Question

Bands, a Division of Euro Ltd., manufactures small planter boxes. In March 2019 the manager decided the business needed to have the security of a two-month loan of $100,000 starting on 1 May 2019 as its cash balance had been diminished because of recent equipment purchases. The bank would charge interest at the equivalent of 6 percent per annum on the loan and require the business to repay interest monthly commencing on 31 May 2019. The principal is paid at the end of the two-month term. To consider the loan application, the bank requested the provision of a number of budgets for May including the Cash Budget.

The following information is available:

* Budgeted sales are 90,000 units per month for April, June and July, and 100,000 units for May of 2019. The selling price is $20 per unit.

* Finished Goods inventory on April 1 for 24,000 units was $240,000. The company follows a policy requiring ending finished goods inventory each month to be 10% of next month’s sales. There is no WIP.

* The inventory of raw materials on April 1 was 11,400kg (@$20/kg). The ending inventory is required to be 20% of next month’s production requirements.

* Selling & administrative expenses are expected to be $75,000 plus 10% of sales (this includes depreciation of $12,500).

* The manufacturing costs budget (based on a practical capacity of 100,000 units per month) follows:

Materials (0.25 kg per box, $20 per kg) $500,000

Direct Labour (6 minutes per box @ $24 per hour) 240,000

Variable Overhead (allocated @$3 per DLH) 30,000

Fixed Overhead (allocated per unit) 100,000 Total $870,000

* Budgeted Fixed manufacturing overhead excludes $28,000 of depreciation.

REQUIRED:

a) Prepare the following budgets for April and May 2019:

(i) Production Budget (ii) Materials Purchases Budget in dollars

b) You have been provided with the following additional information: All sales are made on credit and customers pay 50% in the month of sale; 45% in the month following. The remaining 5% is uncollectable. Assume that materials are paid 50% in the month purchased and 50% in the following month. Labour and relevant overhead costs are paid in the month the liability is incurred. Selling and administration expenses are paid each month as incurred. The opening cash balance at 1 May (before the loan drawdown) was $500. Assume the short-term loan has been secured, prepare the Cash Budget for the month of May, 2019.

c) The CEO of Euro Ltd., a decentralised company with 4 major divisions (all profit centres), is concerned that the preparation of static budgets by the CEO has resulted in the company’s budgets less effective and not helpful for decision making in a constantly changing operating environment. What is the issue that the CEO is facing? How can this issue be addressed? Discuss the issue briefly and provide at least one recommendation to address the issue.

Answer 1