ExpertHard10 marksStructured
ACCA · Question 36 · Budgeting
SECTION B - MULTI-TASK QUESTION 1 (BUDGETING)
Scenario: AquaHarvest Ltd operates a marine agriculture business, farming specialized seaweed for the cosmetics industry. The company is preparing its budgets for the upcoming quarter (Q3: July, August, September).
Data provided:
- Sales volume forecast (kg): July 5,000; August 6,000; September 8,000.
- Selling price: $20 per kg.
- Production volume is set to equal sales volume each month (no inventory held).
- Variable production cost: $8 per kg (paid in the month of production).
- Fixed overheads: $30,000 per month (includes $5,000 depreciation). Paid in the month incurred.
- Sales receipts: 60% collected in the month of sale, 40% in the following month.
- June sales were $80,000.
Answer the following 5 sub-questions (2 marks each):
- What is the budgeted total revenue for August?
- What are the budgeted cash receipts from customers in July?
- What are the total cash payments for production and overheads in September?
- If AquaHarvest flexes its August budget to actual sales of 7,000 kg, what would be the total flexed cost (variable + fixed)?
- Identify the principal budget factor if the maximum seaweed harvesting capacity is capped at 6,500 kg per month.
SECTION B - MULTI-TASK QUESTION 1 (BUDGETING)
Scenario: AquaHarvest Ltd operates a marine agriculture business, farming specialized seaweed for the cosmetics industry. The company is preparing its budgets for the upcoming quarter (Q3: July, August, September).
Data provided:
- Sales volume forecast (kg): July 5,000; August 6,000; September 8,000.
- Selling price: $20 per kg.
- Production volume is set to equal sales volume each month (no inventory held).
- Variable production cost: $8 per kg (paid in the month of production).
- Fixed overheads: $30,000 per month (includes $5,000 depreciation). Paid in the month incurred.
- Sales receipts: 60% collected in the month of sale, 40% in the following month.
- June sales were $80,000.
Answer the following 5 sub-questions (2 marks each):
- What is the budgeted total revenue for August?
- What are the budgeted cash receipts from customers in July?
- What are the total cash payments for production and overheads in September?
- If AquaHarvest flexes its August budget to actual sales of 7,000 kg, what would be the total flexed cost (variable + fixed)?
- Identify the principal budget factor if the maximum seaweed harvesting capacity is capped at 6,500 kg per month.
How to approach this question
1. August Revenue = 6,000 kg * $20.
2. July Receipts = (60% of July Sales) + (40% of June Sales).
3. Sept Payments = (Sept kg * $8) + (Fixed overheads - Depreciation).
4. Flexed August Cost = (7,000 kg * $8) + $30,000.
5. The factor limiting production below demand.
Full Answer
1. August Revenue = 6,000 kg * $20 = $120,000.
2. July Sales = 5,000 * $20 = $100,000. July Receipts = (60% * $100,000) + (40% * $80,000 June sales) = $60,000 + $32,000 = $92,000.
3. Sept Variable Cost = 8,000 * $8 = $64,000. Cash Fixed Overheads = $30,000 - $5,000 (depreciation) = $25,000. Total Payments = $64,000 + $25,000 = $89,000.
4. Flexed Cost for 7,000 kg = Variable (7,000 * $8 = $56,000) + Fixed ($30,000) = $86,000. (Depreciation is included in cost budgets, just not cash budgets).
5. Since September demand is 8,000 kg but capacity is 6,500 kg, Harvesting Capacity is the limiting factor.
Common mistakes
Including depreciation in the cash budget (Q3).
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