Edexcel A-Level Accounting: Budgeting (YAC11) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover topic 2.4, Budgeting, of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018: outcomes 2.4.1 to 2.4.5, Unit 2 (A2) only. Businesses and figures are invented; amounts are in dollars. Ignore taxation.

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Questions

1. Explain how a budget helps management to control a business. [2]

2. Explain the term principal budget factor. [2]

3. Caddow Rugs Ltd plans to sell 800 rugs in January, 900 in February, 1,000 in March and 1,100 in April, at 120 each. Closing inventory of finished rugs is to be 20% of the next month’s sales. There are 150 rugs in inventory on 1 January.

(a) Prepare the revenue budget for January to March. [1] (b) Prepare the production budget, in rugs, for January to March. [4]

4. Ferrisby Glassworks Ltd plans to produce 2,000 units in January, 2,200 in February and 2,500 in March. Each unit uses 1.5 kg of sand mix costing 4 per kg. Closing inventory of sand mix is to be 40% of the next month’s usage. Inventory on 1 January is 1,200 kg.

Prepare for January and February: the purchases budget in kg and in dollars, and the raw materials inventory budget in dollars. [6]

5. Lunden Supplies Ltd makes 25% of its sales for cash. Of credit sales, 70% are received in the month after sale less a 2% cash discount, 28% are received two months after sale, and 2% are written off as irrecoverable two months after sale. Total sales: April 60,000; May 72,000; June 80,000.

Prepare the trade receivables budget for June. [6]

6. Pennard Traders Ltd pays its suppliers two months after purchase. Credit purchases were 15,000 in May and 16,500 in June, and are budgeted at 28,000 in July, 32,000 in August and 30,000 in September.

Prepare the trade payables budget for the quarter ending 30 September. [3]

7. Garnock Ltd’s capital budget for next year includes:

• a new machine costing 64,000, delivered in March; half is paid in March and half in June
• sale of an old machine (cost 40,000, accumulated depreciation 34,000) for 5,000 cash in March
• an extension costing 90,000, paid in September, financed by issuing debentures of 90,000 in August.

(a) List the capital receipts and payments, by month, that will appear in the cash budget. [3] (b) Calculate the profit or loss on disposal of the old machine and state where it appears in the master budget. [2]

8. Rookley Ltd provides this budget information.

• Sales: February 40,000; March 44,000; April 48,000; May 52,000; June 50,000. 30% are cash sales; credit customers pay two months after sale.
• Purchases are 55% of each month’s sales, paid the following month.
• Wages, paid in the month: 7,500 a month, rising by 4% from 1 June.
• Other expenses, paid in the month: 5,600 a month, including depreciation of 900.
• New equipment costing 18,000 is paid for in May.
• Half-yearly interest on 60,000 of 8% debentures is paid in June.
• A final dividend of 5,000 is paid in June.
• The bank balance on 1 April is 3,800.

Prepare the cash budget for April, May and June. [10]

9. Amberly Ltd’s statement of financial position at 1 January:

Equipment: cost 50,000, accumulated depreciation 15,000   35,000
Inventory 9,000; trade receivables 12,000; bank 5,000     26,000
Trade payables                                            (7,000)
Net assets                                                54,000
Ordinary shares 40,000; retained earnings 14,000          54,000

Budget for the six months to 30 June:

• Credit sales 96,000; receipts from customers 90,000.
• Credit purchases 58,000; payments to suppliers 56,000. Closing inventory 11,000.
• Expenses paid 21,000, including 1,500 rent for July to September. Electricity owing at 30 June: 800.
• Equipment is depreciated at 10% a year on cost.
• An interim dividend of 4,000 is paid.

(a) Prepare the budgeted statement of comprehensive income for the six months ending 30 June. [5] (b) Prepare Amberly Ltd’s budgeted statement of financial position at 30 June. [7]

10. Nettlebed Ltd’s fixed budget was for 12,000 chilled meals at 6.50 each; per meal, ingredients 2.20, packaging 0.30, direct labour 1.40. Delivery costs are semi-variable: 2,400 plus 0.15 per meal. Fixed overheads are 15,000. Actual results for 10,500 meals:

Revenue 69,300   Ingredients 22,680   Packaging 3,360
Direct labour 15,120   Delivery 4,050   Fixed overheads 14,700

(a) Prepare a flexible budget for 10,500 meals. [4] (b) Calculate the variances between the flexible budget and actual results, and the total profit variance. [3] (c) Explain why the flexible budget comparison is more useful than comparing actual results with the fixed budget. [2]

11. Vossen Ltd runs twelve furniture showrooms. Head office sets each showroom’s sales and cost budget without consulting showroom managers, and managers who exceed their cost budget lose their bonus. Evaluate the use of budgeting as a management tool at Vossen Ltd. [8]

Answers

1. Actual results are compared with budget to find variances [1]. Significant variances are investigated and corrected, and each budget holder is accountable [1]. [2] Examiner insight: “Compare actual with budget” is only half the answer; add investigation and action.

2. The factor that limits the level of activity the business can achieve [1], for example sales demand or machine capacity, so its budget must be prepared first [1]. [2] Examiner insight: “The most important budget” is too vague; the answer needs the idea of a limit on activity.

3. (a) January 96,000; February 108,000; March 120,000 [1]. (b) Closing inventory: January 180, February 200, March 220 [1]. January 800 + 180 - 150 = 830 [1]. February 900 + 200 - 180 = 920 [1]. March 1,000 + 220 - 200 = 1,020 [1]. [5] Examiner insight: Use the given opening figure of 150, not 20% of January’s sales (160).

4. Usage: January 3,000 kg, February 3,300 kg, March 3,750 kg [1]. Closing inventory: January 1,320 kg, February 1,500 kg [1]. Purchases: January 3,000 + 1,320 - 1,200 = 3,120 kg; February 3,300 + 1,500 - 1,320 = 3,480 kg [1]. In dollars: 12,480 and 13,920 [1]. Inventory budget, January: 4,800 + 12,480 - 12,000 = 5,280 [1]. February: 5,280 + 13,920 - 13,200 = 6,000 [1]. [6] Examiner insight: March usage is needed for February’s closing inventory; without it February goes wrong.

5. Credit sales: April 45,000, May 54,000, June 60,000. Opening balance 1 June: 45,000 x 30% + 54,000 = 67,500 [1]. Add credit sales 60,000 [1]. Receipts: 54,000 x 70% x 98% = 37,044 and 45,000 x 28% = 12,600 [1], total 49,644 [1]. Discounts allowed 756 and irrecoverable debts 900 [1]. Closing balance 67,500 + 60,000 - 49,644 - 756 - 900 = 76,200 [1]. [6] Examiner insight: Check the closing balance independently: all June credit sales plus 30% of May’s.

6. Opening balance 15,000 + 16,500 = 31,500 [1]. Add purchases 90,000; less payments 15,000 (July), 16,500 (August), 28,000 (September) = 59,500 [1]. Closing balance (July 44,500, August 60,000) at 30 September 62,000 [1]. [3] Examiner insight: Paying two months after purchase means July pays May’s purchases, not June’s.

7. (a) March: pay 32,000, receive 5,000 [1]. June: pay 32,000 [1]. August: receive 90,000 debentures; September: pay 90,000 [1]. (b) Carrying amount 40,000 - 34,000 = 6,000; loss 1,000 [1]. It goes in the budgeted statement of comprehensive income only [1]. [5] Examiner insight: Split the 64,000 as the payment terms state.

8.

	April	May	June
Cash sales	14,400	15,600	15,000
Credit customers	28,000	30,800	33,600
Total receipts	42,400	46,400	48,600
Suppliers	24,200	26,400	28,600
Wages	7,500	7,500	7,800
Other expenses	4,700	4,700	4,700
Equipment	–	18,000	–
Debenture interest	–	–	2,400
Dividend	–	–	5,000
Total payments	36,400	56,600	48,500
Opening balance	3,800	9,800	(400)
Net cash flow	6,000	(10,200)	100
Closing balance	9,800	(400)	(300)

Receipts April [1], May [1], June [1]. Suppliers one month later [1]. Wages, June 7,800 [1]. Other expenses 4,700, without depreciation [1]. Equipment 18,000 in May [1]. Interest 60,000 x 8% x 6/12 = 2,400 and dividend 5,000 in June [1]. Closing April 9,800 [1]; May (400) and June (300) [1]. [10] Examiner insight: Using 5,600 instead of 4,700 (depreciation left in) changes every closing balance.

9. (a) Revenue 96,000; cost of sales 9,000 + 58,000 - 11,000 = 56,000 [1]. Gross profit 40,000 [1]. Expenses 21,000 - 1,500 + 800 = 20,300 [1]. Depreciation 50,000 x 10% x 6/12 = 2,500 [1]. Profit for the period 17,200 [1]. (b) Equipment 50,000 - 17,500 = 32,500 [1]. Trade receivables 12,000 + 96,000 - 90,000 = 18,000 [1]. Bank 5,000 + 90,000 - 56,000 - 21,000 - 4,000 = 14,000 [1]. Current assets with inventory 11,000 and prepayment 1,500: 44,500 [1]. Current liabilities: trade payables 9,000 + accrual 800 = 9,800 [1]. Net assets 67,200 [1]. Equity: shares 40,000 + retained earnings (14,000 + 17,200 - 4,000) 27,200 = 67,200 [1]. [12] Examiner insight: The dividend reduces retained earnings and bank, not profit for the period.

10. (a) Revenue 10,500 x 6.50 = 68,250 [1]. Ingredients 23,100; packaging 3,150; labour 14,700 [1]. Delivery 2,400 + 1,575 = 3,975; fixed overheads 15,000 [1]. Flexed profit 8,325 [1]. (b) Revenue 1,050 F; ingredients 420 F [1]. Packaging 210 A; labour 420 A; delivery 75 A; fixed overheads 300 F [1]. Actual profit 9,390, so total 1,065 F [1]. (c) Both are based on 10,500 meals, so variances show cost control and pricing, not the effect of volume [1]. Against the fixed budget every variable cost looks favourable just because output fell by 1,500 meals [1]. [9] Examiner insight: Do not scale the whole 4,200 delivery cost to 3,675; only the 0.15 element varies.

11. Budgets give head office a plan and cash forecast for each showroom [1]. Comparing actual with budget shows weak showrooms early [1]. A bonus linked to the budget gives managers a clear target [1]. However, imposed budgets ignore local knowledge, so targets may be unrealistic [1]. Managers with no say may feel no ownership and lose motivation [1]. A cost-only bonus may lead managers to cut spending that drives sales, such as staffing [1]. Managers may pad future cost estimates [1]. Judgement: budgeting suits Vossen, but managers should help set budgets and be rewarded on showroom profit, not cost alone [1]. [8] Examiner insight: Evaluation needs both sides applied to Vossen and a justified conclusion, not a generic list.

Where marks are usually lost

• Applying the receipt pattern to total sales when some sales are for cash.
• Treating discounts allowed or irrecoverable debts as cash receipts.
• Putting dividends in the statement of comprehensive income.
• Flexing fixed overheads or the fixed part of a semi-variable cost.
• Omitting F or A from a variance.
• Charging a prepaid expense in full to the budget period.

Next steps

• Budgeting revision notes
• Budgeting study guide
• Edexcel A-Level Accounting hub
• Printable checklist
• Try all free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018 (first teaching September 2015), Pearson Education Limited. Unit 2: Corporate and Management Accounting, topic 2.4 Budgeting.