Question Tag: Budget Preparation

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  • 6 Marks

MA – May 2017 – L2 – Q2c – Budgetary control

Identify and explain three steps in the preparation of a Zero-Based Budget.

Zero-based budgeting attempts to improve upon incremental type of budgeting, which is perceived to carry over inefficiencies from previous periods. It allows for budget reductions and permits the re-allocation of resources from low to high priority programs. Critics are of the opinion that such an approach or process of budgeting can be cumbersome in its execution.

Required:

Identify and explain THREE steps in the preparation of Zero-Based Budget. (6 marks)

The steps in the preparation of a Zero-Based Budget include:

  1. Identification of Decision Units:
    • Explanation: Each cost center or unit is identified as a decision unit. These units are the basic elements that carry out specific activities or functions. A decision unit can be a department, section, or any operational entity within the organization that incurs costs.
  2. Preparation of Decision Packages:
    • Explanation: A decision package is created for each decision unit. This package includes a detailed analysis of each activity, its objectives, and the costs associated with it. The decision package also outlines the benefits and consequences of funding the activity at different levels (e.g., existing level, reduced level, or enhanced level).
  3. Ranking and Prioritization of Decision Packages:
    • Explanation: The decision packages are ranked in order of priority based on their importance to the organization’s goals. This ranking helps in allocating resources effectively, ensuring that high-priority activities receive the necessary funding while low-priority activities may be reduced or eliminated.

(6 marks)

  • 9 Marks

MA – May 2017 – L2 – Q2b – Budgetary control, Cash budgets and master budgets

Prepare the production and labour budgets for a manufacturing company for the first quarter of 2016.

Diminutive Limited is a manufacturing company situated at the Jubilee field that produces chemicals for oil production. The company is preparing its budget for the coming year. It expects to be able to sell 10,000 tonnes of its only product, the “Sparkle Oil,” in January 2016. Sales are then expected to rise to 11,000 tonnes in February and 14,000 tonnes in March and then remain stable for the rest of the year.

Diminutive Limited aims to carry a finished goods inventory at the end of each month equal to 10% of the following month’s sales. Each “Sparkle Oil” takes 2 hours of labour to make. Diminutive Limited’s 132 production workers are employed on contracts that require them to work a minimum of 160 hours per month and are each paid GH¢1,280 per month. Production workers are highly skilled and require a minimum of one year’s training. In the short term, it is not possible to recruit any more production workers. Any labour hours required in excess of 160 hours per worker are made up by overtime that is paid at the basic rate plus an overtime premium of 48% of the basic rate.

Required:

i) Prepare the production budget on a monthly basis for the first quarter of 2016. (3 marks)

ii) Prepare the labour budget for the first quarter of 2016 showing both hours and labour cost (assume that all production workers work at least 160 hours per month). (6 marks)

i) Production Budget for the First Quarter of 2016:

Months January February March
Budgeted sales (units) 10,000 11,000 14,000
Add: Closing stock (10% of next month’s sales) 1,100 1,400 1,400
Less: Opening stock (1,000) (1,100) (1,400)
Production requirement 10,100 units 11,300 units 14,000 units

(3 marks)

ii) Labour Budget for the First Quarter of 2016:

Months January February March
Labour Hours:
Production Requirement (units) 10,100 11,300 14,000
Labour Hours (2 hours per unit) 20,200 22,600 28,000
Standard Hours Available (132 workers × 160 hours) 21,120 21,120 21,120
Overtime Required (Hours) 0 1,480 6,880
Labour Cost (GH¢):
Basic Rate Payment (GH¢1,280 × 132 workers) 168,960 168,960 168,960
Overtime Payment:
January (no overtime) 0
February (1,480/160 × GH¢1,280 × 1.48) 0 17,523 0
March (6,880/160 × GH¢1,280 × 1.48) 0 0 81,459
Total Labour Cost (GH¢) 168,960 186,483 250,419

(6 marks)

  • 20 Marks

PSAF – Nov 2018 – L2 – Q3a – Public sector fiscal planning and budgeting

Prepare a budget for 2019 using 2018 as a base and analyze the budgeting approach.

a) You are the head of the Budget department of the Ministry of Works. The Ministry intends to prepare the budget for the 2019 fiscal year and has intended to use the 2018 budget as a base. Below is the detail of the 2018 Budget:

Assumptions for 2019 Budget: i) The Ministry has introduced new equipment, leading to a 36% increase in IGF, but government grants will be cut by GH¢9,600,000. ii) Established post salary will increase by GH¢3,920,000, non-established post salaries will increase to GH¢4,960,000, and allowances will increase by 15%. iii) Utility cost will decrease to GH¢9,700,000; repairs cost will increase by 9%; and training and seminar cost will increase to GH¢17,820,000. iv) The Ministry expects to acquire new equipment, increasing the equipment cost by GH¢150,000,000.

Required: Using the 2018 Budget as a base and assumptions made, prepare the Budget for the 2019 fiscal year. (10 marks)

b)
i) Identify and explain the type of Budget approach used by the Ministry in the Budget preparation. (2 marks)

ii) Explain THREE (3) merits and THREE (3) demerits of the Budget approach adopted in the preparation of the 2019 Budget. (3 marks)

iii) Explain an alternative approach you would have suggested to the Ministry for their subsequent budget preparation and explain THREE (3) reasons why that approach is appropriate under the circumstance. (5 marks)

a) Budget for 2019

b) i) The Ministry used the Incremental Budgeting approach in the preparation of the 2019 Budget. This approach involves using the previous year’s budget as a base and making adjustments for expected increases or decreases in revenues and expenditures.

(2 marks)

ii) Merits of Incremental Budgeting:

  • Simplicity and Time-Efficiency: This method is straightforward and quick to apply, saving time in the budgeting process.
  • Stability: It provides stability as it builds on existing budgets, which are familiar to all stakeholders.
  • Ease of Justification: There is less need to justify the entire budget, as only the increments or decreases are usually scrutinized.

Demerits of Incremental Budgeting:

  • Inefficiencies are Carried Forward: Inefficiencies in the previous budget may be perpetuated if they are not critically examined.
  • Lack of Innovation: The approach discourages a fresh evaluation of activities and can stifle innovation as it assumes past activities are still relevant.
  • Resource Allocation Issues: The approach may not align resources with strategic priorities, leading to the potential misallocation of funds.

(3 marks total – 1.5 marks for three merits and 1.5 marks for three demerits)

iii) An alternative approach that could be suggested is Zero-Based Budgeting (ZBB).

Reasons for ZBB:

  • Resource Optimization: ZBB ensures that every department starts from a “zero base,” justifying all expenditures, leading to better resource optimization.
  • Eliminates Waste: This approach forces a review of all expenditures, helping to eliminate unnecessary spending and promoting efficiency.
  • Alignment with Strategic Goals: ZBB aligns budgeting with current strategic goals, ensuring resources are allocated to the most critical areas of need.

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