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Unit 9: Budgetary Control

7. "Budgetary control is a system which uses budgets as a means of planning and controlling Notes
all aspects of producing and/or selling commodities and services." Comment.
8. If the current year production is not equivalent to the current year sales, why does the
closing stock arise in the business?
9. What do you think are the causes behind an unfavorable fixed overhead budget variance?
10. Victoria Kite Company, a small Melbourne firm that sells kites on the web wants a master
budget for the next three months, beginning January 1, 2005. It desires an ending minimum
cash balance of $5,000 each month. Sales are forecasted at an average wholesale selling
price of $8 per kite. In January 1, Victoria Kite is beginning Just-In-Time (JIT) deliveries
from suppliers, which means that purchases equal expected sales.

On January 1, purchases will cease until inventory reaches $6,000, after which time purchases
will equal sales. Merchandise costs average $4 per kite. Purchases during any given month
are paid in full during the following month. All sales are on credit, payable within 30
days, but experience has shown that 60% of current sales are collected in the current
month, 30% in the next month, and 10% in the month thereafter. Bad debts are negligible.
Monthly operating expenses are as follows:
Wages and Salaries $15,000
Insurance Expired 125

Depreciation 250
Miscellaneous 2,500
Rent 250/Month + 10% of Quarterly
Sales over $10,000

Cash dividends of $1,500 are to be paid quarterly, beginning January 15, and are declared on
the fifteenth of the previous month. All operating expenses are paid as incurred, except
insurance, depreciation and rent. Rent of $250 is paid at the beginning of each month, and the
additional 10% of sales is paid quarterly on the tenth of the month following the end of the
quarter. The next settlement is due January 10. The company plans to buy some new fixtures
for $3,000 cash in March.
Money can be borrowed and repaid in multiples of $500 at an interest rate of 10% per
annum. Management wants to minimize borrowing and repay rapidly. Interest is computed
and paid when the principal is repai(d) Assume that borrowing occurs at the beginning,
and repayments at the end of he months in question. Money is never borrowed at the
beginning and repaid at the end of the same month. Compute the interest to the nearest
dollar.
Assets as of Dec 31, 2004 Liabilities as of Dec. 31, 2004
Cash $5,000 Accounts Payable (Merchandise) $35,550

Accounts Receivable 12,500 Dividends Payable 1,500
Inventory* 39,050 Rent Payable 7,800
Unexpired Insurance 1,500 = $44,850
Fixed assets, net 12,500

= $70,550

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