Topic: Budgetary control

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MA – Nov 2024 – L2 – Q2a – Budgetary Control

Preparation of a budgeted profit and loss account for Ankawa LTD for the year ending 31 December 2025.

Question

Ankawa LTD makes and sells a single product ‘Dee’. The following information is available for use in the budgeting process for the year 2025.

i) Sales targets have been proposed for four quarters in 2025 and the first quarter in 2026:

Year	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Quarter 1 (2026)
Sales (GH¢)	240,000	160,000	144,000	224,000	192,000

Selling price per unit of Dee is expected to be GH¢20.

ii) Inventory levels

At 31 December 2024: Finished units of Dee: 3,000 units
Raw materials: 7,000kg
Closing inventory of finished product Dee at the end of each quarter is budgeted as a percentage of sales units of the following quarter:
- Quarters 1 and 2: 25%
- Quarters 3 and 4: 35%
Closing inventory of raw materials is budgeted to fall by 600kg at the end of each quarter.

iii) Product Dee unit data:

Material: 8kg at GH¢1.60 per kg
Direct labour: 1.2 hours at GH¢3.50 per hour

iv) Other budgeted quarterly expenditure for 2025:

Quarter	Fixed Overhead (GH¢)	Capital Expenditure (GH¢)
Quarter 1	10,000	10,000
Quarter 2	18,000	–
Quarter 3	27,000	–
Quarter 4	30,000	–

v) Depreciation

Property is depreciated on a straight-line basis at 5% per annum based on total cost.
Value of property as at 31 December 2024: GH¢100,000.

vi) Inventory of product Dee is valued on a marginal cost basis for internal budget purposes.

Required:

Prepare the budgeted profit and loss account for the year ended 31 December 2025.

Answer

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Tags: Budgeting, Costing, Financial planning, Forecasting, Profit and Loss
Level: Level 2

Topic: Budgetary control
Series: Nov 2024

MA – Mar 2023 – L2 – Q3b – Budgeting

Prepare a budgeted income statement for AJ Ltd based on given projections and assumptions for 2023.

Question

The Income Statement of AJ Ltd for the year ended December 2022 was as follows:

Projections for 2023:

Sales: The current sales represent 15% of market share. Management plans to increase this to 20%. Meanwhile, industry experts are projecting a 12% growth in the sector.
Cost of Sales: Improvement in material quality will reduce cost of sales by 5% from the current level.
Other Expenses:
i) Administrative costs will increase by 20% over the 2022 actual figure.
ii) Selling and distribution costs will increase by 18% over the 2022 actual figure.
iii) Finance costs will remain at the same percentage of sales revenue as in 2022.

Required:
Prepare the budgeted income statement for the year 2023.

Answer

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Topic: Budgetary control, Master Budget
Series: MAR 2023

MA – Mar 2023 – L2 – Q4b – Budgetary Control

Define budgetary control and its purpose in business operations.

Question

i) Explain budgetary control. (2 marks)

ii) Recommend TWO (2) ways by which budgetary control can help to provide information to ensure operational continuity. (3 marks)

Answer

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Tags: Budgetary Control, Financial planning, Management

Topic: Budgetary control
Series: MAR 2023

MA – Nov 2019 – L2 – Q2b – Budgetary Control

Prepare a budgetary control statement for MZ Ltd for May 2019 using a flexible budget basis.

Question

b) The following monthly budgeted cost values have been taken from the budget working papers of MZ Ltd for the year ended 30 September 2019.

During May 2019, actual costs for the activity level of 82% were as follows:

Item GH¢
Direct Materials 10,500
Direct Labour 12,250
Direct Expenses 5,600
Production Overhead 6,250
Selling Overhead 15,150
Administration Overhead 14,200
Total 63,950
Required:
Prepare a budgetary control statement for MZ Ltd on a flexible budget basis for the month of May 2019.
(10 marks)

Answer

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Tags: Actual vs Budgeted Costs, Budgetary Control, Flexible Budget, Variances

Topic: Budgetary control
Series: NOV 2019

MA – Aug 2022 – L2 – Q3b – Budgetary control

This question focuses on explaining how a rolling budget works and calculating a revised budget for Baya Ltd.

Question

The Finance Manager of Baya Ltd has been criticised for using an incremental budget method in preparing the company’s budget. She, however, needs to respond to the issues raised at a board meeting and as a result, she is considering using different budgeting methods for the year-end 31 December 2022. She has asked you, the Management Accountant, to do some preliminary work to help her decide on which of the methods to use. She believes a rolling budget would be ideal for the fast-growing Baya Ltd in a relatively high inflationary country.

Baya Ltd’s incremental budget for the year-end 31 December 2022 is given below:

	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
Revenue (GH¢’000)	17,520	17,958	18,407	18,867	72,752
Cost of sales	9,636	9,877	10,124	10,377	40,014
Gross profit	7,884	8,081	8,283	8,490	32,738
Distribution costs	(1,577)	(1,616)	(1,657)	(1,698)	(6,548)
Administration	(4,214)	(4,214)	(4,214)	(4,214)	(16,856)
Operating profit	2,093	2,251	2,412	2,578	9,334

The actual figures for quarter 1 (which has just been completed) are:

On the basis of the quarter 1 results, sales volume growth of 3% per quarter is now expected.

Required:
i) Explain how Baya Ltd will operate a rolling budget.
(2 marks)

ii) Recalculate the quarterly rolling budget for Baya Ltd for the last three quarters of the year 2022 and the first quarter of 2023.
(8 marks)

Answer

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Tags: Budgetary Control, Incremental Budgeting, Rolling Budget
Level: Level 2

Topic: Budgetary control
Series: AUG 2022

MA – Aug 2022 – L2 – Q2b – Budgetary control

This question asks for the similarities and differences between a budget and a standard in financial control.

Question

Budgets and standards are very similar and interrelated, but there are notable differences between them.

Required:
Explain TWO (2) similarities and TWO (2) differences between a budget and a standard.

Answer

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Tags: Budgeting, Financial Control, Forecasting, Standard Costing
Level: Level 2

Topic: Budgetary control
Series: AUG 2022

MA – Mar 2024 – L2 – Q2a – Budgetary Control

This question involves preparing sales budgets for gasoline and diesel and a production budget based on crude oil requirements for the first three months.

Question

Squash Refinery has planned the following monthly sales for the first four months in the year:

Months	1	2	3	4
Gasoline (litres)	140,000	200,000	220,000	250,000
Diesel (litres)	100,000	130,000	180,000	210,000

The proposed ex-refinery prices are GH¢12.5 and GH¢10.8 per litre for gasoline and diesel respectively.

One metric tonne of crude oil when processed can yield 2,000 litres of gasoline and 2,500 litres of diesel. The inventory policy of the company is as follows:

Closing inventory at the end of each month: Twice the monthly sales for gasoline and 150% of the monthly sales for diesel.
Opening inventory: Gasoline – 200,000 litres, Diesel – 180,000 litres, and Crude – 140 metric tonnes.

Note: The purchase of crude is based on the production requirement for gasoline.

Required:
i) Prepare the sales budget for gasoline and diesel for the first three months. (3 marks)
ii) Calculate the quantity of crude oil to be purchased for the first three months. (12 marks)

Answer

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Tags: Crude Oil, Diesel, Gasoline, Inventory Management, Production Budget, Sales Budget
Level: Level 2

Topic: Budgetary control
Series: MAR 2024

MA – Dec 2023 – L2 – Q4b – Budgetary control

This question explains programme-based budgeting and outlines the disadvantages of line-item budgeting.

Question

Slay Mama Plc (SMP) has been using line-item budgeting since its establishment. The Chief Executive Officer (CEO) recently attended a seminar on “Achieving the best out of your budget”. During the seminar, the facilitator highlighted the benefits of programme-based budgeting since it is a performance-based budgeting approach.

Required:

i) Explain Programme-Based Budgeting. (2 marks)

ii) Outline THREE (3) disadvantages of line-item budgeting. (3 marks)

Answer

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Tags: Budget Management, Budgeting, Line-Item Budgeting, Programme-Based Budgeting
Level: Level 2

Topic: Budgetary control
Series: DEC 2023

MA – Dec 2023 – L2 – Q3b – Budgetary control

This question requires the preparation of a budget for the supply of rice and beans needed to feed students at Ghanaman SHS for two semesters.

Question

Ghanaman Senior High School (SHS), which has an enrollment of 2,500 students (residential), is one of the schools that depend on the government for the supply of food items. The bursar has proposed that a 50-kilogram bag of rice can feed 200 students per meal, while the same 50-kilogram bag of beans can be used for 350 students. Per the menu plan, rice will be served three times and beans twice a week. The SHS will run two semesters of 16 weeks each for the year 2023.

Other information:

i) Opening inventory:

Rice: 40 bags of 50kg
Beans: 10 bags of 50kg

ii) Inventory policy (Closing inventory):

Rice: 20% of the annual requirement
Beans: 15% of the annual requirement

Required:
Prepare the budget for the supply of both rice and beans needed to feed students for the two semesters of the year 2023.

Answer

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Tags: Budgeting, Food Supply, Inventory Policy, Residential School
Level: Level 2

Topic: Budgetary control
Series: DEC 2023

MA – May 2018 – L2 – Q2b – Budgetary Control

Explain and provide examples of Activity Based Budgeting, Zero Based Budgeting, and Rolling Budgeting in a memorandum format.

Question

The Sales Director has recently attended a course entitled ‘Finance for Non-Accounting Managers’. He wants to understand more about a number of management accounting terms that he feels may be relevant to him.

Required:
Prepare a memorandum explaining and providing examples of the following:
i) Activity Based Budgeting
ii) Zero Based Budgeting
iii) Rolling Budgeting

Answer

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Tags: Activity Based Budgeting, Budgeting Methods, Finance for Non-Accounting Managers, Rolling Budgeting, Zero-Based Budgeting
Level: Level 2

Topic: Budgetary control
Series: MAY 2018

MA – July 2023 – L2 – Q4b – Budgetary Control

Outline the advantages and disadvantages of employee participation in budgeting processes within an organization.

Question

b) It is argued that the extent of budget performance is influenced largely by the extent of involvement of all persons connected with the budgeting process.

Required: Outline THREE (3) advantages and TWO (2) disadvantages of employee participation in budgeting. (5 marks)

Answer

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Level: Level 2

Topic: Budgetary control
Series: JULY 2023

MA – July 2023 – L2 – Q2a – Budgetary control

This question involves preparing a statement to reconcile the budgeted contribution with the actual contribution using marginal costing principles and detailed variance analysis.

Question

Bekwai manufactures and sells a single product. The company operates a standard marginal costing system and a just-in-time purchasing and production system. No inventory of raw materials or finished goods is held.

Details of the budget and actual data for the period are as follows:

Budget data:

Standard production cost per unit:
Direct material: 8kg @ GH¢10.80 per kg	86.40
Direct labour: 1.25 hours @ GH¢18.00 per hour	22.50
Variable overheads: 1.25 hours @ GH¢6.00 per hour	7.50

Standard selling price: GH¢180 per unit
Budgeted fixed production overheads: GH¢170,000
Budgeted production and sales: 10,000 units

Actual data:

Direct material: 74,000 kg @ GH¢11.20 per kg
Direct labour: 10,800 hours @ GH¢19.00 per hour
Variable overheads: GH¢70,000
Actual selling price: GH¢184 per unit
Actual fixed production overheads: GH¢168,000
Actual production and sales: 9,000 units

Required:
Using marginal costing principles, prepare a statement that reconciles the budgeted contribution and the actual contribution. (Your statement should show the variances in as much detail as possible).
(15 marks)

Answer

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Level: Level 2

Topic: Budgetary control
Series: JULY 2023

MA – Nov 2020 – L2 – Q2b – Budgetary Control, Cash Budgets and Master Budgets

Prepare various budgets and an income statement for October 2019 for Mercury Company’s TomaCan product.

Question

Mercury Company’s management wants to prepare budgets for one of its products, TomaCan, for October 2019.

The firm sells the product for GH¢75 per unit and has the following expected sales (in units) for these months in 2019:

July	August	September	October	November	December
6,000	7,000	8,000	9,000	10,000	11,000

The production process requires 5 kilos of Atadwe and 3 kilos of Ginger. The firm’s policy is to maintain an ending finished goods inventory each month equal to 15% of the following month’s budgeted sales, but in no case less than 1,300 units. All materials inventories are to be maintained at 10% of the production needs for the next month, but not to exceed 3,000 kilos. The firm expects all inventories at the end of September to be within the guidelines. The purchase department expects the materials to cost GH¢1.75 per kilo for Ginger and GH¢5.00 per kilo for Atadwe respectively.

The production process requires direct labor at two Skill Levels (SL). The rate for labor at SL1 is GH¢45 per hour, and for SL2 is GH¢25 per hour. SL1 can process one batch of TomaCan per hour, while SL2 uses double the time of SL1 for the same output. Each batch consists of 10 units.

Variable manufacturing overhead is GH¢100 per batch plus GH¢75 per direct labor-hour. Fixed production overhead is GH¢51,240. It is the plan of Mercury Company to spend a third of variable and fixed production overhead costs on selling and administration expenses. The company is in the 25% tax bracket but enjoys a rebate of 50% because of its location. The company uses an actual cost system. The unit cost of production in October is the same as that of September.

Required: On the basis of the preceding data and projections, prepare the following budgets:

i) Production budget for October (in units).
ii) Direct materials purchases budget for October (in kilos).
iii) Direct materials purchases budget for October (in Cedis).
iv) Direct manufacturing labor budget for October (in Cedis).
v) Income statement for the month of October 2019.

Answer

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Level: Level 2

Topic: Budgetary control, Cash Budgets and Master Budgets
Series: NOV 2020

MA – Nov 2018 – L2 – Q2b – Budgetary control

Preparation of a budgeted profit and loss account for Uswa Ltd and explanation of the term "budget manual."

Question

Uswa Ltd is engaged in manufacturing and sale of footwear. The company maintains one central factory and warehouse and sells its products through company-operated retail outlets as well as through distributors. Management is in the process of preparing the budget for the year 2018 on the basis of the following information:

The marketing director has provided the following annual sales projections:

Category	No. of Units	Retail Price Range (GH¢)
Men	1,200,000	100 – 400
Women	500,000	85 – 250

It has been estimated that 30% of the units would be sold through distributors who paid GH¢95 and GH¢70 per footwear for men and women respectively.
The remaining 70% will be sold through company-operated retail outlets.
The previous pattern of sales indicates that 60% of these units are sold at the minimum price; 10% units are sold at the maximum price and remaining 30% at a price of GH¢200 and GH¢120 per footwear for men and women respectively.
The company incurs a variable cost of GH¢45 per footwear regardless of whether sales are through company-operated retail outlet or distributors.
The company operates 22 outlets all over the country. The fixed costs per outlet are GH¢12,000 per month and include rent, electricity, maintenance, etc.
Fixed costs for the factory and head office are GH¢4.5 million and GH¢1.5 million per month respectively.

Required:

i) Prepare a budgeted profit and loss account for the year 2018 for Uswa Ltd. (13 marks)

ii) Explain the term “budget manual.” (2 marks)

Answer

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Level: Level 2

Topic: Budgetary control
Series: NOV 2018

MA – Nov 2020 – L2 – Q1 – Budgetary Control

Prepare a financial analysis statement showing the current annual forecast of costs, revenues, and profits for the years 2019-2021 for a motor car manufacturer.

Question

A motor car manufacturer has been specializing in the production and sale of Bedford model cars. The model is somewhat outmoded, and the current sales forecast indicates that the current (2018) sales level of 150,000 will be the same as in 2019 but will decline to 130,000 cars in 2020 and 110,000 cars in 2021. The company supplies according to orders received, and no stocks are held. Carbon monoxide emission regulations will prevent the model from being manufactured and sold after December 2021.

The company’s current estimates of the selling price and costs in 2019 are as follows:

Per car (GH¢)	Amount (GH¢)
Selling Price	11,200
Production costs:
– Material and Labour (vary with production volume)	3,600
– Assembly	4,000
– Delivery	2,500

75% and 40% of the assembly and delivery costs respectively are fixed, and the remainder vary with production volume.
In addition, the company estimates that it will incur the following non-production costs:
- Marketing costs of GH¢60 million would be amortized on a straight-line basis over three years.
- The Administration costs of GH¢10 million are fixed per annum.
- The selling price, variable costs per car, and total fixed costs are expected to remain constant throughout the period from 2019 to 2021.

The company’s Managing Director is unhappy with the current annual profit forecasts for 2019–2021 based on the information above and believes that the company has the potential to increase the profit to a desired level of GH¢245 million in each of the years 2019 to 2021. The Managing Director has undertaken a strategic review and developed the following strategies to eliminate the gap:

Strategy 1: A marketing proposal will enable the company to enter a new overseas market with the result that the total (including the overseas market) sales level will be stabilized at 160,000 cars per annum from 2019 to 2021. The market entry costs will be GH¢30 million for each of the three years.

Strategy 2: A re-design of the car will enhance its sales appeal and will permit the company to increase its selling price to GH¢12,000. The re-design costs are GH¢30 million and are to be amortized over three years on a straight-line basis.

Strategy 3: A radical cost reduction program will improve efficiency and lower all variable costs by 20%. This will add GH¢70 million to the annual fixed overheads each year from 2019 to 2021.

Required:

a) Prepare a financial analysis statement showing the current annual forecast of costs, revenues, and profits for each of the years 2019 to 2021 and briefly comment on the figures. (Ignore the time value of money)

b) Calculate the profit gap for 2019, 2020, and 2021.

c) Estimate the profit in 2019 if:

i) Strategy 1 was implemented;
ii) Strategy 2 was implemented;
iii) Strategy 3 was implemented.

d) Evaluate which strategy to implement

Answer

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Level: Level 2

Topic: Budgetary control
Series: NOV 2020

MA – Nov 2021 – L2 – Q4c – Budgetary Control

Explain factors that may lead to harmful behavior due to budgetary control.

Question

c) The entire process of budgetary control may negatively affect the behavior of management and staff, leading to the non-achievement of goals.

Required:
Explain THREE (3) factors that may account for such harmful behavior. (5 marks)

Answer

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Level: Level 2

Topic: Budgetary control
Series: NOV 2021

MA – May 2019 – L2 – Q2b – Budgetary control

Analyze the performance of a fast-food restaurant using flexible budgeting and discuss the usefulness of the original operating statement.

Question

Otuo has recently opened a fast-food restaurant in a small town. Fast-food restaurants are characterized by their quick food service. The fast-food restaurant market in the town is dominated by a small number of long-established restaurants. Otuo is seeking to grow its business and attract the town’s residents with its burger meals.

The performance report for the first month of business is to be presented at the restaurant’s monthly management meeting. A draft performance report for the first month of business is reproduced below:

	Budget	Actual	Variance
Sales (number of meals)	6,000	5,400	(600)
	GH¢	GH¢	GH¢
Revenue	180,000	167,400	12,600 A
Direct Material	48,000	49,140	1,140 A
Direct Labour	33,000	27,000	6,000 F
Variable Production Overhead	21,000	18,900	2,100 F
Fixed costs	36,000	40,000	4,000 A
Profit	42,000	32,360	9,640 A

Required:
i) Explain the term flexible budget. (2 marks)
ii) Using a flexible budgeting approach, redraft the operating statement to provide a more realistic indication of the variances. (7 marks)
(Note: You are not required to explain the causes of the variances)
iii) In TWO (2) ways, explain why the original operating statement was of little use to management. (2 marks)
iv) Identify FOUR (4) non-financial measures that Otuo could use to monitor the performance of the new fast-food restaurant. (4 marks)

Answer

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Level: Level 2

Topic: Budgetary control
Series: MAY 2019

MA – April 2022 – L2 – Q4b – Budgetary control

Explain factors to consider when involving staff in the budgeting process.

Question

Most CEOs and their deputies feel reluctant to allow employees of their entities to participate in the budgeting process. They are of the opinion that such “openness” may expose them to pressure from staff on what is due to them.

Required:

Explain THREE (3) factors that will be considered when involving staff in the budgeting process.

Answer

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Level: Level 2

Topic: Budgetary control
Series: APR 2023

MA – May 2021 – L2 – Q2b – Budgetary control

Prepare various budgets (sales, production, material usage, material purchase, and labour usage) for Jatokrom Manufacturing for the first three months.

Question

b) Jatokrom Manufacturing Company Ltd (Jatokrom) produces shea butter body lotion, christened Zimbi, for both local and the West African market under the One-District-One-Factory government initiative. A unit of Zimbi is sold for GH¢10. Conventionally, the selling price for the product changes every other month by 10% due to the erratic nature of the environment in which Jatokrom operates. The last time the selling price was increased was the immediate month preceding the first month of this planning period.
The demand for the product for the planning period averages every 30 days (equivalent to a month) as follows:

Month	1	2	3	4
Demand (Units)	17,700	18,120	19,500	18,600

It is the policy of Jatokrom to keep closing inventory of finished goods to be equivalent to the sales level of 10 working days of next month’s sales. However, experience shows that 3% of each production goes defective and has to be scrapped with no scrap value.
Product Zimbi requires 2kg of material X. However, it is expected that a normal loss of 20% of material X will occur in the production process.
It is the policy of Jatokrom to keep material inventory to cover 10 days of the following period’s production. Material usage in month 5 is estimated to be 65,207.5kg. The price of material X is budgeted to be GH¢3.50/kg.
A unit of Zimbi requires 1.5 hours to produce with a 75% productivity level because of regular maintenance. The Labour rate per hour is GH¢6, but only 39,500 hours can be worked within regular working hours. Overtime hours are paid at time and a half.

Required: Prepare the following budgets for the first three months for Jatokrom Company Ltd.
i) Sales (3 marks)
ii) Production (3 marks)
iii) Material Usage (3 marks)
iv) Material Purchase (3 marks)
v) Labour usage and cost (3 marks)

Answer

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Level: Level 2

Topic: Budgetary control
Series: MAY 2021

MA – May 2017 – L2 – Q2c – Budgetary control

Identify and explain three steps in the preparation of a Zero-Based Budget.

Question

Zero-based budgeting attempts to improve upon incremental type of budgeting, which is perceived to carry over inefficiencies from previous periods. It allows for budget reductions and permits the re-allocation of resources from low to high priority programs. Critics are of the opinion that such an approach or process of budgeting can be cumbersome in its execution.

Required:

Identify and explain THREE steps in the preparation of Zero-Based Budget. (6 marks)

Answer

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Level: Level 2