throughout the budget period. This allows management to
anticipate hiring needs, as well as when to schedule overtime, and when layoffs are likely. The budget provides
information at an aggregate level, and so is not typically used for specific hiring and layoff requirements.

The direct labour budget is typically presented in either a monthly or quarterly format. The basic calculation
used by the budget is to import the number of units of production from the production budget and to multiply
this by the standard number of labour hours for each unit. This yields a subtotal of the direct labour hours
needed to meet the production target. You can also add more hours to account for production inefficiencies,
which increases the amount of direct labour hours. Then multiply the total number of direct labour hours by the
fully burdened direct labour cost per hour to arrive at the total cost of direct labour.

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To assist in budgeting for the year ending 30 June 2016, Central Bakery has provided the following
information.
Income Statement for the year ended 30 June 2015
2016 2017 (estimates)
$ Details
Sales (80% credit) 500,000 1100 units @ $500 Increase price per unit by 5% and
inc GST number of units by 15%
Cost of sales 200,000 Cost $200 per unit Supplier’s price unchanged. All
inc GST stock is purchased on credit
Gross Profit 300,000
Less other expenses
Bad debts 4000 20% of credit sales
Depreciation of equipment 18,000 15% per annum Same rate and method
straight line
Wages 95,000 5% increase plus one new
employee at $65,000
Office expenses 25,000 Will pay $30,800 inc GST
Total Expenses 142,000
Net Profit 158,000

2016 2017 (estimates)

$ Details
Assets
5 Bank 28,000 No required
Debtors control 52,000 Collect $500,000 from debtors
Stock control 40,000 200 units Number of units damaged
Prepaid office expenses 800 30 June 2016 balance $2000
Equipment 120,000 New equipment purchased for cash
$20,000 + GST
Accum Dep’n (44,000)
Total Assets 196,800

2016 2017 (estimates)

$ Details
Liabilities
Creditors control 27,000 Pay $245,000 to creditors
30 June balance $35,000
Accrued wages 2000 30 June balance $3,500
GST Clearing 3000 Not required
Loan 36,000 Taken 30 June 2015 Settle in February paying $4,200
in total
Total Liabilities 36,000
Owners’ equity
Capital 168,800 Drawings $60,000 cash, no
additional capital
Total Equities 196,800
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5.1 Calculate the budgeted cost of sales for the year ending 30 June 2016

Calculation of budgeted cost of sales:

Sales will increase per unit by 10% and cost of sales is 40% of sales. So, Sales according to old price
will be 1265 unit i.e. $575,000 including GST. And budgeted cost of sales will be $230,000.

5.2 Prepare a budgeted income statement for the year ending 30 June 2017

Income Statement for the year ended 30 June 2017

Particulars $
Sales (80% credit) 603,750
Cost of sales 230,000
Gross Profit 373,750
Less other expenses
Bad debts 96,600
Depreciation of equipment 18,000
Wages 1,64,750
Office expenses 30,800
Total Expenses 310,150
Net Profit 63,600

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5.3 Reconstruct the debtors control account to determine the estimated balance at 30 June 2017

A. Reconstruction of Debtors Control Account for June 2017

Collection 500000 Balance 858400

Sales 434700 Bad debts 96600

GST 48300 Cash at bank 28000

983000 983000

BC Corp plans is looking to manufacture 5000 widgets during quarter 1, 600 during quarter 2, 7000
during quarter 3 and 8000 during quarter 4. The widgets are all within a limited size range, so the
amount of processing labour related to each one is nearly identical. The labour routing for each widget
6 is 0.1 hours per widgets for the machine operator, and 0.05 hours per widgets for all other labour. The
labour rates for machine operators are $25 per hour, and $15 per hour for all other staff.

Produce a Direct Labour Budget for the 4 quarters outlined above

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Direct Labor Budget

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Product A (units) 5,000 600 7,000 8,000

x Machine operator hrs (0.1) 0.1 0.1 0.1 0.1
=Total machine operator hrs 500 60 700 800
x Other labor hours (0.05) 0.05 0.05 0.05 0.05
= Total other labor hours  250  30  350  400
Machine operator cost/hr $25 $25 $25 $25
Other labor cost/hr $15 $15 $15 $15
Total machine operator cost $12,500 $1500 $17,500 $20,000
Total other labor cost $3,750 $450 $5,250 $6,000
   Grand total direct labor cost $16,250 $1950 $22,750 $26,000

BC Corp plans to sell the widgets they produced (refer question 6) as they are produced. Management
plan to supply the widgets at an introductory price of $10 each for the first 2 quarters, then increase the
price by 25% for quarters 3 and 4 consecutively.

The Sales Manager anticipates that during quarter 1 they will sell 50% of the manufactured widgets,
75% during quarter 2, and 90% during quarters 3 & 4. The additional supply of widgets will be put
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towards stock for future sales.

The Sales Manager also anticipates that an allowance of 5% for discounts and allowance (from gross
sales) will continue due to historical sales history

Produce a Sales Budget for the 4 quarters.

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Sales Budget
Quarter 1 Quarter 2 Quarter 3 Quarter 4

Forecasted unit sales 2,500 2325 7,000 8,000

x Price per unit $10 $10 $12.5 $12.5

Total gross sales $25,000 $23,250 $87,500 $100,000

- Sales discounts & allowances $1,250 $1,163 $4375 $5000

= Total net sales $23750 $22,087 $83125 $95000

8 What is budgetary slack and when is it used?

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9 Describe the 7 steps involved with the budgetary planning process

The 7 steps involved with the budgetary planning process are as follows:

1. Define Budget Objectives:

2. Access Historical and actual data:
3. Develop a base budget:
4. Access data and prepare budget:
5. Review Budget:
6. Post and report results:
7. Monitor progress and amend:

Provide an example of when a budget will need to be changed in response to changing operational
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requirements.

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A budget needs to be changed in certain circumtances. For example, if the government policies
changes and it will affect the ongoing operations of the business or the goal budget will be changed.

It is not always appropriate to base sales forecasts on current sales trends. State 3 examples of factors
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besides overall demand for your product which may impact on sales in the future.

Factors that affect overall demand for your business are as follows:

1. Rate of Inflation
Inflation is usually inevitable. It will affect the value of the currencies that you use for your business
operations. You may also have to deal with artificial adjustments in inflation depending on the part of
the world in which you will be doing business. Since you have minimal control over inflation, your
business needs to adjust your predictions based on what you can expect to happen. It is always better
for you to err on the side of caution regarding this matter.

2. Internal Organizational Changes

Changes within the business organization usually bring about a certain level of unpredictability for
investors. Many of them may have a problem investing in your business or its products during the
transitional period. If your business or organization is set to go through internal changes, you should
factor them into your forecasts. This will help all the stakeholders adapt well if the sales do not meet
your original targets.

3. Marketing Efforts
It is quite possible that the marketing efforts of the previous years will have a significant impact on the
current sales and revenues. When making your business forecasts, consider the possible effects of your
marketing activities that have already occurred. This will help you get a better picture of what exactly
is expected to happen on the earnings front.

12 Describe 4 different reporting cycles that impact on budget and cash-flow

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13 What is regression analysis? What benefits are there to this technique?

Regression analysis is a reliable method of identifying which variables have impact on a topic of
interest. The process of performing a regression allows you to confidently determine which factors
matter most, which factors can be ignored, and how these factors influence each other. The regression
method of forecasting means studying the relationships between data points, which can help you to:

 Predict sales in the near and long term.

 Understand inventory levels.
 Understand supply and demand.
 Review and understand how different variables impact all of these things.

14 What is a sensitivity analysis? Discuss how this can impact the business budget

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Sensitivity analysis determines how different values of an independent variable affect a particular
dependent variable under a given set of assumptions. In other words, sensitivity analyses study how
various sources of uncertainty in a mathematical model contribute to the model's overall uncertainty.
This technique is used within specific boundaries that depend on one or more input variables.
Sensitivity analysis is used in the business world and in the field of economics. It is commonly used by
financial analysts and economists and is also known as a what-if analysis.

Conducting sensitivity analysis in business provides a number of benefits for decision-makers. First, it
acts as an in-depth study of all the variables. Because it's more in-depth, the predictions may be far
more reliable. Secondly, It allows decision-makers to identify where they can make improvements in
the future. Finally, it allows for the ability to make sound decisions about companies, the economy, or
their investments.

15 List 2 different computerised accounting packages available for the Hospitality Sector?

2 different computerised accounting packages available for the Hospitality Sector are as follows:

1. Intuit QuickBooks: QuickBooks looks great and, outwardly, has a stronger focus on security than the
others. QuickBooks is another veteran of the accounting software business. Like the other apps I
looked at, there’s an attractive dashboard that puts key data such as income (split into open, overdue
and paid in the last 30 days), expenses and profit and loss in front of you as soon as you log in.

2. MYOB Essentials: MYOB Essentials is a nice service that will tick most of the boxes for business
users and accountants for the hospitality sector. It has been around for decades and enjoys a great
global reputation. But, it took the company a while to get on-board with cloud software. After a few
attempts, they have got it right with Essentials. It no longer has MYOB's old “accountants first” mode.
It is now an attractive and user-friendly application.

Describe how the accounting software programs listed in Question 15 can help prepare and monitor
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your budgets

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The accounting software can help prepare and monitor budgets in the following ways:

1. Intuit QuickBooks: The plus sign on the menu bar gives two-click access so you can enter the
most common business documents such as invoices, expenses and timesheets. Payroll and
inventory management are available but cost extra. It also helps us to instantly view the GST
status. With a single click of the GST menu on the left side of the dashboard, you will receive
an instant snapshot of what you’ll owe to the government on next BAS. Similarly, there’s an
instant snapshot of bank account balances and how many unreconciled transactions there are in
QuickBooks.

2. MYOB Essentials: Essentials can store scanned documents. For example, when entering a bill,
there is a "Link Document" button which let you upload a scanned document. If you receive a
paper bill from a supplier, you can scan and store the paper inside Essentials and link it to a
payment so the entire transaction trail is in one place. You can also email documents to your
Essentials account.

17 List and describe the four different ratio types that make up a Financial Ration Analysis

Classifying Ratio Description

Current Ratio: The current ratio is a liquidity ratio that measures a

company's ability to pay short-term obligations or those due within one
Liquidity year. It tells investors and analysts how a company can maximize the
current assets on its balance sheet to satisfy its current debt and other
payables.

Debt to Equity Ratio: The debt-to-equity (D/E) ratio is used to evaluate a

company's financial leverage and is calculated by dividing a company’s
Solvency: total liabilities by its shareholder equity. It reflects the ability of
shareholder equity to cover all outstanding debts in the event of a business
downturn.

Asset turnover measuring: The asset turnover ratio measures the efficiency
of a company's assets in generating revenue or sales. It compares the dollar
Efficiency amount of sales (revenues) to its total assets as an annualized percentage.
Thus, to calculate the asset turnover ratio, divide net sales or revenue by the
average total assets.

Net profit ratio: The net profit percentage is the ratio of after-tax profits to
net sales. It reveals the remaining profit after all costs of production,
administration, and financing have been deducted from sales, and income
Profitability ratio
taxes recognized. As such, it is one of the best measures of the overall
results of a firm, especially when combined with an evaluation of how well
it is using its working capital.

18 Outline the calculation method used to determine the following profitability returns ratios.

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Return on Operating Assets = Net Income / Operating Assets

Operating return on
assets Locate, the net income on the company’s income statement and the
operating assets from the balance sheet.

ROA: Net profit / Averaged total assets.

Net profit can be found at the bottom of a company's income statement, and
assets are found on its balance sheet. Average total assets are used in
Return on assets
calculating ROA because a company's asset total can vary over time due to
the purchase or sale of vehicles, land or equipment, inventory changes, or
seasonal sales fluctuations. It is then expressed as a percentage.
Return on Total Capital
Earnings Before Interest and Taxes
=
Total Capital
Total Capital
Return on total capital = Short-term Debt + Long-term Debt + Shareholders' Equity

EBIT is used in numerator because interest is a return on debt and should be

included in the measure of profit for this particular purpose.

19 List and explain 5 different measures of variance to be considered when developing an annual budget

Variance Type Variance Explanation

The coefficient of variation is expressed as a percent and describes the

standard deviation relative to the mean. It can be used to compare
variability when the units are different (the units will divide out,
providing just a raw number).

Procedure for finding

Coefficient of variation: 1. Find the mean and standard deviation for the data

2. Divide the standard deviation by the mean
3. Multiply by 100

Formula

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Pearson's index of skewness can be used to determine whether the data

is symmetric or skewed. If the index is between -1 and 1, then the
distribution is symmetric. If the index is no more than -1 then it is
skewed to the left and if it is at least 1, then it is skewed to the right.

Procedure for finding

Pearson's Index of Skewness
1. Find the mean, median, and standard deviation of the data.
2. Subtract the median from the mean.
3. Multiply by 3
4. Divide by the standard deviation

Formula

The variation is the sum of the squares of the deviations from the mean.
It has units that are squared instead of the same as the original data and
it does not take the sample size into account.

Procedure for finding

1. Find the mean of the data

Variation 2. Subtract the mean from each value to find the deviation from
the mean
3. Square the deviation from the mean
4. Total the squares of the deviation from the mean

Formula

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The standard deviation is the average deviation from the mean. It is

found by taking the square root of the variance and solves the problem
of not having the same units as the original data. The sample standard
deviation is denoted by s. It is not an unbiased estimator of the
population standard deviation.

Procedure for finding

Standard Deviation
1. Find the variance
2. Take the square root

Formula

The range is the difference between the high and low values. Since it
uses only the extreme values, it is greatly affected by extreme values.

Procedure for finding

Range
1. Take the largest value and subtract the smallest value

Formula

20 Outline 9 different expenditure and revenue items that are relevant to budgeting and forecasting

Revenues refer to gross income generated in conducting business. Some typical revenue accounts are:
1. Sales
2. Service revenue
3. Professional fees
4. Rent income
5. Investment income
6. Commission income
7. Royalties
8. Franchise fee
9. Interest income

Expenditure represents a payment with either cash or credit to purchase goods or services. Expenditures are:
1. Capital expenditure
2. Discount provided
3. Bank charges
4. Utility expenditure
5. Office expenses
6. Travelling expenses
7. Legal expenditure
8. Advertising expenditure
9. Insurance expenditure
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21 Describe and compare the following forecasting techniques

Time series techniques examine sales patterns in the past in order to predict
sales in the future. For example, with a trend analysis, the marketing executive
identifies the rate at which a company’s sales have grown in the past and uses
that rate to estimate future sales. For example, if sales have grown 3 per cent
per year over the past five years, trend analysis would assume a similar 3 per
cent growth rate next year.

Time series forecast

A simple form of analysis such as this can be useful if a market is stable. The
problem is that many markets are not stable. A rapid change in any one of a
market’s dynamics is likely to result in wide swings in growth rates. Just think
about auto sales before, during, and after the government’s Cash for Clunkers
program. What sold the previous month could not account for the effects of the
program. Consequently, if an executive were to have estimated auto sales based
on the rate of change for the previous period, the estimate would have been
way off.

Executive opinion is exactly what the name implies: the best-guess estimates of a
company’s executives. Each executive submits an estimate of the company’s sales,
which are then averaged to form the overall sales forecast. The advantages of executive
opinions are that they are low cost and fast and have the effect of making executives
committed to achieving them. An executive-opinion-based forecast can be a good
Executive Opinions starting point. However, there are disadvantages to the method, so it should not be used
Forecasting alone. These disadvantages are similar to those of the sales force composites. If the
executives’ forecast becomes a quota upon which their bonuses are estimated, they will
have an incentive to underestimate the forecast so they can meet their targets.
Organizational factors also come into play. A junior executive, for example, is not
likely to forecast low sales for a product that his or her CEO is pushing, even if low
sales are likely to occur.

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22 List 3 common features and assumptions that are inherent in forecasting, regardless of the method used?

The common features and assumptions that are inherent in forecasting, regardless of the method used are as
follows:
 There is no way to state what the future will be with complete certainty. Regardless of the
methods that we use there will always be an element of uncertainty until the forecast horizon
has come to pass.
 There will always be blind spots in forecasts. We cannot, for example, forecast completely new
technologies for which there are no existing paradigms.
 Providing forecasts to policy-makers will help them formulate social policy. The new social
policy, in turn, will affect the future, thus changing the accuracy of the forecast.

Describe how each of the following factors impact on budget development. Provide an example to
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demonstrate your comments

Growth or decline in economic conditions are those economic indicators can

be categorized as leading, coincident or lagging. That is, they describe likely
future economic conditions, current economic conditions or conditions of the
recent past. Economists are typically most interested in leading indicators as a
Growth or decline in way to understand what economic conditions will be like in the next three to
economic conditions six months.
For example, indicators like new orders for manufactured goods and new
housing permits indicate the pace of future economic activity as it relates to
the rate of manufacturing output and housing construction.

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Human resource requirements

New legislation or regulation

Organisational and
management restructures

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Organisational objectives

Shift in market trends

Significant price movement

for certain commodities or
items

Supplier availability and cost

24 Describe where you would find the following data and how it impacts budget preparation

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competitor research

customer or supplier research

declared commitments in
areas of operation

financial information from

suppliers

financial proposals from key

stakeholders

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income and expenditure for

previous time periods

departmental, event or project

budgets

grant funding guidelines or

limitations

management policies and

procedures

organisational budget
preparation guidelines

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performance information from

previous periods

Name: ________________________
Student Declaration: I declare that the work submitted
is my own, and has not been copied or plagiarised from any Signature: ________________________
person or source. Date: ____/_____/_____

ASSESSOR USE ONLY

Comment

Result
Satisfactory Not Satisfactory Incomplete
(Please Circle)

Name: ________________________
Assessor: I declare that I have conducted a fair, valid, reliable and
flexible assessment with this student, and I have provided Signature: ________________________
appropriate feedback
Date: ____/_____/_____

SITXFIN004 assessment September 2018

TOID 21438 CRICOS code 02552G Page 25 of 25 Authorised by M. Phillips