Questions on Budgeting

Question 1 (Pakistan Limited)

Pakistan Ltd., is a merchandising company and sells a wide range of products. Since a sale of the company
has grown rapidly over the few years, the company is planning to borrow money to meet the working
capital requirement. President of Pakistan Ltd., has just approached the company's bank with a request
for loan, as it will assist the company in acquiring inventories. As the company had some difficulty in paying
off its loans in the past, the loan officer has asked for a cash budget to help in determining whether the
loan should be granted or not. For preparing cash budget following data is available for three months
(from January to March), during which the loan will be used:
(a) On January 1, the start of the loan period, cash balance will be Rs.244,000 and accounts
receivable Rs.856,000 of which Rs. 746,000 will be collected during January and Rs. 102,000 will
be collected during February. The remainder will be uncollected.
(b) Past experience shows that 30% of a month's sales are collected in the month of sale, 60% in
the month following sale, and 8% in the second month following sale. The other 2% represents
bad debts that are never collected. Budgeted sales and expenses for the six months are as follows:
January February March
Rupees
Sales 1,350,000 1,950,000 1,700,000
Purchases 754,000 980,000 986,000
Payroll 84,000 101,000 98,500
Lease payments 100,000 100,000 100,000
Advertising 320,000 380,000 415,000
Equipment purchases 98,000
Depreciation 80,000 80,000 80,000

(c) Merchandise purchases are paid in full during the month following purchases. Accounts
payable Rs. 980,000 for merchandise purchased on December 31, which will be paid during
January.
(d) In preparing the cash budget, assume that Rs.600,000 loan will be granted in January and
repaid in June. Interest on the loan will total Rs. 96,000, payable when loan will be repaid.
Required:
Prepare a cash budget showing month-wise and total budgeted figures from January to March.

Question 2 (Rameez Limited)

The following data was extracted from the books of Rameez Limited as at 1 July 2021.
i) Budgeted Sales:
Units
July 100,000
August 140,000
September 150,000
October 120,000
The selling price is Rs. 3 per unit. Sales are invoiced twice per month, in the middle of the month
and on the last day of the month. Terms are 2% for 10 days and net 30 days. Sales are made evenly
through the month and 50% of sales are paid within the discount period. The remaining amounts
are paid within the 30-day period.

Compiled by: Joudat Ali Malik, FCMA, APFA, M.A. (Eco.), CFC (Canada)
Senior partner, Focus Financial & Tax Consultants.
 ii) Stocks of finished goods were 22,000 units on 1st July. The company’s policy is to maintain 20%
of stock at each month-end and represented 20% of next month sales.
iii) Stocks of raw materials were 34,200 kilogram on 1st July. The company’s policy is to maintain
closing inventory of each month equal to 40% of next month production requirements.
iv) The standard production cost of the product, based on normal monthly production of 200,000
units is:
Cost per unit
Rs.
Direct Materials (0.6 kilogram per unit) 0.60
Direct Wages 0.30
Variable Overheads 0.10
Fixed Overheads 0.15
1.15
Fixed overhead includes Rs. 10,000 per month depreciation on production plant and machinery.
Any volume variance is included in cost of sales.
v) Production salaries and wages are paid during the month in which they are incurred.
vi) Selling expenses are estimated at 8% of gross sales. Administrative expenses are Rs. 40,000 per
month of which Rs. 1,000 per month relates to depreciation of office equipment. Selling and
administrative expenses and all production overheads are paid in the following month in which
they are incurred.
vii) The cash balance is expected to be Rs. 32,000 on 1st August.
Required:
a) The budgeted production requirements (in units) for each of the months of July, August and
September.
b) The budgeted purchase requirement of raw materials (in units) for each of the months of July
and August.
c) The Cash forecast for August.

Question 3 (New Focus Company)

New Focus Company is planning to arrange for a six-monthly overdraft facility with a bank. However,
before finalization of any arrangement it wants to know the estimated requirements of cash. For this
purpose, it has hired you as consultant to make an estimate of the foreseeable cash requirements.
The following is the basic data regarding various business cycles of the Company.
I. Sales forecast for the six months are as under:
Months Rupees
January 80,000
February 90,000
March 60,000
April 90,000
May 1,10,000
June 60,000

II. Purchases are made as and when required.

III. No closing stock is maintained as the supplier has capability to supply any quantities at
any time.
IV. Gross profit ratio is maintained @ 25% of the sales price.
V. Various expenses for the six months are as under:

Compiled by: Joudat Ali Malik, FCMA, APFA, M.A. (Eco.), CFC (Canada)
Senior partner, Focus Financial & Tax Consultants.
 Expenses Rupees
Salaries and wages 39,000
Repairs and maintenance 12,000
Insurance 1,000
Stores and spares 27,000
Duties 36,000
Legal charges 4,000

VI. The recoveries from the debtors are made as follows:

40% in the month of sale
35% in the month following the month of sale
25% in the second month after sale
VII. Trade creditors are paid as under:
50% in the month of Purchase
30% in the month following the month of purchase
20% in the second month after purchase
VIII. All other business expenses are paid in the month of expense. Expenses are evenly spread
throughout the year.
IX. The company commenced its business on January 1, 2021 with a cash balance of Rs.
30,000.
Required:
You are required to prepare a cash budget to facilitate the company’s management in assessing
the working capital requirement for the next six months.

Question 4 (JS Company)

JS Company management is interested in preparation of budget and task is assigned to you to
prepare the following budgets.
a) Sales Budget
b) Production Budget
c) Labour Budget
d) Material usage Budget
Relevant data is given below:
Sales volume 23,000 units
Opening stock 5,000 units
Closing stock 2,000 units
Standard selling price Rs. 80
Labour1 5hrs @ Rs. 2/hr
Labour 2 3hrs @ Rs. 5/hr
Material A 5 Kgs @ Rs. 6/Kg
Material B 3Kgs @ Rs. 10/kg

Question 5 (Areesh Furnitures)

Areesh Furnitures produces two types of furniture items tables and chairs for office use. The company has
decided to introduce a comprehensive budget system in its last management meeting.

Compiled by: Joudat Ali Malik, FCMA, APFA, M.A. (Eco.), CFC (Canada)
Senior partner, Focus Financial & Tax Consultants.
The following are the company’s forecasts for two months of July and August 2019.
1. Budgeted stocks of finished goods in units
Products
Month Chair Table
June 2019 500 300
August 2019 650 330
2. Budgeted sales and costs of production per unit in two-month period:
Chair Table
Sales in quantity 4,800 3,200
Selling price (Rs.) 4,500 8,000
Materials Rs. Rs.
Wood 1,005 1,800
Nails 500 480
Glue 350 410
Labour
Skilled labour 700 1,000
Unskilled labour 200 150

3. Production overheads are budgeted at 30% of skilled labour cost.

3. Stock of raw materials and work-in-progress are not available at the beginning and end of the
two months.
Required:
Prepare:
(i) Sales budget
(ii) Production budget
(iii) Material usage and purchases budget
(iv) Product-wise profit statement

Past Paper Questions- PIPFA

Question 1 (Manno)- Winter 2016 Q5
Manno began trading as a car cleaner in June.

 In September, Manno will take delivery of new equipment costing Rs. 2,400, which will be paid
for half in the month of delivery and half the following month. This equipment is expected to last
two years.
 Manno charges on average Rs.20 to clean the cars and he has decided to clean a maximum of 100
cars per month. He receives cash on the day the cars are cleaned.
 It is now July and Manno has 50 cars in his approach, but he is gaining a reputation for reliability
and quality of service, and he expects this number to go up by 30% each month until his maximum
is reached. Every car cleaned once a month.
Compiled by: Joudat Ali Malik, FCMA, APFA, M.A. (Eco.), CFC (Canada)
Senior partner, Focus Financial & Tax Consultants.
  Manno has obtained one monthly contract for cleaning the cars of a local doctor’s surgery which
he will start in August. Manno will invoice them Rs.50 each time he cleans their cars
 The local Car Association wants to use Manno’s services, starting when he has his new equipment.
This will also be a monthly contract, for Rs.75 per month.
 Both clients will pay Manno the month after he has cleaned the cars.
 Manno has not taken a salary so far, but intends to draw Rs.1,000 each month starting in August.
Costs are 5% of income, and are paid in the month incurred.
 The balance on Manno’s current account is expected to be Rs.200 at the beginning of August and
the bank has authorized an overdraft facility of Rs.1,000.

Required:

Prepare a Cash Budget for each of the four months August, September, October and November. Work
to the nearest Rs. (15-Marks)

Question 2 (Toy Land Plastics)- Summer 2017 Q5

Toy Land Plastics, manufactures toys for children. A small fan which is very popular among children sells
for Rs. 40 per unit. All sales are on account, with 40% of sales collected in the month of sale and 60%
collected in the following month. The data further extracted from the firm's records is as under:

 Toy Land Plastics, maintains a minimum cash balance of Rs. 45,000. Total payments in January 2018 are
budgeted at Rs. 585,000.

 A schedule of cash collections for January and February of 2018 revealed the following receipts:

Cash Receipts
January February
(Rs.) (Rs.)
From 31st December accounts receivables 324,000 -
From January sales 228,000 342,000
From February sales - 235,200

 March 2018 sales are expected to total 15,000 units.

 Finished-goods inventories are maintained at 20 percent of the following month's sales.

 The December 31st, Balance Sheet revealed the following selected figures: cash, Rs. 67,500; accounts
receivable, Rs. 324,000; and finished goods, Rs. 67,050.

Required:

(a) Determine the number of units that Toy Land Plastics sold in December. 05-Marks
(b) Compute the Sales Revenue for March 2018. 05-Marks
(c) Compute the total Sales Revenue to be reported on Toy Land Plastics' budgeted Income
Statement for the first quarter of 2018. 05-Marks
(d) Determine the accounts receivable balance to be reported on the March 31, 2018, in the
budgeted balance sheet. 05-Marks
Compiled by: Joudat Ali Malik, FCMA, APFA, M.A. (Eco.), CFC (Canada)
Senior partner, Focus Financial & Tax Consultants.
Question 3 (Chemical Enterprises)- Winter 2017 Q2
Chemical Enterprises is a small business concern which deals in trading of chemicals. They are not in a
position to employ a full time accountant, therefore, hired a part timer to maintain their accounts. The
owner has provided information to the Accountant which shows that their sales for the month of
September 2017 were Rs. 612,500 on which they earned a gross profit of 30%. The sales are likely to
increase to Rs. 1,000,000 in the next month. He also informed that there was increase in debtors of Rs.
17,500, however, the creditors increase by Rs. 5000 compared to last month. The inventory increase
during the month by Rs. 8,750. It is estimated that 1% of the debts would be doubtful for recovery. The
administration, general and marketing expenses aggregate to Rs. 62,125 per month plus 15% of sales.
Depreciation expense of Rs. 35,000 per month included in fixed marketing, general and administrative
expenses.

Chemical Enterprises has won a consultancy project and it is expected that the first payment of Rs.
2,000,000 on account of Inception Report will be received in November 2017.

Required:

Calculate Estimated Cash Receipts & Cash Disbursements from operations for the month of September
2017. (15-Marks)

Question 4 (Theory)- Summer 2018 Q3

Explain briefly the following terms, which are associated with a budgetary control system:

(a) Flexible Budgeting 05-Marks

(b) Zero-base Budgeting 05-Marks

Question 5 (Body Check Pvt. Ltd.)- Winter 2018 Q1

Body Check (Pvt.) Ltd., follows the practice of preparing budgets on an annual basis. The planned
quantities of opening and closing inventories for 2019 are given below:

January 1 December 31
(Units) (Units)
Raw materials 52,500 67,500
Work in process 18,000 18,000
Finished goods 120,000 75,000

Two units of Raw Material are essentially required for production of each unit of finished product. In the
next year the company plans to sell 720,000 units.

Required:

(a) Calculate the number of units the company would have to manufacture in the forthcoming year.
10-Marks
(b) If 750,000 finished units are required to be manufactured, determine the quantity of Raw Material
required to be purchased. 10-Marks

Compiled by: Joudat Ali Malik, FCMA, APFA, M.A. (Eco.), CFC (Canada)
Senior partner, Focus Financial & Tax Consultants.
Question 6 (Redfern Hospital)- Summer 2019 Q1
Redfern hospital is a Government funded hospital in the country of Newland. Relevant cost data for the
year ended 31st December 20X0 is as follows:

 Salary cost in Rs. per staff member was payable as follows:

Budget Actual
Doctors 100,000 105,000
Nurses 37,000 34,500

 Budgeted and actual staff was 60 doctors and 150 nurses.

 Budgeted cost for the year based on 20,000 patients per annum was as follows:

Rs. Variable Fixed

cost % cost %
Other staff cost 1,440,000 100 -
Catering 200,000 70 30
Cleaning 80,000 35 65
Other operating costs 1,200,000 30 70
Depreciation 80,000 - 100

 Variable cost varies according to number of patients.

 The actual number of patients for the year was 23,750. Actual costs (excluding the cost of doctors
and nurses) incurred during the year were as follows:

Rs.
Other staff cost 1,500,000
Catering 187,500
Cleaning 142,000
Other operating costs 1,050,000
Depreciation 80,000

Required:
(a) Prepare a statement which shows the actual and budgeted costs for Redfern hospital in
respect of the year ended 31st December 20X0 on a comparable basis. 15-Marks
(b) Briefly describe incremental budget? 02-Marks
(c) What is the purpose of Zero-based budget? 03-Marks

Question 7 (Hotel)- Winter 2019 Q8

You are the general manager of a Hotel. It is the hotel’s policy that budget is prepared, using a six month
time horizon. You are about to prepare the budget for July to December 2019, and have collected the
following information:

(i) The hotel has 90 bedrooms, each of which can accommodate one or two guests;
(ii) During the months of July, August and December (high season), standard room rates will be
Rs. 110 per night;
Compiled by: Joudat Ali Malik, FCMA, APFA, M.A. (Eco.), CFC (Canada)
Senior partner, Focus Financial & Tax Consultants.
 (iii) During the months of September, October and November (low season), standard room rates
will be Rs. 95 per night;
(iv) The rates above apply to each room, regardless of whether there are one or two guests;
(v) Average room occupancy per night at standard rates is expected to be:
 High season 80%
 Low season 50%;
(vi) The Company is registered with number of internet-based hotel providers like
Trip2enjoy.com. It is expected that, subject to capacity, an average of 20 rooms per night can
be sold through these facilities. These sales will be in addition to the occupancy levels noted
in point (v) above. The internet-based provider pays 40% of the standard rate for all bookings;
(vii) It is forecasted that the average additional spending by guests will be Rs. 40 per room per
night, and that the gross margin earned on this additional spending will be 35%;
(viii) Variable costs are estimated to be Rs. 17 per room night;
(ix) Fixed costs are estimated to be Rs. 40,000 per month;
(x) When occupancy is above 90%, additional staff costs of Rs. 150 per night are forecasted.

Required:

For the six-month period up to 31st December 2019, prepare Budgeted Profit and Loss Account for
hotel. (15-Marks)

Question 8 (Theory)- Winter 2020 Q3

Define budgeting. 05-Marks

Question 9 (Theory)- Winter 2020 Q4

Differentiate Zero Based Budget and Incremental Budget. 05-Marks

Question 10 (Cash budget)- Winter 2020 Q6

From the following information, Prepare Cash Budget for the month of January to April:

Month Expected Expected

sales Rs. purchase
Rs.
January 60,000 48,000
February 40,000 80,000
March 45,000 81,000
April 40,000 90,000
Wages to be paid to workers Rs. 5,000 each month. Balance at the bank on 1st January is Rs. 8,000. It has
been decided by the Management that:

(i) In case of Deficit Fund within the limit of Rs. 10,000 arrangements can be made with bank.
(ii) In case of Deficit Fund exceeding Rs. 10,000 but within the limits of Rs. 42,000 issue of bonds
is to be preferred.
(iii) In case of Deficit Fund exceeding Rs. 42,000, issue of shares is preferred. (15-Marks)

Question 11 (ENG Fertilizer Company)- Summer 2021 Q6

Compiled by: Joudat Ali Malik, FCMA, APFA, M.A. (Eco.), CFC (Canada)
Senior partner, Focus Financial & Tax Consultants.
ENG Fertilizer Company has budgeted to sell 400,000 units during the month of July. The growth rate in
sales is anticipated@ 5% per month. Historically the volume of monthly inventory in units is estimated to
be 80% of next month’s sale. The stock lying in inventory is 320,000 units as on June 30. Each unit of
finished product requires 15 pounds of raw material at a cost of Rs. 5 per pound. The closing inventory of
raw material is 1,200,000 pounds.

Required:

(a) Compute company’s total required production in units of finished product for the entire three-
month period ending September 30. (08-Marks)
(b) Assume the company plans to produce 900,000 units of finished product in the three- month
period ending September 30, and to have raw-material inventory on hand at the end of the three-
month period equal to 25 percent of the use in that period. Compute the total estimated cost of
raw-material purchases for the entire three-month period ending September 30. (07-Marks)

Question 12 (Theory)- Summer 2021 Q9

Define and explain Budgetary Controls? 06-Marks

Question 13 (Theory)- Winter 2021 Q2

Identify and describe different purpose of budgeting and forecasting. 05-Marks

Question 14 (Fasih Naveed & Co.)- Winter 2021 Q3

The Directors of Fasih Naveed & Co. were concerned about the firm’s cash flow. They have provided the
following data;

(a) Sales figures mentioned below are for the months of November 2020 to June 2021 (the figures
from January 2021 onward are estimated);

Actual Sales Rs.

November 2020 60,000
December 2020 64,000

Forecast Sales Rs.

January 2021 65,000
February 2021 70,000
March 2021 72,500
April 2021 76,250
May 2021 80,000
June 2021 78,750

(b) Half the sales are normally paid for in the month in which they occur and the customers are
rewarded with a 5% cash discount. The remaining sales are paid for net in the month following
the sale.
(c) Goods are sold at a mark-up of 25% on the goods purchased one month before sale. Half of the
purchases are paid for in the month of purchase and a 4% prompt settlement discount is received.
The remainder is paid in full in the following month.
Compiled by: Joudat Ali Malik, FCMA, APFA, M.A. (Eco.), CFC (Canada)
Senior partner, Focus Financial & Tax Consultants.
(d) Wages of Rs.12,000 per month are paid in the month in which they are earned. It is expected that
the wages will be increased by 10% from 1st March 2021.
(e) Rent will cost Rs.60,000 per annum payable three monthly in advance in January, April, July and
October each year.
(f) The partners have arranged a bank loan of Rs.60,000 which would be credited to firm’s current
account in February 2021.
(g) The half-yearly interest on Rs.200,000, 8% debentures of Re.1 each is due to be paid on 15th
January 2021.
(h) The ordinary dividend of Rs.12,000 for the year 2020 will be paid in March 2021.
(i) The bank balance at 31st December 2020 is Rs.12,000.

Required:

Prepare a Cash Budget for the four months ended 30th April 2021. Give your answers to the nearest
Rs. (10-Marks)

Compiled by: Joudat Ali Malik, FCMA, APFA, M.A. (Eco.), CFC (Canada)
Senior partner, Focus Financial & Tax Consultants.