Question

Budgets: Discussion question

RD Ltd. is in the process of preparing its budgets for 2020. The company produces and sells a single product, Z, which currently has a selling price of £100 for each unit.

The budgeted sales units for 2020 are expected to be as follows:

Jan	Feb	Mar	Apr	May	Jun	July	Aug	Sep	Oct	Nov	Dec
5,000	5,500	6,000	6,000	6,250	6,500	6,250	7,000	7,500	7,750	8,000	7,500

The company expects to sell 7,000 units in January 2021.

The selling price for each unit will be increased by 15% with effect from 1 March 2020.

1,000 units of finished goods are expected to be in stock at the end of 2019. It is company policy to hold a closing stock balance of finished goods equal to 20% of the following month’s sales.

Each unit of Z produced requires 3 kgs of material X, which currently costs £5 for each kg. The price for each kg is expected to increase by 10% on 1 June 2020.

Stock of raw material at the end of 2019 is expected to be 3,750 kgs. The company wishes to avoid any stock-outs and requires the closing stock of raw materials to be set at 20% of the following month’s production requirements.

A purchase of fixed asset will be made in March, £50,000 – payment will be made in four equal installments starting in June. Opening cash balance of £20, 000.

The production of each unit of Z requires 4 hours of skilled labour and 2 hours of unskilled labour. Skilled labour is paid at a rate of £10 for each hour and unskilled labour at £8 for each hour. Each worker is expected to work 40 hours each week, 48 weeks each year.

Taxation on 2019’s profit will be paid in March and this am­­­­ounts to £15, 000. Fixed overhead including depreciation of £550 is £3,000 per month and this is expected to increase in May to £3,500.

Required:

Prepare the following budgets for the first six months of 2020.

(a) The sales budget (in value)                                   

(b) The production budget (in units)                        

(c) The material usage budget (in value)                

(d) The material purchase budget (in value)         

(e) The direct labour budget (in hours)                                                   

(f) Cash budget                                                                

Answer 1

Budget for first 6 months of 2020 ( in pounds)
Sales Budget(In value):
Month	Jan	Feb	Mar	Apr	May	Jun
Sales Qty	5000	5500	6000	6000	6250	6500
Selling price per unit	100	100	115	115	115	115
Sales in Value	500000	550000	690000	690000	718750	747500
Production budget in units
Month	Jan	Feb	Mar	Apr	May	Jun
Opening Stock- OS(Last month closing stock)	1000	1100	1200	1200	1250	1300
Closing stock- CS(20% of following months sales)	1100	1200	1200	1250	1300	1250
Sales	5000	5500	6000	6000	6250	6500
Production (Sales+CS-OS)	5100	5600	6000	6050	6300	6450
Material Usage Budget (In Value)
Month	Jan	Feb	Mar	Apr	May	Jun
Raw mat X reuired for each unit of production in Kgs	3	3	3	3	3	3
Production in units	5100	5600	6000	6050	6300	6450
Raw material reuired in units	15300	16800	18000	18150	18900	19350
Cost of RM per kg	5	5	5	5	5	5.5
Material requirement in value	76500	84000	90000	90750	94500	106425
Material Purchase Budget (In Value)
Month	Jan	Feb	Mar	Apr	May	Jun
Opening Stock- OS(Last month closing stock) in kgs	3750	3360	3600	3630	3780	3870
Closing stock- CS(20% of following months production requirement) in kgs	3360	3600	3630	3780	3870	3840
Production requirement	15300	16800	18000	18150	18900	19350
Purchases (PR+CS-OS)	14910	17040	18030	18300	18990	19320
Cost of RM per kg	5	5	5	5	5	5.5
Purchases in value	74550	85200	90150	91500	94950	106260
Direct Labour Budget( In hours)
Month	Jan	Feb	Mar	Apr	May	Jun
production of Z in units	5100	5600	6000	6050	6300	6450
Skilled labour required per unit(in hrs)	4	4	4	4	4	4
Unskilled labour required per unit( in hrs)	2	2	2	2	2	2
Total no of skilled labour hrs	20400	22400	24000	24200	25200	25800
Total no of unskilled labour hrs	10200	11200	12000	12100	12600	12900
Total no of labour hrs required for production	30600	33600	36000	36300	37800	38700
Cash budget
Month	Jan	Feb	Mar	Apr	May	Jun
Opening cash balance	20000	157400	306150	552550	809800	1077850
Add
Sales in value	500000	550000	690000	690000	718750	747500
Less
RM purchase	74550	85200	90150	91500	94950	106260
Labour paid	285600	313600	336000	338800	352800	361200
Installment paid on FA purchase	0	0	0	0	0	12500
Fxed over head excluding depreciation	2450	2450	2450	2450	2950	2450
Tax to be paid	0	0	15000	0	0	0
Total	362600	401250	443600	432750	450700	482410
Closing cash balance	157400	306150	552550	809800	1077850	1342940
Notes
It is assuemd that ;
the sales are on cash basis
Depreciation is fixed every month
The increse in fixed overhead is only in may month
Purchases are on cash basis