Question

QUESTION 5
Nii Limited manufactures three products called SI, MI, and LAR. The information given below
relates to the month of October, 2011.
Product
Quantity
Price/Unit
(Units)
(GH₵)
Sales:
SI
1200
80
MI
2400
96
LAR
1800
112
Materials used in the company’s
Products:
Material
MA
MB
MC
Unit cost
GH₵ 3
GH₵ 5
GH₵ 8
Quantity used in:
MA
MB
MC
(Units)
(Units)
(Units)
Product SI
5
3
1
Product MI
4
4
3
Product LAR
3
2
2
Finished stocks:
Product (SI)
Product (MI)
Product (LAR)
(Units)
(Units)
(Units)
Quantities:
1
st October
1200
1800
600
31st October
1320
1980
660
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Material stocks:
MA
MB
MC
(Units)
(Units)
(Units)
1
st October
31,200
24,000
14,400
31st October
37,440
28,800
17,280

Required:
(a) Prepare the following functional budgets for the month of October 2012 for
(i)
Sales in quantity and value, including total value
(ii)
Production quantities
(iii)
Material usage in quantities
(iv)
Material purchases in quantities and value, including total value.
(b) Explain the term ‘Principal budget factor’ as used in budgeting control and give three (3) examples from a financial institution.

Answer 1

i)	Sales in quantity and value, including total value
	Product	SI	MI	LAR	Total
	Sales (Units)	1,200	2,400	1,800	5,400
	Rate	80	96	112
	Sale Value	96,000	2,30,400	2,01,600	5,28,000
ii)	Production Quantity
	Product	SI	MI	LAR	Total (Units)
	Opening Stock (Units)	1200	1800	600	3600
	Closing stock (Units)	1320	1980	660	3960
	Sales (Units)	1,200	2,400	1,800	5400
	Production (Units)	1,320	2,580	1,860	5760
iii)	Material usage in quantities
	Material	MA	MB	MC
	Unit Cost (GH₵)	3	5	8
	Qty Used In (Units)	Units	Units	Units
	Product SI	5	3	1
	Product MI	4	4	3
	Product LAR	3	2	2
	Material Usages (Unit)	22,500	18,000	12,780	53,280
iv)	Material purchases in quantities and value, including total value.
	Product	MA	MB	MC	Total (Units)
	Opening Stock (Units)	31200	24000	14400	69,600
	Closing stock (Units)	37,440	28,800	17,280	83,520
	Consumed (Units)	22,500	18,000	12,780	53,280
	Purchase (Units)	28,740	22,800	15,660	67,200
	Cost per Unit	3	5	8
	Total Cost (Amount)	86,220	1,14,000	1,25,280	3,25,500

b) The principal budget factor is the factor that limits the activities of functional budgets of the organisation.
The early identification of this factor is important in the budgetary planning process because it indicates which budget should be prepared first.

In general sales volume is the principal budget factor. So sales budget must be prepared first, based on the available sales forecasts. All other budgets should then be linked to this.

Alternatively, machine capacity may be limited for the forthcoming period and therefore machine capacity is the principal budget factor. In this case the production budget must be prepared first and all other budgets follows it.

Failure to identify the principal budget factor at an early stage could lead to delays later on when managers realize that the targets they have been working with are not feasible.

In case of one limiting factor, we shall need to apply the concept of Marginal costing. In this we initially allot the limiting resource on the basis of highest contribution per limiting factor.