Practice questions
Original questions written by HomiLabs in the style of the exam, with answers and mark schemes. They are not
Cambridge past paper questions and have not been reviewed by Cambridge. Try each one before opening the answer.
Q1Cash budgets · Core · Paper 4 style · 5 marksRehan sells sports equipment in Sialkot. Budgeted sales are: January $40,000; February $45,000; March $50,000. 20% of sales are for cash. Credit customers pay 60% in the month after the sale and 40% two months after the sale.
- (a) Calculate the total budgeted cash receipts from sales for March. [3]
- (b) Explain why the receipts for March are different from the sales for March. [2]
Show answer
- (a) $44,400
Cash sales 20% × 50,000 = 10,000 (B1); February credit 36,000 × 60% = 21,600 (B1); January credit 32,000 × 40% = 12,800; total 44,400 (B1).
- (b) Most sales are on credit, so cash from March credit sales arrives in April and May, while March receipts include cash from January and February credit sales.
1 mark: timing difference due to credit terms. 1 mark: receipts include earlier months' sales / exclude part of current month's sales.
A grocery wholesaler in Hyderabad buys all goods on credit. Budgeted purchases: April $30,000; May $36,000; June $42,000. Half of each month's purchases are paid in the following month, taking a 2% cash discount. The other half is paid two months after purchase.
- (a) Calculate the budgeted payments to suppliers in June. [3]
- (b) State one advantage and one disadvantage to the wholesaler of taking the cash discount. [2]
Show answer
- (a) $32,640
May: 36,000 × 50% × 98% = 17,640 (M1 A1); April: 30,000 × 50% = 15,000; total 32,640 (A1).
- (b) Advantage: reduces the cost of purchases / increases profit. Disadvantage: cash leaves the business sooner, reducing liquidity.
1 mark for each.
Hina is opening a small café in Lahore and her bank has asked for a cash budget for the first six months.
- (a) Explain two reasons why a cash budget will be useful to Hina. [4]
- (b) State two items that appear in a budgeted statement of profit or loss but not in a cash budget. [2]
Show answer
- (a) It shows in advance any months with a cash shortage, so she can arrange an overdraft or delay spending. It shows months with surplus cash, which can be used to repay debt or invest. (Also: supports the loan application; lets actual cash flows be compared with plan.)
Up to 2 marks per reason (identify 1, explain 1): plan for shortages/arrange finance; plan use of surpluses; support for bank/loan application; control by comparing actual with budget.
- (b) Depreciation; provision for doubtful debts (also: irrecoverable debts, profit or loss on disposal, accruals not yet paid).
1 mark each for any two non-cash items.
A furniture showroom in Karachi has budgeted sales of $80,000 in June and $90,000 in July. Wages earned are $24,000 in June and $28,000 in July. Three-quarters of each month's wages are paid in that month and the rest in the next month. Sales staff earn commission of 5% of sales, paid in the month after the sale.
- (a) Calculate the wages paid in July. [2]
- (b) Calculate the commission paid in July. [1]
- (c) The showroom also charges depreciation of $1,800 a month on its vans. Explain how this affects the cash budget. [2]
Show answer
- (a) $27,000
75% × 28,000 = 21,000 (M1) + 25% × 24,000 = 6,000; total 27,000 (A1).
- (b) $4,000
5% × June sales 80,000 = 4,000 (B1).
- (c) It does not appear, because depreciation is not a payment of cash; the cash outflow happened when the vans were bought.
1 mark: excluded / no effect. 1 mark: non-cash expense; cash paid when asset bought.
Bilal owns a stationery shop in Quetta. His bank balance on 1 February is $3,000. Budgeted figures: Feb $ Mar $Cash sales 18,000 20,000Receipts from credit customers 22,000 25,000Payments to suppliers 28,000 30,000Expenses paid 9,000 9,500Drawings 2,000 2,000
- (a) Prepare Bilal's cash budget for February and March. [4]
- (b) State two actions a business could take if a cash budget showed a deficit. [2]
Show answer
- (a) Cash budget February MarchReceiptsCash sales 18,000 20,000Receipts from credit customers 22,000 25,000Total receipts 40,000 45,000PaymentsPayments to suppliers 28,000 30,000Expenses 9,000 9,500Drawings 2,000 2,000Total payments 39,000 41,500Net cash flow 1,000 3,500Opening balance 3,000 4,000Closing balance 4,000 7,500
B1 total receipts; B1 total payments; B1 net cash flow 1,000 and 3,500; B1 closing balances 4,000 and 7,500.
- (b) Arrange a bank overdraft; reduce or delay drawings (also: delay purchases of non-current assets, chase receivables, ask suppliers for more time).
1 mark each.
Zara Textiles, Faisalabad, provides the following budgeted information.Month Sales $May 60,000June 64,000July 70,000August 75,000September 72,0001 All sales are on credit: 30% of customers pay in the month after sale and 70% two months after sale.2 Purchases each month are 60% of that month's sales and are paid in the following month.3 Wages of $9,000 are paid each month.4 Rent of $18,000 for the quarter is paid in July.5 Depreciation of $2,000 a month is charged on equipment.6 A new machine costing $25,000 will be paid for in August.7 The bank balance on 1 July is $8,500.
- (a) Prepare a cash budget for each of the three months July to September, showing the closing balance each month. [6]
- (b) State why depreciation is not included in the cash budget. [1]
- (c) Suggest one action the business could take because of the August balance. [1]
Show answer
- (a) Cash budget July August SeptemberReceiptsReceipts from credit customers 61,200 65,800 71,500Total receipts 61,200 65,800 71,500PaymentsPayments to suppliers 38,400 42,000 45,000Wages 9,000 9,000 9,000Rent 18,000 – –New machine – 25,000 –Total payments 65,400 76,000 54,000Net cash flow (4,200) (10,200) 17,500Opening balance 8,500 4,300 (5,900)Closing balance 4,300 (5,900) 11,600
B1 receipts 61,200, 65,800, 71,500; B1 supplier payments 38,400, 42,000, 45,000; B1 wages and rent; B1 machine in August; B1 net cash flows −4,200, −10,200, 17,500; B1 closing balances 4,300, (5,900), 11,600 (own figure rule).
- (b) Depreciation is a non-cash expense; no money is paid out.
B1.
- (c) Arrange an overdraft for August in advance, or delay the machine payment until September.
Any one sensible action: arrange overdraft/short-term loan; delay or lease the machine; chase receivables; delay supplier payments.
Shifa Clinic, Peshawar, budgets fees of: January $50,000; February $54,000; March $58,000; April $60,000.1 70% of fees are received in cash in the month of treatment; the rest are paid by insurance companies two months later.2 Salaries are $30,000 a month.3 Medical supplies cost 20% of each month's fees and are paid for in the following month.4 The clinic has an equipment loan of $120,000 on 1 March. It repays $2,500 at the end of each month, plus interest of 1% of the balance outstanding at the start of that month.5 The bank balance on 1 March is $4,000.
- (a) Calculate the fees received in March and in April. [2]
- (b) Prepare the cash budget for March and April. [5]
Show answer
- (a) March $55,600; April $58,200.
Mar 40,600 + 15,000 = 55,600 (B1); Apr 42,000 + 16,200 = 58,200 (B1).
- (b) Cash budget March AprilReceiptsFees received 55,600 58,200Total receipts 55,600 58,200PaymentsSalaries 30,000 30,000Medical supplies 10,800 11,600Loan repayment 2,500 2,500Loan interest 1,200 1,175Total payments 44,500 45,275Net cash flow 11,100 12,925Opening balance 4,000 15,100Closing balance 15,100 28,025
B1 salaries; B1 supplies 10,800 and 11,600; B1 loan repayments; B1 interest 1,200 and 1,175; B1 closing balances 15,100 and 28,025.
Sindhri Exports, Multan, sells mangoes overseas. The business is seasonal. Budgeted figures: May $ June $ July $Sales receipts 30,000 95,000 140,000Purchases of mangoes (paid in month) 60,000 70,000 50,000Packing and transport 3,000 9,500 14,0001 Fixed expenses are $8,000 a month.2 A bank loan of $50,000 will be received on 1 May and repaid in full on 1 August. Interest at 1.5% per month on the loan is paid at the end of each month.3 The bank balance on 1 May is an overdraft of $2,000.
- (a) Prepare the cash budget for May, June and July. [5]
- (b) Calculate the bank balance immediately after the loan is repaid on 1 August. [1]
- (c) Explain why a cash budget is especially important for a seasonal business. [2]
Show answer
- (a) Cash budget May June JulyReceiptsSales receipts 30,000 95,000 140,000Bank loan 50,000 – –Total receipts 80,000 95,000 140,000PaymentsPurchases of mangoes 60,000 70,000 50,000Packing and transport 3,000 9,500 14,000Fixed expenses 8,000 8,000 8,000Loan interest 750 750 750Total payments 71,750 88,250 72,750Net cash flow 8,250 6,750 67,250Opening balance (2,000) 6,250 13,000Closing balance 6,250 13,000 80,250
B1 loan receipt in May; B1 interest 750 each month; B1 totals of payments 71,750, 88,250, 72,750; B1 net flows; B1 closing balances 6,250, 13,000, 80,250.
- (b) $30,250
80,250 − 50,000 = 30,250 (B1).
- (c) Cash goes out on stock and expenses before the main sales season brings cash in, so the business must know how much finance it needs, and when, to survive the low months.
1 mark: receipts and payments occur at different times of the year. 1 mark: plan finance for the off-season / use surpluses after the season.
Kohistan Ltd expects a bank balance of $15,000 on 1 October 2026. Budgeted information: Oct $ Nov $ Dec $Operating receipts 120,000 110,000 135,000Operating payments 95,000 118,000 101,0001 In October a vehicle with a carrying amount of $6,000 will be sold for $7,500 cash.2 A dividend of $30,000 will be paid in November.3 New shares will be issued in December, raising $50,000 in cash.4 Tax of $22,000 will be paid in December.
- (a) Prepare the cash budget for October to December. [5]
- (b) Explain why the profit on disposal of the vehicle does not appear in the cash budget. [2]
Show answer
- (a) Cash budget October November DecemberReceiptsOperating receipts 120,000 110,000 135,000Sale of vehicle 7,500 – –Share issue – – 50,000Total receipts 127,500 110,000 185,000PaymentsOperating payments 95,000 118,000 101,000Dividend – 30,000 –Tax – – 22,000Total payments 95,000 148,000 123,000Net cash flow 32,500 (38,000) 62,000Opening balance 15,000 47,500 9,500Closing balance 47,500 9,500 71,500
B1 vehicle 7,500 (not 1,500); B1 share issue; B1 dividend and tax; B1 net flows 32,500, (38,000), 62,000; B1 closing 47,500, 9,500, 71,500.
- (b) The cash budget records the cash actually received, $7,500. The $1,500 profit is an accounting figure (proceeds less carrying amount) used only in the statement of profit or loss.
1 mark: cash budget shows proceeds received. 1 mark: profit is a non-cash measurement / difference from carrying amount.
Gul Fans makes table fans. Budgeted sales in units: January 1,200; February 1,400; March 1,500; April 1,800; May 2,000.1 The selling price is $25 a fan until February and $27 from 1 March. All sales are on credit; customers pay in the month after sale.2 Each month the business produces the number of fans it will sell in the following month.3 Materials cost $8 a fan and are paid for in the month after production.4 Labour costs $6 a fan and is paid in the month of production.5 Fixed costs paid are $6,000 a month.6 The bank balance on 1 March is $5,000.
- (a) Calculate the receipts from customers for March and April. [2]
- (b) Calculate the payments for materials and labour in March and April. [3]
- (c) Calculate the closing bank balance for March and for April. [2]
Show answer
- (a) March $35,000; April $40,500.
Mar: 1,400 × 25 = 35,000 (B1); Apr: 1,500 × 27 = 40,500 (B1).
- (b) Materials: March $12,000, April $14,400. Labour: March $10,800, April $12,000.
Materials Mar = Feb production (1,500) × 8 = 12,000; Apr = Mar production (1,800) × 8 = 14,400 (B1 B1). Labour Mar 1,800 × 6 = 10,800; Apr 2,000 × 6 = 12,000 (B1).
- (c) March $11,200; April $19,300.
Mar: 5,000 + 35,000 − 28,800 = 11,200 (B1); Apr: 11,200 + 40,500 − 32,400 = 19,300 (B1).
Karim Electronics, Dubai, has these budgets: Oct $ Nov $ Dec $ Jan $Sales 80,000 90,000 120,000 70,000Purchases – 60,000 50,000 –Wages earned – 20,000 24,000 18,0001 10% of sales are for cash. Of credit sales, 50% are received in the month after sale, after a 2% cash discount; 45% are received two months after sale; 5% become irrecoverable.2 Purchases are paid in the month after purchase.3 75% of each month's wages are paid in that month and 25% in the following month.4 Other expenses are $7,500 a month, including depreciation of $1,500. All other expenses are paid in the month incurred.5 The bank balance on 1 December is an overdraft of $3,200.
- (a) Calculate the budgeted receipts from sales for December and for January. [3]
- (b) Prepare the cash budget for December and January. [4]
- (c) Explain one reason why the business offers a cash discount even though it reduces the amount received. [1]
Show answer
- (a) December $84,090; January $96,370.
Dec: 12,000 + 81,000 × 50% × 98% (39,690) + 72,000 × 45% (32,400) = 84,090 (M1 A1). Jan: 7,000 + 52,920 + 36,450 = 96,370 (A1).
- (b) Cash budget December JanuaryReceiptsReceipts from customers 84,090 96,370Total receipts 84,090 96,370PaymentsPayments to suppliers 60,000 50,000Wages 23,000 19,500Other expenses (excluding depreciation) 6,000 6,000Total payments 89,000 75,500Net cash flow (4,910) 20,870Opening balance (3,200) (8,110)Closing balance (8,110) 12,760
B1 wages 23,000 and 19,500; B1 other expenses 6,000 (depreciation excluded); B1 supplier payments; B1 closing balances (8,110) and 12,760 (own figure rule).
- (c) It encourages customers to pay sooner, improving cash flow and reducing the risk of irrecoverable debts.
B1 any valid reason.
Noor Interiors, Islamabad, has an agreed overdraft limit of $12,000. The bank balance on 1 January 2027 is expected to be $6,000. Budgeted totals are: Jan $ Feb $ Mar $ Apr $Total receipts 42,000 38,000 51,000 60,000Total payments 47,500 55,000 49,000 44,000February payments include $15,000 for new display equipment.
- (a) Calculate the budgeted closing bank balance for each month. [2]
- (b) Identify the months in which the overdraft limit would be exceeded. [1]
- (c) The owner proposes to delay the equipment payment from February to April. Calculate the revised closing balances. [2]
- (d) Advise the owner whether delaying the equipment payment solves the cash problem. Justify your answer. [3]
Show answer
- (a) January $500; February $(16,500); March $(14,500); April $1,500.
M1 running balance; A1 all four correct.
- (b) February and March.
B1.
- (c) January $500; February $(1,500); March $500; April $1,500.
M1 moving 15,000 to April; A1 balances.
- (d) Yes, on these figures: the balance never goes beyond a $1,500 overdraft, well inside the $12,000 limit, and April still ends $1,500 in credit. However, the supplier must agree to the later payment, the display may arrive later and delay any extra sales, and the margin is small in February and March if customers pay late. Decision: delay the payment, but agree it in writing with the supplier and keep the overdraft facility available.
1 mark: all months now within limit (with figures). 1 mark: a risk or condition (supplier agreement, lost sales, late receipts, April end-balance same). 1 mark: clear justified decision.
All sales of Indus Tiles Ltd are on credit. Customers pay 40% in the month after sale and 60% two months after sale. There are no irrecoverable debts. March sales were $48,000 and budgeted receipts from customers in May are $57,600. Budgeted sales for May are $66,000.
- (a) Calculate the budgeted sales for April. [3]
- (b) Calculate the budgeted receipts from customers in June. [2]
- (c) Calculate the budgeted trade receivables at 31 May. [2]
- (d) State one reason why the directors would monitor the trade receivables figure. [1]
Show answer
- (a) $72,000
57,600 = 40% × April + 60% × 48,000 (M1); 40% × April = 28,800 (M1); April = 72,000 (A1).
- (b) $69,600
40% × 66,000 = 26,400 + 60% × 72,000 = 43,200 (M1) = 69,600 (A1).
- (c) $109,200
Unpaid 60% of April 43,200 + all of May 66,000 (M1) = 109,200 (A1).
- (d) A rising balance may show customers taking longer to pay, which harms cash flow.
B1 any valid reason (credit control, liquidity, risk of irrecoverable debts).
The cash budget of Saeed Packaging Ltd shows a cash deficit of $40,000 for the next three months, after which the balance becomes positive. The directors are considering two options:Option 1: an overdraft of $40,000 for three months at an interest rate of 12% per annum.Option 2: offer customers a 2.5% cash discount to pay one month earlier. The directors expect customers owing $64,000 to accept, which would remove the deficit.
- (a) Calculate the cost of Option 1. [1]
- (b) Calculate the cost of Option 2. [1]
- (c) Advise the directors which option they should choose. Justify your answer. [6]
Show answer
- (a) $1,200
40,000 × 12% × 3/12 = 1,200 (B1).
- (b) $1,600
64,000 × 2.5% = 1,600 (B1).
- (c) Option 1 is cheaper by $400 and does not depend on customers' behaviour; the bank may withdraw an overdraft at short notice, and it adds to interest costs. Option 2 is more expensive, customers may not all accept, and once offered the discount may be expected permanently, reducing future profit; but it lowers the risk of irrecoverable debts and needs no bank approval. Decision: choose the overdraft because it is cheaper and more certain, provided the bank agrees.
Up to 2 marks for points for Option 1 (cheaper by 400; certain amount; temporary). Up to 2 marks for points for/against Option 2 (uncertain take-up; permanent expectation; fewer bad debts; no security needed). 1 mark for use of figures. 1 mark for a clear decision consistent with the argument.
Budgeted information for Ravi Traders, Lahore, for August:1 credit sales $50,000; receipts from credit customers $42,0002 credit purchases $30,000; payments to suppliers $28,000 (inventory levels do not change)3 depreciation of equipment $3,0004 insurance of $6,000 paid on 1 August for six months5 repayment of a bank loan $5,000.
- (a) Calculate the budgeted profit for August. [2]
- (b) Calculate the budgeted net cash flow for August. [2]
- (c) Explain three reasons why the profit and the net cash flow are different. [3]
Show answer
- (a) $16,000
50,000 − 30,000 − 3,000 − 1,000 (insurance 6,000 × 1/6) (M1) = 16,000 (A1).
- (b) $3,000
42,000 − 28,000 − 6,000 − 5,000 (M1) = 3,000 (A1).
- (c) Depreciation reduces profit but is not a cash payment; insurance paid for six months is a cash outflow of $6,000 but only $1,000 is an expense of August; the loan repayment is a cash outflow but not an expense. (Also: receipts and payments differ from sales and purchases because of credit.)
1 mark for each reason, with reference to the figures (max 3).
Sahara Solar Lamps plans to sell: January 4,000 units; February 5,000 units; March 6,000 units; April 5,500 units. Inventory of finished goods at the end of each month is to be 20% of the next month's sales. Inventory on 1 January will be 800 units.
- (a) Prepare the production budget in units for January, February and March. [4]
- (b) Explain why the sales budget is usually prepared before the production budget. [2]
Show answer
- (a) Production budget (units) Jan Feb MarSales 4,000 5,000 6,000Add closing inventory 1,000 1,200 1,100Less opening inventory (800) (1,000) (1,200)Production 4,200 5,200 5,900
B1 closing inventory 1,000, 1,200, 1,100; B1 opening inventory 800, 1,000, 1,200; B1 method; B1 production 4,200, 5,200, 5,900.
- (b) Sales demand is usually the principal budget factor; the number of units to produce depends on how many can be sold, so the other budgets are built from the sales budget.
1 mark: sales is the limiting/principal budget factor. 1 mark: production depends on forecast sales (plus inventory changes).
Gujrat Fans Ltd makes two ceiling fans. Budgeted sales: Quarter 1 Quarter 2Deluxe – units 1,500 1,800Deluxe – price $ 60 60Standard – units 3,200 3,000Standard – price $ 35 36
- (a) Prepare the sales budget in $ for each quarter. [3]
- (b) State two factors the sales manager should consider when forecasting sales. [2]
Show answer
- (a) Sales budget Quarter 1 $ Quarter 2 $Deluxe 90,000 108,000Standard 112,000 108,000Total 202,000 216,000
B1 Deluxe; B1 Standard; B1 totals 202,000 and 216,000.
- (b) Past sales trends; expected competitor prices (also: economic conditions, advertising plans, seasonal demand, market research).
1 mark each.
A manufacturing business prepares a full set of budgets each year.
- (a) Explain the term 'master budget'. [2]
- (b) Name two functional budgets, other than the sales budget. [2]
- (c) Explain the term 'principal budget factor' and give an example. [2]
Show answer
- (a) The summary budget that brings together all the functional budgets as a budgeted statement of profit or loss, budgeted statement of financial position and cash budget.
1 mark: combines functional budgets. 1 mark: shown as budgeted financial statements/cash budget.
- (b) Production budget; materials purchases budget (also labour, overheads, receivables, payables budgets).
1 mark each.
- (c) The factor that limits the activity of the business, so it must be budgeted first; for example, sales demand or a shortage of skilled labour.
1 mark: definition. 1 mark: valid example.
Ravi Chemicals plans production of: April 3,000 units; May 3,600 units; June 4,000 units; July 4,400 units. Each unit uses 2.5 kg of material costing $4 per kg. The inventory of material at the end of each month must equal 30% of the next month's production requirements. The inventory at 1 April will meet this policy.
- (a) Prepare the materials purchases budget, in kg and in $, for April, May and June. [5]
- (b) Material is paid for in the month after purchase. State the payment to suppliers in June. [1]
- (c) Give one reason why the business holds an inventory of material. [1]
Show answer
- (a) Materials purchases budget April May JuneMaterial for production (kg) 7,500 9,000 10,000Add closing inventory (kg) 2,700 3,000 3,300Less opening inventory (kg) (2,250) (2,700) (3,000)Purchases (kg) 7,950 9,300 10,300Purchases at $4 per kg ($) 31,800 37,200 41,200
B1 usage 7,500, 9,000, 10,000; B1 closing inventory 2,700, 3,000, 3,300; B1 opening inventory 2,250, 2,700, 3,000; B1 purchases 7,950, 9,300, 10,300 kg; B1 $31,800, $37,200, $41,200.
- (b) $37,200
May purchases 37,200 (B1).
- (c) To avoid production stopping if a delivery is late.
B1 any valid reason (buffer against supplier delays, bulk discounts, demand changes).
For the quarter ending 31 March 2027, Lyari Traders budgets: trade receivables on 1 January $46,000; credit sales $180,000; receipts from credit customers $171,500; discounts allowed $2,300; irrecoverable debts written off $1,800.
- (a) Prepare the trade receivables budget for the quarter. [4]
- (b) Calculate the budgeted trade receivables collection period in days, using closing receivables and a 90-day quarter. Give your answer to one decimal place. [2]
Show answer
- (a) Trade receivables budget $Balance 1 January 46,000Credit sales 180,000 226,000Less receipts (171,500)Less discounts allowed (2,300)Less irrecoverable debts (1,800)Balance 31 March 50,400
B1 opening + credit sales; B1 receipts; B1 discounts and irrecoverable debts; B1 closing 50,400.
- (b) 25.2 days
50,400 ÷ 180,000 × 90 (M1) = 25.2 days (A1).
Khyber Hardware budgets for the year: cost of sales $150,000; inventory at start $24,000 and at end $30,000; all purchases on credit; trade payables at start $18,000; payments to suppliers $149,000.
- (a) Calculate the budgeted purchases. [2]
- (b) Prepare the trade payables budget for the year. [3]
- (c) Explain how a just-in-time (JIT) system would change the inventory figures in these budgets. [2]
Show answer
- (a) $156,000
150,000 + 30,000 − 24,000 (M1) = 156,000 (A1).
- (b) Trade payables budget $Balance at start 18,000Credit purchases 156,000 174,000Less payments (149,000)Balance at end 25,000
B1 opening; B1 purchases and payments; B1 closing 25,000.
- (c) Goods would be delivered only as needed, so closing inventory would be close to zero and purchases would nearly equal cost of sales.
1 mark: minimal inventory. 1 mark: purchases ≈ cost of sales / less cash tied up.
A garment factory in Karachi plans to produce 2,400 shirts next month. Each shirt needs 1.5 productive labour hours. Idle time is expected to be 10% of hours paid. Workers are paid $12 an hour. The normal capacity is 3,800 paid hours; any extra hours are paid as overtime at time and a half.
- (a) Calculate the total labour hours that must be paid. [2]
- (b) Calculate the total budgeted labour cost. [3]
- (c) Suggest two ways the factory could avoid paying overtime. [2]
Show answer
- (a) 4,000 hours
Productive hours 2,400 × 1.5 = 3,600 (M1); 3,600 ÷ 0.9 = 4,000 (A1).
- (b) $49,200
Basic 4,000 × 12 = 48,000 (M1); overtime 200 hours × premium 6 = 1,200 (M1); total 49,200 (A1).
- (c) Recruit extra workers or temporary staff; reduce idle time through better scheduling/maintenance (also: spread production over earlier months, subcontract).
1 mark each.
Margalla Ltd prepares budgets for the six months ending 30 June 2027:1 sales 9,000 units at $50 each2 production 9,500 units; variable production cost $22 per unit3 fixed production overheads of $57,000 are absorbed on budgeted production4 opening inventory 600 units valued at $28 each; inventories are valued at full production cost5 administration expenses $48,000; selling expenses 5% of revenue; depreciation of office equipment $6,000.
- (a) Prepare the budgeted statement of profit or loss for the six months ending 30 June 2027. [6]
- (b) Explain why the budgeted profit will not equal the budgeted increase in the bank balance. [2]
Show answer
- (a) Budgeted statement of profit or loss $ $Revenue (9,000 × $50) 450,000Opening inventory (600 × $28) 16,800Production cost (9,500 × $28) 266,000Less closing inventory (1,100 × $28) (30,800)Cost of sales (252,000)Gross profit 198,000Administration 48,000Selling (5% × 450,000) 22,500Depreciation 6,000 (76,500)Budgeted profit 121,500
B1 revenue; B1 absorption rate 57,000 ÷ 9,500 = $6, full cost $28; B1 closing inventory 600 + 9,500 − 9,000 = 1,100 units; B1 cost of sales 252,000; B1 expenses 76,500; B1 profit 121,500.
- (b) Profit includes non-cash items such as depreciation and inventory changes, and sales or purchases on credit are counted before cash moves; capital spending and loan repayments affect cash but not profit.
1 mark for a reason; 1 mark for a relevant example.
Ravi Foods Ltd is preparing its master budget for the year ending 31 December 2027. Figures from the functional budgets:1 non-current assets at 1 January 2027: cost $260,000, accumulated depreciation $60,0002 new equipment costing $40,000 will be bought in 20273 depreciation is 10% per annum on the cost of all non-current assets held at the year end4 closing inventory $32,000; trade receivables (December sales) $48,000; trade payables (December purchases) $27,0005 the cash budget shows a closing bank balance of $14,5006 share capital $150,000; retained earnings at 1 January 2027 $83,500; budgeted profit for the year $64,000; dividends paid $20,000.
- (a) Prepare the budgeted statement of financial position at 31 December 2027. [6]
- (b) Explain how the directors can use the master budget. [2]
Show answer
- (a) Budgeted statement of financial position $ $Non-current assets: cost (260,000 + 40,000) 300,000Less accumulated depreciation (60,000 + 30,000) (90,000) 210,000Inventory 32,000Trade receivables 48,000Bank 14,500 94,500Total assets 304,500Share capital 150,000Retained earnings (83,500 + 64,000 − 20,000) 127,500 277,500Trade payables 27,000Total equity and liabilities 304,500
B1 cost 300,000; B1 depreciation 30,000, carrying amount 210,000; B1 current assets 94,500; B1 retained earnings 127,500; B1 payables as current liability; B1 totals 304,500 balancing.
- (b) It brings all functional budgets together to show whether the plans give an acceptable profit and financial position; later, actual results can be compared with it to control performance.
1 mark: coordination/overall plan (check plans are consistent, profitable, liquid). 1 mark: control – compare actual with budget.
The owner of a chain of three pharmacies in Lahore is thinking about introducing a system of budgets.
- (a) Explain three purposes of budgeting for the business. [6]
Show answer
- (a) Planning: forces managers to think ahead about sales, staff and stock. Coordination: makes sure the three pharmacies and departments work to the same plan. Control: actual results can be compared with budget and variances investigated. (Also motivation and communication.)
Up to 2 marks for each purpose: 1 mark naming it, 1 mark applying/explaining it (max 6).
Al-Shifa Hospital, Karachi, currently sets departmental budgets centrally. The new finance director suggests participative budgeting.
- (a) Explain the term 'participative budgeting'. [2]
- (b) Discuss the advantages and disadvantages of participative budgeting for the hospital. [6]
Show answer
- (a) Budget holders (department managers) are involved in setting their own budgets with senior management, rather than having budgets imposed.
1 mark: managers take part. 1 mark: contrast with imposed/top-down.
- (b) Advantages: department heads know their patient numbers and costs, so budgets are more realistic; managers feel ownership and are more motivated to meet them; better communication between departments. Disadvantages: takes longer; managers may build in budgetary slack; targets may not match the hospital's overall goals; senior managers may still override them, causing demotivation.
Up to 3 marks for advantages and up to 3 for disadvantages, each developed in the hospital context.
The directors of Shah Logistics Ltd plan to pay each depot manager a bonus if the depot's actual costs are below its budget.
- (a) Explain the term 'budgetary slack'. [2]
- (b) Advise the directors whether they should link the bonus to the budget. Justify your answer. [6]
Show answer
- (a) Deliberately overstating budgeted costs (or understating revenue) so the target is easier to achieve.
1 mark: deliberate overstatement/understatement. 1 mark: to make the target easy to meet.
- (b) For: gives managers a clear target and incentive to control costs; aligns their goals with the company's. Against: encourages budgetary slack in the budget-setting stage; managers may cut essential spending (maintenance, training) to earn the bonus; ignores factors outside their control such as fuel prices; may harm service quality. Decision: link bonuses only if budgets are reviewed for slack and include non-financial targets, or use a flexed budget; otherwise do not.
Up to 2 marks for points for; up to 3 marks for points against (slack, short-termism, uncontrollable costs, quality); 1 mark for a justified decision.
A bottling plant in Hub records electricity costs of $9,200 when output is 4,000 crates and $13,700 when output is 7,000 crates. The cost is semi-variable.
- (a) Use the high–low method to calculate the variable cost per crate and the fixed cost. [3]
- (b) Calculate the flexed budget cost of electricity for an output of 5,800 crates. [1]
- (c) Actual electricity cost at 5,800 crates was $12,400. Calculate the variance and state whether it is favourable or adverse. [1]
- (d) Suggest one possible cause of this variance. [1]
Show answer
- (a) Variable $1.50 per crate; fixed $3,200.
(13,700 − 9,200) ÷ (7,000 − 4,000) = 1.50 (M1 A1); fixed 9,200 − 4,000 × 1.50 = 3,200 (A1).
- (b) $11,900
3,200 + 5,800 × 1.50 = 11,900 (B1).
- (c) $500 adverse
12,400 − 11,900 = 500 A (B1).
- (d) An increase in the electricity tariff (or machines left running when idle).
B1 any valid cause.
Bolan Biscuits budgeted to make and sell 10,000 cartons. Actual output and sales were 11,500 cartons. Original budget $ Actual $Revenue 300,000 339,250Direct materials 80,000 94,300Direct labour 60,000 67,850Variable overheads 20,000 24,150Fixed overheads 50,000 52,000Profit 90,000 100,950
- (a) Prepare a flexed budget for 11,500 cartons. [4]
- (b) Calculate the variance for each item, stating whether it is favourable or adverse. [3]
- (c) Explain why the flexed budget is more useful than the original budget for control. [1]
Show answer
- (a) Flexed budget (11,500 cartons) $Revenue 345,000Direct materials (92,000)Direct labour (69,000)Variable overheads (23,000)Fixed overheads (50,000)Profit 111,000
B1 revenue 345,000; B1 variable costs × 1.15; B1 fixed overheads unchanged 50,000; B1 profit 111,000.
- (b) Revenue 5,750 A; materials 2,300 A; labour 1,150 F; variable overheads 1,150 A; fixed overheads 2,000 A; total profit variance 10,050 A.
B1 revenue and materials; B1 labour and variable overheads; B1 fixed overheads and total 10,050 A.
- (c) It compares actual costs with what costs should have been at the actual level of output, so variances are not distorted by the change in volume.
B1.
Thar Pumps budgeted to make and sell 8,000 pumps at $45 each. Variable cost per pump: materials $15, labour $9, variable overheads $3. Fixed costs were budgeted at $90,000.Actual results: 6,500 pumps made and sold at $46 each; materials $101,400; labour $60,450; variable overheads $20,800; fixed costs $88,000.The production manager says: 'Total costs were $35,350 below budget, so my department performed very well.'
- (a) Calculate the flexed budget profit for the actual output. [3]
- (b) Calculate the total cost variance compared with the flexed budget, stating whether it is favourable or adverse. [2]
- (c) Evaluate the production manager's claim. [3]
Show answer
- (a) $27,000
Flexed revenue 6,500 × 45 = 292,500 (B1); flexed costs 6,500 × 27 + 90,000 = 265,500 (B1); profit 27,000 (B1).
- (b) $5,150 adverse
Actual costs 270,650 − flexed 265,500 (M1) = 5,150 A (A1).
- (c) The $35,350 saving (306,000 − 270,650) arises mainly because 1,500 fewer pumps were made, not from efficiency. Against the flexed budget, costs were $5,150 adverse: materials $3,900 A, labour $1,950 A and variable overheads $1,300 A, partly offset by fixed costs $2,000 F. The claim is therefore misleading.
1 mark: original budget comparison distorted by lower volume. 1 mark: flexed comparison shows 5,150 adverse (with item detail). 1 mark: conclusion that claim is not justified.
