Practice Questions • 20 Questions
Distinguish between a functional budget and a master budget, and state the THREE components of the master budget. [3 marks]
Define the term "budget" and state TWO purposes of budgeting in a business organisation. [4 marks]
Define the term "variance". Explain what is meant by a favourable variance and an adverse variance, giving a numerical example for each. [4 marks]
A business reports a budgeted profit of £15 000 for the quarter but a closing cash balance of −£3 000. Explain FOUR reasons why the cash balance may differ from the budgeted profit. [5 marks]
A business purchased raw materials at a lower price than budgeted, resulting in a favourable materials price variance. However, the materials were of lower quality and more wastage occurred than expected. Explain the concept of interdependence of variances using this example, and discuss ONE implication for management decision making. [5 marks]
Prepare a sales budget for the three months January to March using the following information: - January: 400 units at £15 per unit - February: sales volume increases by 50 units; price falls by £0.50 - March: sales volume increases by a further 80 units; price falls by a further £0.50 Show units, price and total revenue for each month. [6 marks]
A business has budgeted sales of £80 000 for January and £90 000 for February. The gross profit margin is 40%. Opening inventory at 1 January is £12 000. The business maintains closing inventory at £15 000 each month end. Prepare the purchases budget in £ for January and February. [6 marks]
A company's production budget shows 1 200 units in January and 1 440 units in February. Each unit requires 1.5 hours of direct labour. The company employs 15 workers, each working 120 hours per month. Prepare the labour budget for January and February showing: hours required, hours available, and the surplus or shortfall. State how many additional workers (if any) are needed in each month. [6 marks]
A business budgeted for material costs of £32 000 in October but actual material costs were £38 500. Identify the variance and its type. Then outline the FIVE stages of budgetary control, applying each stage to this scenario. [6 marks]
Explain THREE limitations of budgeting and budgetary control. [6 marks]
Prepare a production budget for January to March using the following information: - Sales: January 800 units; February 950 units; March 1 100 units - The company holds closing inventory equal to 10% of the following month's sales - Opening inventory in January is 75 units - April sales are forecast at 1 200 units [8 marks]
A family-owned manufacturing business is introducing a formal budgeting system for the first time. Explain FOUR benefits the business might gain from introducing budgetary control. [8 marks]
A company forecasts the following sales for the first quarter: January 600 units; February 900 units; March 750 units Opening inventory at 1 January is 100 units. (a) Prepare a production budget using a variable production plan, maintaining closing inventory at 100 units each month end. [4 marks] (b) Prepare a production budget using an even production plan (produce 750 units per month). [2 marks] (c) State ONE advantage and ONE disadvantage of even production planning. [2 marks]
Using the budgeted figures below, prepare a budgeted income statement for the year ended 31 March: - Revenue: £320 000 - Opening inventory: £18 000 - Purchases: £192 000 - Closing inventory: £22 000 - Distribution costs: £14 500 - Administrative expenses: £28 000 (includes depreciation of £6 000) - Loan interest: £4 000 [8 marks]
The following information is available for a manufacturing business for the month of November: Budget: Sales revenue £96 000; Direct materials £24 000; Direct labour £18 000; Fixed overheads £14 000 Actual: Sales revenue £88 000; Direct materials £27 500; Direct labour £16 200; Fixed overheads £14 600 (a) Calculate the variance for each line and state whether it is favourable or adverse. [4 marks] (b) Suggest ONE possible cause and ONE corrective action for the sales revenue variance and the direct materials variance. [4 marks]
Evaluate whether zero-based budgeting (ZBB) is always preferable to incremental budgeting for a large manufacturing company. [10 marks]
Using the following budgeted information for the year ended 31 December, prepare a budgeted statement of financial position for a sole trader: - Non-current assets at cost: £85 000; accumulated depreciation: £32 000 - Closing inventory: £14 000 - Trade receivables: £22 000 (1 month credit sales outstanding) - Cash balance: £8 600 (from cash budget) - Trade payables: £11 500 (1 month credit purchases outstanding) - Opening capital: £62 000 - Budgeted profit for the year: £38 500 - Drawings during the year: £24 000 - Long-term bank loan: £20 000 [10 marks]
A new small business is considering preparing a cash budget before it begins trading. Evaluate the usefulness of a cash budget to this business. [10 marks]