- 10 Marks
Question
The Finance Manager of Baya Ltd has been criticised for using an incremental budget method in preparing the company’s budget. She, however, needs to respond to the issues raised at a board meeting and as a result, she is considering using different budgeting methods for the year-end 31 December 2022. She has asked you, the Management Accountant, to do some preliminary work to help her decide on which of the methods to use. She believes a rolling budget would be ideal for the fast-growing Baya Ltd in a relatively high inflationary country.
Baya Ltd’s incremental budget for the year-end 31 December 2022 is given below:
| Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Total | |
|---|---|---|---|---|---|
| Revenue (GH¢’000) | 17,520 | 17,958 | 18,407 | 18,867 | 72,752 |
| Cost of sales | 9,636 | 9,877 | 10,124 | 10,377 | 40,014 |
| Gross profit | 7,884 | 8,081 | 8,283 | 8,490 | 32,738 |
| Distribution costs | (1,577) | (1,616) | (1,657) | (1,698) | (6,548) |
| Administration | (4,214) | (4,214) | (4,214) | (4,214) | (16,856) |
| Operating profit | 2,093 | 2,251 | 2,412 | 2,578 | 9,334 |
The actual figures for quarter 1 (which has just been completed) are:
On the basis of the quarter 1 results, sales volume growth of 3% per quarter is now expected.
Required:
i) Explain how Baya Ltd will operate a rolling budget.
(2 marks)
ii) Recalculate the quarterly rolling budget for Baya Ltd for the last three quarters of the year 2022 and the first quarter of 2023.
(8 marks)
Answer
i) Explanation of Rolling Budget:
A rolling budget is one that is continually updated by adding a new budget period as the most recent period is completed. For example, if the company has a budget for a full 12 months, once one quarter is over, the next quarter’s budget is added, keeping the budget always covering the upcoming 12-month period. This approach is suitable for companies operating in a dynamic environment, where it is essential to adjust targets and expectations frequently in response to changing market conditions.
(2 marks)
ii) Recalculation of Quarterly Rolling Budget for Baya Ltd:
Adjustment Basis:
- Revenue: Expected to grow by 3% per quarter.
- Cost of sales and distribution costs are assumed to grow in line with sales growth.
- Administration costs remain fixed.
Revised Quarterly Rolling Budget:
| Quarter 2 (GH¢’000) | Quarter 3 (GH¢’000) | Quarter 4 (GH¢’000) | Q1 2023 (GH¢’000) | |
|---|---|---|---|---|
| Revenue | 18,470 | 19,024 | 19,595 | 20,183 |
| Cost of sales | 10,159 | 10,464 | 10,778 | 11,101 |
| Gross profit | 8,311 | 8,560 | 8,817 | 9,082 |
| Distribution costs | (1,662) | (1,712) | (1,764) | (1,817) |
| Administration | (4,214) | (4,214) | (4,214) | (4,214) |
| Operating profit | 2,435 | 2,634 | 2,839 | 3,051 |
Assumptions:
- Revenue: Grows by 3% each quarter.
- Cost of sales: Follows the same pattern as revenue growth.
- Distribution costs: Follows the same growth pattern.
- Administration costs: Remain fixed throughout the period.
(8 marks)
- Tags: Budgetary Control, Incremental Budgeting, Rolling Budget
- Level: Level 2
- Topic: Budgetary control
- Series: AUG 2022
- Uploader: Joseph