Planning and Control:

Question

Scenario:

ABC Retail Ltd. is preparing its budget for the upcoming financial year. The management has provided the following information for the upcoming year:

Sales Forecast:
Estimated sales for Q1: R300,000
Estimated sales for Q2: R350,000
Estimated sales for Q3: R400,000
Estimated sales for Q4: R450,000
Cost of Goods Sold (COGS):
COGS is estimated at 60% of sales.
Operating Expenses:
Fixed operating expenses: R120,000 per year
Variable operating expenses are estimated at 10% of sales.
Other Information:
ABC Retail Ltd. plans to invest R50,000 in new equipment during the year.
The company anticipates receiving R25,000 in other income.
Actual Performance (for variance analysis):
Actual sales for Q1: R280,000
Actual sales for Q2: R360,000
Actual sales for Q3: R420,000
Actual sales for Q4: R440,000
Required:

3.1 Create a quarterly sales budget based on the provided sales forecast. (10 marks)

3.2 Calculate the budgeted COGS for each quarter and the total for the year. (5 marks)

3.3 Calculate the total operating expenses (fixed and variable) for each quarter and the total for the year. (5 marks)

3.4 Calculate the sales variances (both favorable and unfavorable) for each quarter based on actual sales compared to the budgeted sales. (10 marks)

Answer 1

To assist with the budgeting and variance analysis for ABC Retail Ltd. based on the provided information, we will complete the following tasks:

3.1 Quarterly Sales Budget

Based on the sales forecast, the budgeted sales for each quarter will simply reflect the estimated sales provided:

| Quarter | Budgeted Sales (R) | |---------|---------------------| | Q1 | 300,000 | | Q2 | 350,000 | | Q3 | 400,000 | | Q4 | 450,000 | | Total | 1,500,000 |

3.2 Budgeted COGS for Each Quarter

COGS is estimated as 60% of sales. We will calculate the budgeted COGS for each quarter.

| Quarter | Budgeted Sales (R) | Budgeted COGS (60% of Sales) (R) | |---------|---------------------|-----------------------------------| | Q1 | 300,000 | 180,000 | | Q2 | 350,000 | 210,000 | | Q3 | 400,000 | 240,000 | | Q4 | 450,000 | 270,000 | | Total | 1,500,000 | 900,000 |

3.3 Total Operating Expenses (Fixed and Variable)

Operating expenses consist of fixed operating expenses and variable operating expenses, which are estimated at 10% of sales.

1. Fixed Operating Expenses: R120,000 for the entire year.

   • Quarterly fixed operating expenses = R120,000 / 4 = R30,000 per quarter.

2. Variable Operating Expenses: 10% of sales for each quarter.

| Quarter | Budgeted Sales (R) | Variable Operating Expenses (10% of Sales) (R) | Total Operating Expenses (R) | |---------|---------------------|-------------------------------------------------|-------------------------------| | Q1 | 300,000 | 30,000 | 60,000 | | Q2 | 350,000 | 35,000 | 65,000 | | Q3 | 400,000 | 40,000 | 70,000 | | Q4 | 450,000 | 45,000 | 75,000 | | Total | 1,500,000 | 150,000 | 300,000 |

3.4 Sales Variances for Each Quarter

Sales variances are calculated by comparing actual sales to budgeted sales. A positive variance indicates sales were higher than budgeted (favorable), while a negative variance indicates sales were lower than budgeted (unfavorable).

| Quarter | Budgeted Sales (R) | Actual Sales (R) | Variance (R) | Variance Analysis | |---------|---------------------|-------------------|---------------|---------------------------| | Q1 | 300,000 | 280,000 | (20,000) | Unfavorable | | Q2 | 350,000 | 360,000 | 10,000 | Favorable | | Q3 | 400,000 | 420,000 | 20,000 | Favorable | | Q4 | 450,000 | 440,000 | (10,000) | Unfavorable | | Total | 1,500,000 | 1,480,000 | (20,000) | Unfavorable (net) |

Summary:

1. Quarterly Sales Budget: Total estimated sales for the year is R1,500,000.
2. Budgeted COGS: Total COGS for the year is R900,000.
3. Total Operating Expenses: Total operating expenses for the year amount to R300,000.
4. Sales Variances: The total variance shows an unfavorable result of R20,000.

This completes the analysis required.