The following budgeted accounting statements were submitted to the board of directors of Alpha Ltd on 1 October Year 4:
|
Budgeted profit and loss account for the year to 30 September Year 5 |
||
|
|
£ |
£ |
|
Sales |
|
15,600,000 |
|
Cost of sales |
|
10,452,000 |
|
Gross profit |
|
5,148,000 |
|
Fixed overheads: |
|
|
|
Selling and advertising |
1,500,000 |
|
|
General administration |
1,094,500 |
|
|
|
|
2,594,500 |
|
Operating profit |
|
2,553,500 |
|
Interest payable on medium term loan |
135,000 |
|
|
Royalties payable on sales |
780,000 |
|
|
|
|
915,000 |
|
Net profit |
|
1,638,500 |
|
Budgeted balance sheet at 30 September Year 5, with comparative figures at 1 October Year 4 |
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|
|
30 September Year 5 £ |
1 October Year 4 £ |
|
Fixed assets at cost |
2,300,000 |
1,800,000 |
|
Less: Accumulated depreciation |
585,000 |
450,000 |
|
|
1,715,000 |
1,350,000 |
|
Trading stock |
3,200,000 |
4,000,000 |
|
Trade debtors |
2,600,000 |
2,200,000 |
|
Cash in bank |
1,854,750 |
– |
|
Total assets |
9,369,750 |
7,550,000 |
|
Share capital |
4,400,000 |
4,400,000 |
|
Retained earnings |
3,313,500 |
1,675,000 |
|
|
7,713,500 |
6,075,000 |
|
Medium term loan |
1,000,000 |
1,000,000 |
|
Trade creditors |
656,250 |
475,000 |
|
|
9,369,750 |
7,550,000 |
At 31 March Year 5 the following information was available in respect of the first six months of the trading year:
(a) Sales were 20% below the budgeted level, assuming an even spread of sales throughout the year.
(b) The gross profit percentage was two percentage points below the budgeted percentage.
(c) Actual advertising expenditure of £100,000 was 50% below the budgeted amount. All other selling expenses were in line with the budget.
(d) General administration costs were 10% below the budgeted level.
(e) Trading stock at 31 March was £200,000 higher than the budgeted level. It was assumed in the budget that stock would decrease at a uniform rate throughout the year.
(f ) Trade debtors at 31 March were equivalent to two months’ actual sales, assuming sales were spread evenly throughout the six months.
(g) Trade creditors at 31 March were equivalent to one month’s actual cost of goods sold, assuming costs were spread evenly throughout the six months.
(h) On 1 January Year 5 the rate of interest charged on the medium term loan was increased to 16% per annum.
The budget for the second six months was revised to take account of the following predictions:
(a) Revenue during the second six months would continue at the level achieved during the first six months.
(b) Cost control measures would be implemented to restore the gross profit percentage to the budgeted level.
(c) Advertising, selling and general administration costs would be maintained at the levels achieved in the first six months.
(d) Trading stocks would be reduced to the level originally budgeted at 30 September.
(e) Trade debtors would be reduced to the equivalent of one month’s sales.
(f ) Trade creditors would be maintained at the equivalent of one month’s cost of goods sold.
(g) Interest on the medium term loan would remain at 16% per annum.
The directors of the company wish to know what change in the cash in bank will arise when the revised budget for the second six months is compared with the consequences of continuing the pattern in the first six months. Taxation has been ignored.
Required
(1) Prepare an accounting statement for the six months to 31 March Year 5 comparing the actual results with the original budget.
(2) Prepare a revised budget for the second six months and compare this with the actual results which would have been achieved if the pattern of the first six months had continued.