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FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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SID Product Bhd (SPB) is a manufacturer operating in Kuantan, Pahang. It produces variety of household products for the local and overseas market. FIB is currently operating below its full capacity due to the Covid 19 Pandemic. The slow recovery of the global economy is affecting its future operation. FIB is operating at 70% of its capacity, which represent 140,000 units of its products. The different mixtures of its products will not affect the proportion of the resources used by FIB. The flexed budgets for the current year are as follows: Capacity level (units) 100,000 120,000 140,000 RM RM RM Direct materials 1,800,000 2,160,000 2,520,000 Direct labour 2,620,000 3,120,000 3,620,000 Production overhead 1,300,000 1,510,000 1,720,000 Selling & distribution overhead 2,206,000 2,606,000 3,006,000 Administrative overhead 1,500,000 1,500,000 1,500,000 Total costs 9,426,000 10,896,000 12,366,000 The Managing Director of SPB expects the global economy will pick up, which will mean better prospect for next year. He has requested the management accountant to prepare a budget if FIB operates at 180,000 units. The following information should be taken into consideration: 1. Material costs will increase by 5% next year. 2. RM120,000 of direct labour costs is the fixed salary for the production manager which will increase by 7% next year. Other labour rate will remain the same. 3. Production overhead and selling and administrative overhead are semi-variable costs. 4. A warehouse rented at RM36,000 per annum will not be needed next year due to the policy of inventory reduction to reduce production cost. This rental is included in the selling and distribution overhead. Required: (a) Prepare a flexible budget for next year based on forecasted activity of 180,000 units (b) Discuss on the effectiveness of participation in the budgeting process.
Transcribed Image Text:SID Product Bhd (SPB) is a manufacturer operating in Kuantan, Pahang. It produces variety of household products for the local and overseas market. FIB is currently operating below its full capacity due to the Covid 19 Pandemic. The slow recovery of the global economy is affecting its future operation. FIB is operating at 70% of its capacity, which represent 140,000 units of its products. The different mixtures of its products will not affect the proportion of the resources used by FIB. The flexed budgets for the current year are as follows: Capacity level (units) 100,000 120,000 140,000 RM RM RM Direct materials 1,800,000 2,160,000 2,520,000 Direct labour 2,620,000 3,120,000 3,620,000 Production overhead 1,300,000 1,510,000 1,720,000 Selling & distribution overhead 2,206,000 2,606,000 3,006,000 Administrative overhead 1,500,000 1,500,000 1,500,000 Total costs 9,426,000 10,896,000 12,366,000 The Managing Director of SPB expects the global economy will pick up, which will mean better prospect for next year. He has requested the management accountant to prepare a budget if FIB operates at 180,000 units. The following information should be taken into consideration: 1. Material costs will increase by 5% next year. 2. RM120,000 of direct labour costs is the fixed salary for the production manager which will increase by 7% next year. Other labour rate will remain the same. 3. Production overhead and selling and administrative overhead are semi-variable costs. 4. A warehouse rented at RM36,000 per annum will not be needed next year due to the policy of inventory reduction to reduce production cost. This rental is included in the selling and distribution overhead. Required: (a) Prepare a flexible budget for next year based on forecasted activity of 180,000 units (b) Discuss on the effectiveness of participation in the budgeting process.
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