MASTER BUDGETING

Problem 1
John Carpenter’s trading company in the process of preparing the master budget for the first
three months of the year gathered the following information about its assets and liabilities and
also about the past and future sales

Actual and forecasted sales:

Inventory of merchandise Nov Sales Rs. 120,000
(20,000 units @ Rs. 4) Rs. 80,000 Dec Sales Rs. 160,000
Accounts Receivable" Jan Sales Rs. 160,000
Nov Sales Rs. 30,000 Feb Sales Rs. 200,000
Dec. Sales Rs. 80,000 Rs. 110,000 Mar Sales Rs. 240,000
Cash in Hand Rs. 10,000 Apr Sales Rs. 280,000
Rs. 200,000
Accounts Payable Rs. 80,000
Equity Rs. 120,000
The company’s sales are mostly all on credit. Historical data shows that 50% of credit sales are
collected on the month of sales and the remaining 50% are collected on the following two
months of sales equally. Bad debts and uncollectable debts are negligible. All purchases are paid
on the following month of purchase. Margin on sales is 50%, operating and distribution expenses
are 30% of the month’s sales. Expenses are payable on the month of them being due. The
company has a policy of maintaining sufficient inventory of merchandise to meet the following
month’s sales and minimum cash balance of Rs. 10,000.

The company has been thinking of buying a computing machine in the month of January at a
cost of Rs. 80,000. The company has reached with an agreement with a bank for a soft loan at
12% cost. Loans are received in a multiple of Rs. 5,000 and payments are made in Rs. 1,000.
Amount of interest due are paid for the loan repaid with the repayment amount to a nearest of Rs.
100.

Required:
1. Merchandise purchase budget
2. Operating expenses budget
3. Cash Receipt and Disbursement Budget
4. Budgeted income statement
5. Budgeted balance sheet at the end of march.
Problem 2
Nepal Batteries Ltd. prepares its master budget on a quarterly basis. The following data have
been collected to assist in the preparation of master budget for the second quarter of 2018.

i. As of march 31, 2018 ( the end of the prior quarter), the company’s balance were as
follows:

Rs. Rs.
Cash 9,000
Account Receivable 48,000
Inventory 12,600
Plant and Equipment 200,000
Account Payable 18.300
Capital Stock 180,000
Retained Earnings 71,300
269,600 269,600

ii. Actual Sales for March and budgeted sales for April to July are as follows:
Rs.
March 60,000
April 70,000
May 85,000
June 90,000
July 50,000

iii. Sales are 20% for cash and 80% on credit. All credit sale items are net 30. The
accounts receivable at March 31 are a result of March credit sales.
iv. The company’s gross profit rate is 40% of sales.
v. Monthly expenses are budgeted as follows:
Salaries and wages Rs. 7,500 per month
Freight out is 6% of sales
Advertising Rs. 6,000 per month
Depreciation Rs. 2,000 per month
Other expenses 4% of sales
vi. At the end of each month, inventory is to be on hand equal to 30% of following
months sales needs, stated at cost.
vii. Half a month’s inventory purchases are paid for in the month of purchase and half in
the following month.
viii. Equipment are planned to be purchased during the quarter:
a. April – Rs. 11,500
b. May – Rs. 8,250
ix. Dividends totaling Rs. 4,000 will be declared and paid in the month of june.
x. The company must maintain a minimum cash balance of Rs. 8,000. An open line of
credit is available at a local branch of Nepal Bank Ltd. All borrowing of the line is
made at the beginning of the month and all payments are made at the end of the
month. Borrowings and repayments of the principle in the multiples of Rs. 1,000.
Loan repayments are on FIFO basis, interest is paid only at the time of repayment of
principle. However, any interest on unpaid loans should be properly accrued when the
statements are prepared. The interest rate is 12% per annum.
Required:
Prepare the master budget for the company.

Problem no 3
The Ryan’s Trading House Ltd. has collected the following information to prepare its master
budget.

Balance Sheet as of January 1, 2017

$ $
Equity 150,000 Merchandise Inventory 100,000
Bank Loan 20,000 Accounts Receivable
Retained Earnings 26,000 November Sales : 16,000
December Sales : 60,000 76,000
Cash at bank 20,000
196,000 196,000

Merchandise Sales Budget

Particulars/ Months Jan Feb Mar Apr
Sales Revenue (Rs.) 200,000 300,000 350,000 300,000

Merchandise Purchase Budget

Particulars/ Months Jan Feb Mar
Sales Forecast 200,000 300,000 350,000
Required for Sales 100,000 150,000 175,000
Add Ending Inventory 150,000 175,000 150,000
250,000 325,000 325,000
Less: Opening Inventory (100,000) (150,000) (175,000)
 Amount to Purchase 150,000 175,000 150,000

Sales would be 20% in cash and 80% on credit. Credit sales would be realized on the
following two months of sales equally. All expenses including purchases would be paid
in the same month of the expenses and purchases. Gross profit margin would be 50% on
Sales. The selling and administrative expenses would be 10% of sales.

Sufficient merchandise inventory would be maintained to meet next month’s sales needs.
The company would desire to have minimum cash balance of $ 20,000. The repayment of
loan is due on January 1 along with an interest for a year of $ 2000.

A line of credit is available to meet cash shortage in the multiples of $ 10,000 at an

interest rate of 12% per annum. The repayment of the line of credit would be in the
multiples of $ 1,000 along with the interest on the principle to be repaid.
Required
i. Cash Receipt and Disbursement Budget (10)
ii. Budgeted Income Statement at the end of March 2017 (5)
iii. Budgeted Balance Sheet at the end of March 2017 (5)

Problem no 4
Shubham Trading Point distributes medical supplies in Kathmandu valley. Its balance
sheet at the end of December is as follows.
Debit(Rs.) Credit(Rs.)
Plant and furniture 420,000
Investment 200,000
Inventory 150,000
Accounts receivable
From Nov sales 60,000
From Dec sales 180,000 240,000
Cash at bank 40,000
Capital stock 500,000
Long Term Loan Payable 400,000
Retained earnings 150,000
Total 10,50,000 10,50,000
The projected figures for sales, purchases and expenses of next three months are
as follows:

Actual Sales Forecasted Sales Salaries Variable Fixed

sales (Rs.) sales ( Rs.) expenses overhead
November 300,000 January 750,000 90,000 37,500 45,000
December 450,000 February 900,000 90,000 45,000 45,000
March 1,200,000 90,000 60.000 45,000
April 750,000
 The company’s gross margin is 60% of sales. Company keeps 50% inventory for next
month of cost of goods sold. All other expenses including purchase are paid same
month when they become due. Cash sales will be 20% and credit sales will be
collected 50% in the same month of sale, 25% in the following month, 25% two
months later from the month of sales. At the beginning of January, Company will sell
a portion of fixed asset of Rs.170,000 at cost and at the same date company will
purchase another fixed assets of Rs.130,000. The Company is planning to pay off a
portion of its long term bank loan of Rs. 200,000 in principle and premium interest of
Rs. 32,000 in January. The company is also planning to pay a dividend of Rs. 500,000
to its shareholders in the month of May.

The company is expected to receive a 15% dividend from the investment in the month
of March. Company maintains minimum cash balance of Rs.25,000. Fixed overhead
includes an amount of depreciation chargeable on fixed assets at Rs. 5,000 per month.

The previous negotiation with a joint venture bank for borrowing in the multiple
of Rs.10,000 in the beginning of the month when required and repayable at the end
of the month only in the multiple of Rs.5,000 plus interest at 12% P.A. The interest
is paid to the extend refund of principal.

Required:
a Prepare purchase budget for three month ending March.
b Prepare Cash budget for the three month ending March.
c Prepare budgeted income statement for three month ended March.
d Prepare budgeted balance sheet as on ending March.
e List out the objectives of Cash Budget
f Do you find any change in the financial position of the company?

Problem no 5

The information needed for the preparation of master budget have been provided
below:
Balance Sheet at the end of 2017
Liabilities Rs. Assets Rs.
Share Capital 350,000 Plant & Machinery 400,000
Retained Earning 130,000 Inventory 120,000
12% Debenture 60,000 Account Receivable 150,000
Account Payable 150,000 Cash 20,000
Total 690,000 Total 690,000
Total sales units for first 4 months of 2018 = 50,000 units, which is apportioned on the
ratio of 2:3:3:2 from January to April. Selling price per unit is Rs.20.
Gross profit averages 40% of sales. Ending inventory of merchandize will be sales need of
next month. Experience shows that all purchases are paid in the next month of purchase.
50% sales are for cash. Credit sales will be collected in the next month of sales. Selling
and Administrative expenses will be 10% of sales which will be paid same month.
Company is going to purchase machinery in the month of January costing Rs.200,000.
Depreciation per year will be 15%. Company will pay Debenture on March. Provision for
tax and dividend are 25% and 10% respectively. During March Company issues share
capital for Rs.250,000. The company keeps minimum cash balance of Rs.30,000. If the
cash is not sufficient, company can take loan from bank at 9% interest rate per annum
which is paid on repayment of loan. All the borrowings and payments are made in the
multiple of Rs.1, 000.

Required:
a. Sales Budget for January to March (2)
b. Merchandize Purchase Budget for three months ending March (4)
c. Cash Budget for three months ending March (6)
d. Budgeted Income Statement up to March (3)
e. Budgeted Balance Sheet at the end of the March (3)