a) Compute the monthly budgeted production and material purchases for January to March 2019. (b) Prepare a budgeted profit and loss account and a statement of cash receipts and payments for January 2019. (c) List and briefly explain four implications of the company’s treatment of fixed manufacturing overheads compared to a predetermined overhead rate prepared annually.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
A product manager has responsibility for a single product and is in the process of
submitting data to be compiled into budgets for 2019. The manager has performance
targets set in relation to sales volume, profitability levels and a target cash surplus from
the product.
Shown below are the agreed budgeted sales for the product for December 2018 to
May 2019.
Dec Jan Feb Mar April May
Units 14,000 16,000 22,000 17,000 20,000 24,000
The company policy is that, at each month end, the closing stock of finished goods should
be 25% of the following month’s
sufficient for 10% of the following month’s production. Stock levels currently conform to
this policy. One unit of raw material makes one unit of finished stock, there is no wastage.
Raw material purchases are paid for during the month following the month of purchase.
All other expenses are paid for as incurred. All sales are made on credit and the company
expects cash receipts for 50% of sales in the month of sale and 50% in the following
month. The company operates an absorption costing system which is computed on a
monthly basis. That is, in addition to direct costs it recovers each month’s fixed and
variable manufacturing overhead expenses in product costs using the budgeted
production and budgeted expenditure in the month to establish an absorption rate. This
cost is used to place a value on the stock holding. Opening stock is valued at the unit costwhich was established in the previous month. At 1 January 2019 finished stock should be
assumed at K40 per unit. A flow of cost based on FIFO is assumed.
Sales are made at a price of K58 per unit.
Estimated costs to be used in the budget preparation for the product are:
Material K10.00 per unit produced
Variable overhead and labour K16.00 per unit produced
Fixed overhead costs K210,000 per month
(including depreciation of K54,000 per month)
Selling costs:
Variable K7.00 per unit sold
Fixed K164,000 per month
Required:
(a) Compute the monthly budgeted production and material purchases for January to
March 2019.
(b) Prepare a budgeted
payments for January 2019.
(c) List and briefly explain four implications of the company’s treatment of fixed
manufacturing overheads compared to a predetermined overhead rate prepared
annually.
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