Accounting Business Reporting for Decision Making

412 Accounting: Business Reporting for Decision Making

9.47 Usefulness of a budgeting system LO2, 6

Nancy Ho owns and operates the Always on Time printing company. Nancy and her staff do not

engage in planning or budgeting, as they consider the business too small to warrant their attention to

such matters. Recently, it has been necessary for the employees to work overtime every night in order

to complete customer orders, although some customers have become frustrated and taken their busi-

ness elsewhere. The backlog of orders has arisen because customers have been promised a two-day

turnaround, and has been compounded by the business running out of premium paper and inks.

Required

Discuss how a budgeting system would assist the Always on Time printing company.

9.48 Budgeting styles   LO6, 7

Lisa Lin is the manager of a large retail store specialising in children’s clothing and accessories.

As Lisa is the longest-serving employee, she believes that she knows what is best for the store.

Lisa does not consult with her departmental managers in relation to operational plans, and pre-

pares all budget estimates by herself. Over the past several years, unfavourable budget variances

have become more significant. When questioned about the variances, departmental managers have

given many excuses to explain their department’s lack of performance against budget. The situ-

ation has not been helped by the high turnover of employees at all levels.

Required

a. Comment on the style of budgeting used by Lisa Lin.

b. Suggest any improvements that could be made to the budgetary process, and how such

changes would benefit the retail store.

9.49 Target setting in budget planning   LO6, 7

‘Nobody ever seems to be able to hit our sales targets. Why is that?’ (John Lyons, Chief Accountant

of Clocktower Fashions).

John Lyons was showing his frustration at the failure of the company’s store managers to meet

their specific targets for sales and expenses. He says, ‘We do everything for them; we don’t ask

them to contribute at all; our formula for target setting is well known.’

Required

Briefly outline what might be wrong with Clocktower Fashions’ budget process with respect to

target setting. What improvements would you suggest?

9.50 Preparation of receipts from accounts receivable schedule and cash budget   LO5

Rainbow Enterprises has presented the following estimates relating to 2018 activities.

Quarter ending

31 March 30 June 30 September 31 December

Sales revenue $790 000 $890 000 $990 000 $1 040 000

Purchases 504 000 429 000 409 000 439 000

Cost of sales 395 000 445 000 495 000 520 000

Marketing and administration expenses 188 000 188 000 188 000 188 000

Occupancy expenses 87 000 87 000 87 000 87 000

Depreciation expense 14 400 14 400 14 400 14 400

Sales in the December quarter of 2017 were $690 000. All sales are on credit, of which 55 per

cent are collected in the quarter of sale and 45 per cent in the following quarter. Purchases are on

credit, and entity policy is such that all purchases are paid for in the same quarter. The marketing

and administration expenses incurred and paid are the same. Occupancy expenses incurred and

paid are usually the same, except that the electricity bill (estimated to be $700) for December 2018

will not be paid until January 2019. A major IT hardware acquisition of $27 300, to be paid for in

cash, is expected in the December quarter. The bank balance at 31 December 2017 was $18 450.