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Budgets Grade 12 Notes Accounting Study Guide

A budget is simply a spending plan that takes into account estimated current and future income and expenses for a specified future time period, usually a year. Having a budget keeps your spending in check and makes sure that your savings are on track for the future. Budgets Grade 12 Notes Accounting Study Guide

Budgeting is an important tool for internal control in any business.
Budgets are prepared to forecast what will happen in the future.

4.1 Key concepts

ConceptExplanationPurpose
Cash budgetA forecast of cash receipts and cash payments.To forecast future receipts and payments
Projected Income StatementA forecast of income and expenses.To forecast future profits or losses
Debtors’ collection scheduleA schedule (plan) of how the business will collect money from its debtors.To forecast receipts from debtors
Creditors’ payment scheduleA schedule (plan) of how the business will pay its creditors.To forecast payments to creditors

Sales

  1. A business’ main source of income is sales. These can be for cash or on credit.
  2. Cash sales are received immediately and will be entered as a receipt on the cash budget in the month of sale.
  3. The money from credit sales will be collected from debtors in the future.
  4. The cash and credit sales may need to be calculated from the given information.

4.2 Debtors’ collection schedule

Use the following steps when preparing a debtors’ collection schedule:

  1. Calculate and enter the credit sales.
  2. Take each month and insert the percentage that will be received in that month.
  3. Do the calculations using credit sales to work out the amount to be received from debtors.
  4. Total the columns for each month.

Worked example 1
Prepare the debtors’ collection schedule for July, August and September 2011 from the information below:

  1. 60% of total sales are for cash.
  2. Debtors are expected to pay as follows:
    • 50% in the same month as the credit sale transactions subject to a 10% discount
    • 30% in the month following the credit sales transaction month
    • 17% in the second month following the credit sale transaction month
    • 3% is expected to be written off
      (This 3% is written off as a bad debt and will not form part of the debtors’ collection schedule as no cash will be received from bad debts.)
  3. Total sales:
    • Actual
      –– June 2011 R160 000
    • Budgeted
      –– July 2011 R150 000
      –– August 2011 R180 000
      –– September 2011 R200 000

ACTUAL SALES:
These are sales that have taken place in the months before the budget period.
A portion of the credit sales may be collected in the budget period.
BUDGETED SALES:
These are the estimated sales for the budget period.
Answer to worked example 1 (see page 64)

Credit salesJulyAugustSeptember
June 2011R64 00030%19 20017%10 880
July 2011R60 00050% − 10%27 00030%18 00017%10 200
Aug 2011R72 00050% − 10%32 40030%21 600
Sep 2011 R80 00050% − 10%36 000
R46 200R61 280R67 800

First calculate 50% of the credit sales and then subtract the 10% discount from this figure [50% − 10% is not 40%].
Explanations

Step 1 Step 2 Step 3 
Calculate and enter credit sales.
Cash sales = 60%
Credit sales = 40%
Insert % to be collected in
each month.
Do the calculations to work out the amount
of credit sales collected in each month.
June: R160 000 × 40% =
R64 000
July: R150 000 × 40% = R60 000
August: R180 000 × 40% =
R72 000
Sept: R200 000 × 40% =
R80 000
See answer above.June credit sales: No calculation as they
are not part of this collection period
July: R64 000 × 30% = R19 200
August: R64 000 × 17% = R10 880
July credit sales:
July: R60 000 × 50% = R30 000
R30 000 − 10% = R27 000
August: R60 000 × 30% = R18 000
Sept: R60 000 × 17% = R10 200
August credit sales:
August: R72 000 × 50% = R36 000
R36 000 − 10% = R32 400
Sept: R72 000 × 30% = R21 600
September credit sales:
Sept: R80 000 × 50% = R40 000
R40 000 − 10% = R36 000

4.3 Creditors’ payment schedule (creditors’ budget)

The following must be considered when the Creditors’ budget is calculated:

  • when and how much stock is purchased on credit and
  • When is the payment due?

This forms part of the second step in the preparation of the main budget.
ILLUSTRATIVE ACTIVITY:
(This info has a twofold understanding:

  • That the stock balance at the beginning of the month will be the same, every month, and
  • That total purchases are equal to Cost of Sales when purchases are not given.)

REQUIRED:
Calculate the expected payments to creditors for credit purchases for the budged period January to March 2014.
The Opening stock balance will be maintained as the stock basis.
INFORMATION:

  • Creditors are paid in full in the month following purchases
    (That means that the purchasing on credit during December will be paid at the end of January.)
ACTUAL CASH purchases of trading stockNovember 2013R10 000
December 2014R12 000
BUDGETED CASH purchases of trading stockJanuary 2014R10 000
February 2014R13 000
March 2014R14 500

 

ACTUAL CREDIT purchases of trading stockNovember 2013R14 000
December 2013R12 000
BUDGETED CREDIT purchases of trading stockJanuary 2014R10 000
February 2014R12 000
March 2014R13 000

The following template is the interpretation of the instruction that the
Creditors will be paid in full the following month:

1NOV14 000This amount will be paid at the end of December, however this amount is not part of the budget month
 2DEC12 000R12 000 will be paid at the end January and forms part of the budget months
 3JAN10 000R10 000 will be paid at the end of January and February forms part of the budget months
 4FEB12 000R12 000 will be paid at the end of February and March forms part of the budget months
 5MAR13 000This amount will be paid at the end of April and does not form part of the budget months

SOLUTION:
CREDITORS PAYMENTS SCHEDULE: Budgeted period: Jan – Mar 2014

MONTHCREDIT PURCHASES  BUDGETED PERIOD
NOVDECJANFEBMAR
1 NOV14 000
2 DEC12 00012 000
3 JAN10 00010 000
4 FEB12 00012 000
5 MAR13 000
Payments to creditors* 12 000* 10 000* 12 000

* Creditors are paid in full in the month following purchases
EXTRACT OF THE CASH BUDGET:
CASH PAYMENTS:

CASH PAYMENTSJANUARYFEBRUARYMARCH
Cash Purchases10 00013 00014 500
Payments to Creditors12 00010 00012 000

Example of creditor’s payment schedule:
REQUIRED:
Prepare a Purchases Payment Schedule of KIMA TRADERS for January
2014 to March 2014.
INFORMATION:

SALES FORECAST:   BALANCES AT 31 DECEMBER 2013  
January
February
March
R126 000
R130 000
R144 000
Trading Stock
Creditors
R75 000
R60 000

Whenever the credit purchases are not given, calculate the cost of sales from the given total sales (R6000)
E.g. Cost of Sales = 50 % on cost
Calculation:
Sales × 100/150 = Cost of sales (Purchases)
6000 × 100/150 =

ADDITIONAL INFORMATION:

  1. Mark-up is equal to 100% on Cost price
  2. Cash purchases of trading stock amount to only 20% of all purchases
  3. All credit purchases are payable in the month following the month of Purchase.
  4. Stock replenishment will take place on a monthly basis and the opening balance will be maintained as a base stock.

PROCEDURE TO FOLLOW:

  1. Determine the budget months:
    Answer: January to March 2014.
  2. Does the question give you the purchases of stock?
    Answer: No, therefore Cost of sales is equal to purchases of stock.

EXPLANATIONS:

1Mark-up is equal to 100% on Cost price.
Formula:
Cost price: 100% + Profit: 100% =Sales: 200%
The purchases of stock is not given therefore you have to calculate the cost of sales amount to determine the purchases of stock:
January: Creditors’ balance will be paid in January: R60 000. (the balance was the credit purchases during December)
February: Make use of the sales figure of January to calculate the cost of sales that is equal to purchases:
126 000 × 100/200 = R63 000 (Cost of sales)
March: Make use of the sales figure of February to calculate the cost of sales: 130 000 × 100/200 = R 65 000 (Cost of sales)
Cash purchases for March: Make use of the March sales figure to calculate the cost of sales. Need this figure to determine the cash purchases for March: 144 000 × 100/200 = R72 000(cost of sales)
2Cash purchases of trading stock amount to only 20 % of all purchases. Therefore credit purchase is 80% of all purchasesJanuary: 63 000 × 20%= R12 600 cash purchases in January
(63 000 × 80%= R50 400 payment of account in February)
February: 65 000 × 20%= R13 000 cash purchases for February
65 000 × 80% = R52 000 payment of account in March
March: 72 000 × 20% = R14 000 cash purchases for March
3All credit purchases are payable in the month following the month of Purchase.This means that the creditors will be paid the next month. Anything bought during January will be paid at the end of February.
4Stock replenishment will take place on a monthly basis and the opening balance will be maintained as a base stock.This means that the opening stock will stay the same every month.
See the illustration below

You need to make use of the Sales figures to calculate the cost of sales per month

ILLUSTRATION: CALCULATION OF THE PURCHASES AMOUNT OF STOCK.

STOCK REPLENISHMENT WILL TAKE PLACE ON A MONTHLY BASIS AND THE OPENING BALANCE WILL BE MAINTAINED AS A BASE STOCK.”
Here is an illustration what it means:

  • If the opening balance is the same at every given month, then the Cost of sales will automatically be equal to the total purchases.
  • So, when the stock purchased is not given, calculate cost of sales.
  • Cost of Sales is equal to total purchases.
  • Find the ratio between credit (eg. 80%) and cash purchases (eg. 20%) and calculate
  • Complete the Creditors Payment schedule

GENERAL LEDGER OF KIMA TRADERS

DR                                            TRADING STOCK ACCOUNT                                                     N          CR
Jan1BalanceB/d75 000Jan31(126 000 × 100/200) Cost of sales63 000
Bank (63 000 × 20%)12 600BalanceC/d75 000
63 000 × 80%
Creditors control
50 400
138 000138 000
Feb1 Balance B/d75 000Feb28(130 000 × 100/200)
Cost of sales
65 000
Bank (65 000 × 20%)13 000BalanceC/d75 000
Creditors control (80%)52 000
Mar1BalanceB/d75 000Mar31(144 000 × 100/200)
Cost of sales
72 000
Bank (72 000 × 20%)14 400BalanceC/d75 000
Creditors control (80%)57 600
Apr1BalanceB/d75 000

SOLUTION:
CREDITORS PAYMENTS SCHEDULE: Budgeted period: January to March 2014

MONTH  PURCHASES  CREDIT PURCHASES    BUDGETED PERIOD 
NOV DEC JAN FEB MARCH 
Balance of creditors60 000
JAN63 00050 40050 400
FEB65 00052 00052 000
MAR72 00057 600
Payments to creditors60 00050 40052 000

EXTRACT OF THE CASH BUDGET:
CASH PAYMENTS:

CASH PAYMENTS JANUARY FEBRUARY  MARCH 
Cash Purchases12 60013 00014 400
Payments to Creditors60 00050 40052 000

4.4 Analysis of cash budget

Worked example 2
Example adapted from March 2010 NSC question paper – see FEB/MARCH 2010 Paper 1 at:
http://www.education.gov.za/Examinations/PastExamPapers/AccountingPapers2010/tabid/507/Default.aspx
You are provided with the Projected Income Statement and additional information relating to Helen’s Hair Stylists for the period April to June 2010. The business is owned by Helen Davids. Helen has also prepared a cash budget for the same time period. The financial year-end is 31 March.
Required
Answer the questions that follow.
Information
Helen’s hair stylists
Projected Income Statement for April to June 2010

 APRIL MAY JUNE 
 RRR
Sales of hair products8 7500105 000122 500
Cost of sales50 00060 00070 000
Gross profit37 50045 00052 500
Other operating income122 000122 000162 000
Fee income from customers120 000120 000160 000
Sundry income2 0002 0002 000
OPERATING EXPENSES95 350120 072127 372
Salary of hairdressing assistants25 50025 50034 000
Wages of cleaner3 4003 6723 672
Rent of premises24 60030 75030 750
Consumable stores14 40014 40019 200
Water & electricity6 0006 0007 000
Telephone2 2002 2002 200
Advertising8 00015 0008 000
Motor vehicle expenses1 4005 6005 600
Repairs & maintenance of equipment3 5003 5003 500
Sundry expenses2 3002 3002 300
Depreciation on vehicle2 0009 1009 100
Depreciation on equipment2 0502 0502 050
OPERATING PROFIT64 15046 92887 128
Interest income3 31500
67 46546 92887 128
Interest on loan750625500
NET PROFIT66 71546 30386 628

 

Depreciation and bad debts will be included in the projected income statement but NOT on the cash budget because they are non-cash items (i.e. they do not affect the cash flow of the business).

Additional information

  1. Line of business:
    Helen gave up her job to start this business in 2004. She invested her life savings of R800 000 in this business. The business styles hair for its customers. They also sell hair products to the public.
  2. Employees:
    Helen employs three hair stylists. She has planned to expand the business by employing a fourth stylist from 1 June 2010. She also employs a cleaner.
  3. Business premises rented:
    The rent is calculated on a fixed amount per square metre. She currently rents 60 square metres, but will increase this floor space as from 1 May 2010 due to expansion.
  4. Fixed deposit:
    The fixed deposit of R468 000 is for 12 months and will mature on the 30 April 2010.

Questions
Refer to the Projected Income Statement to identify/calculate the following:

  1. The monthly salary paid to each hair stylist. (2)
  2. The % increase in wages that the cleaner will receive during the projected period. (2)
  3. The % interest rate on the fixed deposit. (4)
  4. The rental per square metre, and the number of additional square metres she will rent from 1 May 2010. (4)
  5. As the internal auditor you compare the following projected figures to the actual figures at the end of April. Provide four comments that you would include in your internal auditor’s report in respect of scenarios A, B and C below.
    Projected April 2010Actual April 2010
    ATelephone2 2004 150
    BWater & electricity6 0004 900
    CFee income120 000136 800

Answers to worked example 2 (see page 78)

  1. Calculation of monthly salary paid to each hair stylist: [2]
    R25 500 ÷ 3 = R8 50033 or R34 000 ÷ 4 = R8 500
    Explanation to help you understand how to get to the answer above:

    • There are 3 hairstylists in April and May and 4 hairstylists in June.
    • Therefore divide salary (April or May) by 3 hairstylists (R25 500 ÷ 3 = R8 500)
    • OR Divide salary (June) by 4 hairstylists (R34 000 ÷ 4 = R8 500)
  2. Calculation of the % increase in wages that the cleaner will receive during the projected period: [2]
    272 ÷ 3 400 × 100 = 8%
    Explanation to help you understand how to get to the answer above:

    • Calculate the increase in wages by deducting the wage of May from wage
      of April (R3 672 – R3 400 = R272)
    • Calculate the % increase (R272 ÷ R3 400 × 100 = 8%)
  3. Calculation of % interest rate on the fixed deposit: [4]
    3 315 ÷ 468 000 × 12 months × 100 = 8,5% OR
    3 315  × 12 months = R39 780
    39 780  × 100 = 8,5%
    468 000
    Explanation to help you understand how to get to the answer above:
    Interest on fixed deposit = R3 315 (interest income in Projected Income Statement)
    Fixed deposit = R468 000 (see information no. 4)
    3 315    × 100 × 12 (months)
    468 000       1
    = 8,5%
  4. Calculation of rental per square metre: [2]
    24 600 ÷ 60 = R410
    Explanation to help you understand how to get to the answer above:
    Rent expense for April = R24 600 (see Projected Income Statement)
    R24 600 is the amount paid for 60 square metres.
    To calculate rental per square metre you have to divide the total rent by 60
    R24 600 ÷ 60 = R410
    Calculation of the number of additional square metres she will rent from 1 May 2010: [2]
    30 750 ÷ 410 = 75 sq metres or 60 × 30 750 ÷ 24 600 = 75 sq metres
    Increase = 75 – 60 = 15 sq metres 33
    Explanation to help you understand how to get to the answer above:
    Rent expense for May = R30 750 (see Projected Income Statement)
    R30 750 ÷ R410 = 75 square metres
    75 – 60 (original square metres) = 15 additional square metres
    (For internal control purposes it is important to compare actual with budgeted figures. In this way possible problems relating to expenses or income can be corrected.)
  5. Provide four comments that you would include in your internal auditor’s report in respect of scenarios A, B and C above. [8]
    1. Comment on telephone:
      The telephone costs are higher than the expected amount by R1 950.
    2. Comment on water & electricity:
      The water & electricity costs are R1 100 less than the expected amount.
    3. Comment on fee income & consumable stores:
      There was a good increase in fee income of R16 800
      (R136 800 – R120 000) which shows that the business is popular with its customers.
      The consumable stores (e.g. shampoos, conditioners) increased slightly by R720 (R15 120 – R14 400) because the business had more customers.

When commenting on actual figures use the following steps:

  1. Compare actual with budgeted figures and state whether the actual figure is more or less than the budgeted figure.
  2. Decide and state whether the expense or income item has been well controlled or not (within budget or not).

Below is a list of suggested past examination questions for extra practice:

Topic Paper Question 
Projected Income StatementFebruary/March 20093
Projected Income StatementFebruary/March 20106
Cash BudgetFebruary/March 20111
Cash BudgetFebruary/March 20125
Cash BudgetNovember 20135.2

 

 

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