Chapter 23 – Exercises & Cases

Multiple Choice Questions

1. Budgets are used for:
   a) Planning only
   b) Control only
   c) Planning, coordination, and control
   d) Only financial reporting
   Answer: c) Budgets support planning, coordination, and control.

2. The first step in preparing an operating budget is usually:
   a) Cash budget
   b) Production budget
   c) Sales budget
   d) Capital budget
   Answer: c) The sales budget drives the operating budget.

3. A cash budget includes:
   a) Only revenues
   b) Only expenses
   c) Cash inflows and outflows
   d) Only capital expenditures
   Answer: c) Cash budgets include inflows and outflows.

4. A flexible budget adjusts for:
   a) Different activity levels
   b) Different currencies
   c) Different tax rates
   d) Different capital structures
   Answer: a) Flexible budgets adjust for different activity levels.

5. Budget slack is:
   a) A form of cost savings
   b) Extra funds set aside for emergencies
   c) Intentional overstatement of costs or understatement of revenues
   d) Flexible budgeting
   Answer: c) Budget slack pads the budget.

6. Standard costs are used to:
   a) Avoid budgeting altogether
   b) Set benchmarks for performance
   c) Only calculate payroll
   d) Only value inventory
   Answer: b) Standards provide benchmarks for costs.

7. Variance analysis compares:
   a) Actual results to standards/budgets
   b) Budgets to competitor results
   c) Cash flows to profits
   d) Assets to liabilities
   Answer: a) Variance analysis compares actual to standard/budget.

8. Scenario planning involves:
   a) Ignoring budgets
   b) Creating multiple budget versions based on different assumptions
   c) Only using historical data
   d) Using zero-based budgeting
   Answer: b) Scenario planning creates multiple budget versions.

9. In Luxembourg, cash budgeting must consider:
   a) Only sales taxes
   b) VAT, social charges, taxes, and capital investments
   c) Only VAT
   d) Only wages
   Answer: b) Cash budgets must consider VAT, social charges, taxes, etc.

10. Rolling budgets:
    a) Are fixed and never change
    b) Are updated continuously
    c) Are only used for capital expenditures
    d) Are not useful for SMEs
    Answer: b) Rolling budgets are continuously updated.

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Questions

1. Why do managers use budgets? Describe at least three purposes.

2. What is the difference between an operating budget and a financial budget?

3. Describe the steps in preparing a master budget.

4. What is a cash budget? Why is it important even if the income statement shows a profit?

5. What is the difference between a static budget and a flexible budget?

6. How do standard costs support budgeting and cost control?

7. What is variance analysis? Why is it useful?

8. What budgeting practices are particularly important for Luxembourg SMEs?

9. How do budgets help with compliance requirements (VAT, taxes, social charges) in Luxembourg?

10. How can rolling budgets and scenario planning improve budgeting accuracy?

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Problems Set A

Problem A-1: Sales Budget

Budgeted unit sales:

• Q1: 5,000 units
• Q2: 6,000 units
• Q3: 7,000 units
• Q4: 6,500 units Selling price: €40 per unit

Prepare the sales budget.

Problem A-2: Production Budget

Using data from Problem A-1 and the following:

• Desired ending inventory: 10% of next quarter's sales
• Beginning inventory Q1: 400 units

Prepare the production budget for Q1.

Problem A-3: Direct Materials Budget

Each unit requires 2 kg of material at €5 per kg.

• Desired ending inventory of materials: 500 kg
• Beginning inventory: 400 kg

Prepare the direct materials budget for Q1.

Problem A-4: Cash Budget

Beginning cash: €10,000 Cash inflows: €60,000 Cash outflows: €52,000 Minimum cash balance: €15,000

Determine ending cash and required borrowing (if any).

Problem A-5: Standard Cost

Standard materials: 3 kg at €4/kg Standard labor: 0.5 hours at €20/hour Standard overhead: 0.5 hours at €15/hour

Calculate the total standard cost per unit.

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Problems Set B

Problem B-1: Budgeted Income Statement

Given the following budget data:

• Sales: 50,000 units at €30
• COGS: €12 per unit variable, €200,000 fixed
• Selling & admin: €6 per unit variable, €150,000 fixed

Prepare the budgeted income statement.

Problem B-2: Cash Budget with VAT

Monthly data:

• Sales (excluding VAT): €80,000
• VAT (17%) collected at time of sale
• Purchases (excluding VAT): €30,000 (VAT 17%)
• Salaries: €20,000
• Social charges: €4,500
• Rent: €5,000
• Other expenses: €3,000
• Beginning cash: €25,000
• VAT paid monthly (assume VAT on sales minus VAT on purchases)

Prepare the cash budget and ending cash balance.

Problem B-3: Variance Analysis

Standard: 2 kg per unit at €5/kg Actual: 2,200 kg used for 1,000 units at €5.50/kg

Calculate the materials price variance and materials quantity variance.

Problem B-4: Rolling Budget Scenario

A company prepares a rolling budget. Actual Q1 sales were €100,000. The new forecast for Q2 is €110,000, Q3 €120,000, Q4 €115,000. Prepare the updated annual sales budget (sum of actual Q1 plus new forecasts for Q2-Q4).

Problem B-5: Complete Variance Analysis

Standard cost per unit:

• Materials: 2 kg × €5/kg = €10
• Labor: 0.5 hours × €20/hour = €10
• Overhead: 0.5 hours × €12/hour = €6
• Total: €26

Actual results for 1,000 units:

• Materials: 2,100 kg × €5.20/kg = €10,920
• Labor: 520 hours × €21/hour = €10,920
• Overhead: €6,500 (actual)

Calculate all variances and analyze.

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Comprehensive Problem

Comprehensive Problem 23: Complete Master Budget for Le Petit Bistro

Company: Le Petit Bistro - Luxembourg restaurant with catering services

Background: Marie wants to prepare a comprehensive master budget for 2025 to plan operations, manage cash flow, and support financing discussions with her bank.

Assumptions:

Sales Forecast (excluding VAT):

• Q1: €280,000 (lower due to post-holiday season)
• Q2: €320,000 (spring season)
• Q3: €360,000 (summer peak)
• Q4: €300,000 (fall season)
• Total: €1,260,000

Cost Structure:

• Cost of goods sold: 35% of sales (food and beverage costs)
• Selling & administrative expenses:
  • Fixed: €60,000 per quarter (rent €15,000, salaries €30,000, insurance €2,000, other €13,000)
  • Variable: 8% of sales (marketing, supplies, credit card fees)

Payroll Details:

• Salaries: €120,000 per year (€30,000 per quarter)
• Employer social charges: 25% of salaries = €30,000 per year (€7,500 per quarter)
• Total payroll cost: €150,000 per year

VAT:

• Restaurant meals: 17% VAT
• VAT collected on sales: 17% of sales
• VAT on purchases: 17% of purchases (recoverable)
• VAT payment: Quarterly (net VAT = VAT collected - VAT on purchases)

Accounts Receivable:

• 70% of sales collected in current quarter
• 30% of sales collected in following quarter
• Beginning AR (Q1): €30,000 (from previous year)

Inventory:

• Maintain ending inventory at 20% of next quarter's COGS
• Beginning inventory (Q1): €24,000
• Inventory purchases paid 60% in current quarter, 40% in following quarter

Other Information:

• Beginning cash (Q1): €40,000
• Minimum cash balance: €35,000
• Capital expenditure: €50,000 for kitchen upgrade in Q2
• Loan: €100,000 outstanding, repayments: €5,000 principal + €2,000 interest per quarter
• Beginning fixed assets (net): €180,000
• Depreciation: €15,000 per year (€3,750 per quarter)
• Beginning accounts payable: €12,000
• Beginning retained earnings: €150,000
• Tax rate: 20% on operating income
• Tax payments: 25% prepayment each quarter based on estimated annual tax

Required:

1. Sales Budget:
   a) Prepare quarterly sales budget (excluding VAT)
   b) Calculate VAT collected on sales
   c) Calculate total sales including VAT

2. Cost of Goods Sold and Inventory Budget:
   a) Calculate budgeted COGS each quarter
   b) Determine desired ending inventory each quarter
   c) Calculate required inventory purchases each quarter
   d) Show inventory flow

3. Selling & Administrative Budget:
   a) Calculate fixed expenses each quarter
   b) Calculate variable expenses each quarter
   c) Show total S&A expenses

4. Payroll Budget:
   a) Salaries each quarter
   b) Social charges each quarter
   c) Total payroll cost

5. Budgeted Income Statement:
   a) Prepare quarterly income statements
   b) Prepare annual income statement
   c) Show sales, COGS, gross profit, S&A, operating income, taxes, net income

6. Cash Budget (Quarterly):
   a) Cash collections (from sales, considering AR timing)
   b) Cash disbursements:

   • Inventory purchases (consider AP timing)
   • Salaries and social charges
   • Rent and other fixed expenses
   • Variable expenses
   • VAT payments (quarterly)
   • Tax prepayments (quarterly)
   • Loan payments (principal and interest)
   • Capital expenditures c) Net cash flow each quarter
     d) Ending cash balance each quarter
     e) Financing needs (if ending cash < €35,000)

7. Capital Expenditure Budget:
   a) Plan for €50,000 kitchen upgrade in Q2
   b) Determine financing needs
   c) Show impact on cash budget

8. Budgeted Balance Sheet (End of Year):
   a) Assets: Cash, accounts receivable, inventory, fixed assets (net)
   b) Liabilities: Accounts payable, loans, VAT payable, taxes payable
   c) Equity: Retained earnings (beginning + net income - dividends if any)

9. Variance Monitoring Plan:
   a) Identify key variances to monitor monthly
   b) Set materiality thresholds (e.g., 5% or €5,000)
   c) Define reporting requirements
   d) Establish investigation procedures

10. Luxembourg-Specific Analysis:
    a) VAT cash flow impact (collections vs. payments)
    b) Social charges cash flow (monthly payments)
    c) Tax planning (prepayments and final payment)
    d) Compliance deadlines and cash requirements

11. Scenario Planning:
    a) Base Case: As budgeted
    b) Optimistic Case: Sales +10%
    c) Pessimistic Case: Sales -15%
    d) For each scenario, analyze:

    • Impact on profit
    • Impact on cash flow
    • Financing needs
    • Required actions

12. Budget Communication:
    a) Prepare executive summary for management
    b) Prepare detailed budgets for department managers
    c) Prepare summary for bank (if needed for financing)
    d) Identify key assumptions and risks

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Cases

Case 23-1: Budgeting Participation

A Luxembourg SME uses top-down budgeting. Managers complain that budgets are unrealistic and impossible to meet. Employees feel disengaged. The company is considering participative budgeting.

Questions for Analysis:

1. What are the advantages and disadvantages of participative budgeting?

2. How can the company implement participative budgeting effectively?

3. How can they prevent budget slack?

4. What training or tools are needed?

5. How can budgeting improve motivation and performance?

6. What should management do to transition from top-down budgets?

Case 23-2: Cash Flow Crisis

A profitable Luxembourg SME experiences a cash flow crisis because VAT and social charge payments coincide with a seasonal sales downturn. The company did not prepare a cash budget.

Questions for Analysis:

1. Why did the cash crisis occur despite profitability?

2. How could a cash budget have prevented the crisis?

3. What immediate actions can the company take?

4. What long-term changes are needed?

5. How should the company incorporate VAT and social charges into cash planning?

6. How can they communicate with banks or investors?

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Solutions are published in supplementary/instructor/solutions/chapter_23_solutions.md.