Question

Hakim Sdn Bhd manufacturers water filtration system products that are used in both residential and commercial building. One of its products named product B is made using two different raw materials and two types of labour. The company operate a standard absorption costing system and now preparing its budgets for the first quarter for the year ending 31 December 2020.

In order to produce one unit of product B, two types of materials are required namely material X and Y. One unit of product B needs 5 kgs of material X at cost RM4 per kg. As for material Y, 3 kgs are needed at cost RM7 per kg.

Annual overheads are RM280,000. 40% of these overheads are fixed and the reminder for variable overhead. Fixed overheads are absorbed on a unit basis.

As for company’s inventory policy, closing inventory of finished goods is 30% of the following month’s sales volume and closing inventory of materials is 45% of the following month’s materials usage. Closing inventory as of 31 December 2019 for finished goods are 500 units, material X and Y are 1,500 kgs and 1,700 kgs respectively.

The selling price of the Product B is RM220 per unit. The following information has been identified for Product B.

The sales forecast for the year 2020 are as follows:

Months sales volume (units)

January 2250

February 2050

March 1650

April 2050

May 1250

June 2050

The management teams are concerned that Hakim Sdn Bhd has recently faced intense competition in the marketplace for Product B. Consequently, there have been issues concerning the availability and costs of specialized materials and employees needed to manufacture Product B, and there is concern that these might cause a problem in the current budget setting process.

Required:

Almost every organization, regardless of size, complexity or sector, depends heavily on budgets and budgetary systems to achieve their strategic goals since it involves the establishment of predetermined goals, the reporting of actual performance results and evaluation of performance. in terms of the predetermined goals. Define and discuss the functions of budget committee that can be implemented in Hakim Sdn Bhd to improve the preparation of their budgeting process.

Answer 1

Hakim Sdn Bhd can improve the preparation of their budgeting process by implementation of these ideas with their budget committee.

The budgeting process is firmly linked with the workings of the business and its organization hierarchy. Its effectiveness, to a big extent, rely upon the institutional efficiency.The vital tasks and duties of the budget committee are as follows:-
(1) Committee should firstly set down overall policies of management concerning the budgetary system.
(2) Hakim Sdn Bhd must set a common guideline for the formation and implementation of the budgets.
(3) Committee has to design budget in that sense, like it should give managers the past data analysis on which they can rely upon.
(4) The committee must be efficient enough to prepare various functional budgets.
(5) To gather the budget figures and to mind that everyone submits their datas in time.
(6) Commitee should deeply scrutinize the budgets.
(7) To propose lines of improvement and corrections, if needed, in the submitted budgets.
(8) To accord final approval to budget.
(9) The committee's one of the main work is to prepare the master budget.
(10) To provide budget summaries, if needed.
(11) To maintain records of variations between actual results and budgeted results.
(12) To suggest corrective measures if and when needed.
(13) To settle the departmental disputes among multiple line executive members in the committee.
(15) To present the final budget to the president and to the board & directors for consent.

These steps should be taken by the budget committee of Hakim Sdn Bhd to implement budget and its proceedings effectively.

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