Question Tag: Incremental Budget

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  • 1 Marks

MI – May 2016 – L1 – SA – Q8 – Budgeting

Identify the budgeting system where all costs are justified annually.

The budgetary system that requires each budgeting unit to justify all costs in each year rather than year-to-year cost change is called:

A. Incremental budget
B. Rolling budget
C. Flexible budget
D. Zero-based budget
E. Program planning budgetary system

Answer: D

Explanation:
Zero-based budgeting is a method where all expenses must be justified for each new period. Unlike traditional budgeting, no reference is made to the previous year’s budget, making it necessary to start from zero and build a budget based solely on the needs and costs for the current year.

  • 20 Marks

IMAC – NOV 2023 – L2 – Q2 – Budgeting

Discuss the contents of a budget manual, explain incremental and zero-based budgeting, and prepare budgeted profit and loss statement and financial position for Chico Ltd.

a) As organisations become larger and more complex, it is no longer possible for just one person to prepare a budget. Instead, budgeting across the organisation must be carefully coordinated among various actors. As a result, there is the need for a budget manual irrespective of the type of or approach to budgeting.

Required:
i) State FIVE (5) contents of a budget manual. (5 marks)
ii) Write short notes on the following:

  • Incremental budget. (2.5 marks)
  • Zero-Based Budget. (2.5 marks)

b) Chico Ltd, a newly established manufacturing company with branches across Africa is preparing its first annual budget. The following information is relevant:

Sales forecast for each month:

Month Sales Forecast (GH₵)
January to June 20,000
July to December (and thereafter) 22,000
  • Gross profit margin: 20%
  • Credit given to customers: 2 months
  • Credit taken from suppliers: 2 months
  • Closing inventory: 3 months of demand
  • Monthly operating expenses: GH₵1,222

At the start of the budget period, a non-current asset with a cost of GH₵120,000 and a useful life of 6 years was purchased and transferred to one of its branches. In addition, a cash amount of GH₵80,000 was provided for the operations of Chico Ltd.

Required:
Prepare the budgeted statement of profit or loss and budgeted statement of financial position for Chico Ltd. (10 marks)

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