Question

Maleficent Company Limited is preparing budget based on the information below.

1. Budget sales revenues:

	January	February	March
	$	$	$
Credit sales	550,000	450,000	650,000
Cash sales	65,000	55,000	55,000
Total sales	615,000	505,000	705,000

2. Past experience indicates that customers usually settle their balances as follows:

   • - 60% of a month's credit sales are collected in the month of sale; and

   • - the remaining 40% of a month's credit sales are collected in the following month.

3. All purchases are made on credit, 50% are paid in the month of purchase and 50% will be settled in the month following purchase. Budgeted inventory purchases are:

January $ 550,000

February $460,000

March $575,000

4. Other budgeted cash disbursements:

   1. (i) Purchase of equipment in February for $45,000 in cash;

   2. (ii) Selling and administrative expenses of $28,000 per month; and

   3. (iii) Dividends of $35,000 to be paid in March.

5. The cash balance as at 1 February 2020 was $50,000. It is the company policy to maintain the minimum cash balance at $50,000 at the end of each month. Therefore, the company has a credit arrangement with its bank to borrow at the beginning of any month at 8% annual interest, if necessary. The principal amount together with interest will be repaid when it has enough cash.

Required:

1. (a) Prepare a cash budget for February and March.

2. (b) Budgeting is an important management tool if implemented properly. Identity positive results when budgets are properly used.

3. (c) The CEO of Maleficent Company Limited considers to implement Zero-based budgeting and requires managers of all divisions to examine every cost and budget item in order to create budgets based on perceived needs for the coming period, regardless of what was done in previous years.

   1. (i) How does Zero-based budgeting differ from traditional budgeting?

   2. (ii) What are the possible advantages and disadvantages of adopting Zero-based budgeting approach?

Answer 1

b) When budgets are implemented it gives enormous benefits to the organisation. Below are the listed benefits:

· Efficiency: The use of budgetary control system helps the management to conduct its business in an efficient manner

· Control on expenditure: Budgetary control is a powerful tool for controlling expenditure in an organization. It is used as a yardstick for measuring performance of the individuals and departments at the end of the year. Incentive systems are linked to performance based on control of expenditure

· Finding Deviations: It helps the management in understanding the deviations and taking remedial actions to control the same

· Effective utilization of resources: Budgetary control system helps the organisation in effective utilisation of its limited resources like money, material, labor, machine hours etc. Budgets are developed after considering all constraints

· Revision of plan: Budgets helps in revision of plans if needed based on current developments and trends in the business

· Implementation of standard costing system: Budgets helps in developing standard costs for products and services. It creates suitable conditions for implementation of standard costing system.

· Cost Control and Cost Reduction: Budgets helps in controlling cost and implementing cost reduction programs in the organisation

c) Zero Based Budgeting

i) Zero based budgeting is a technique of budgeting which is building budget from scratch and not considering previous year as a base. Hence all items of budget are discussed afresh and budgeted. Hence it calls for a fresh perspective when a budget is to be done. It is an improved technique over traditional budgeting which has a base. Usually previous year budget or actual performacen is base in traditionally budgeting.

ii)

Advantages of Zero based budgeting

· It helps in efficient allocation of resources since as it does not keep previous budgets as base

· It helps in elimination of unnecessary spends year on year basis

· It motivates the employees for new thinking again and again since the budget items needs to be started from scratch

· It involves all the team members in a department and leads to meaningful budgeting exercise

Disadvantages of Zero based budgeting:

· It is time consuming exercise since the budget items should be discussed afresh

· It will consume higher manpower resources in an organization since it needs an involvement of lot of managerial resources each time to discuss budget

· Some budget items may not need a zero based budgeting concept hence the concept may not benefit.