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9609 · 5.5.1

The meaning and purpose of budgets — practice questions

Practice and worked examples for 9609 The meaning and purpose of budgets. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A retailer expects to sell 10,000 units next quarter. Opening inventory is 1,200 units; desired closing inventory is 1,800 units. Calculate the budgeted production.

Show solution outline

Production = Sales + Closing inventory − Opening inventory

= 10,000 + 1,800 − 1,200 = 10,600 units

The firm must produce 600 more units than it sells to build up its stock for the following period.

Worked example 2

Crafty Creations is preparing its cash budget for the first quarter. The opening cash balance on Jan 1st is $5,000. Budgeted cash flows are:

  • Cash Sales: Jan 10,000;Feb10,000; Feb 12,000; Mar 15,000.15,000.
  • Credit Sales (collected one month later): Dec 4,000;Jan4,000; Jan 5,000; Feb 6,000.6,000.
  • Cash Payments (Materials & Wages): Jan 8,000;Feb8,000; Feb 9,000; Mar 11,000.11,000.
  • Rent (paid in Jan): $3,000 for the quarter. Calculate the closing cash balance for March.
Show solution outline

Step 1: Calculate total cash inflows for each month.

  • Jan Inflows = $10,000 (cash sales) + $4,000 (Dec credit sales) = 14,00014,000
  • Feb Inflows = $12,000 (cash sales) + $5,000 (Jan credit sales) = 17,00017,000
  • Mar Inflows = $15,000 (cash sales) + $6,000 (Feb credit sales) = 21,00021,000

Step 2: Calculate total cash outflows for each month.

  • Jan Outflows = $8,000 (payments) + $3,000 (rent) = 11,00011,000
  • Feb Outflows = $9,000 (payments) = $9,000
  • Mar Outflows = $11,000 (payments) = $11,000

Step 3: Calculate monthly net cash flow and closing balance.

  • January:
    • Net Cash Flow = 14,000−14,000 - 11,000 = 3,0003,000
    • Closing Balance = $5,000 (opening) + $3,000 = 8,0008,000
  • February:
    • Net Cash Flow = 17,000−17,000 - 9,000 = 8,0008,000
    • Closing Balance = $8,000 (opening) + $8,000 = 16,00016,000
  • March:
    • Net Cash Flow = 21,000−21,000 - 11,000 = 10,00010,000
    • Closing Balance = $16,000 (opening) + $10,000 = **26,000∗∗26,000**

The closing cash balance for March is **26,000∗∗.26,000**.

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