In: Accounting
(c) Concise Limited makes a component for one of the engines that it builds. It uses, on average, 2,000 of these components, steadily throughout the year. The component costs $16 per unit to make and it costs an additional $320 to setup the production process each time a batch of components is made. The holding cost per unit is 10% of the unit production cost. The company makes these components at a rate of 200 per week, and the factory is open for 50 weeks per annum. Calculate the Economic Batch Quantity EBQ. (d) List and explain seven key purposes of a budgeting system. (e) Briefly explain any four (4) approaches to budgeting
Solution c
Therefore, on substituting the values in the formula, EBQ is determined to be 1000 units.
Solution d
Purposes of budgeting
1) For planning the resource requirements by analysing how much of it is to be acquired and how much would be consumed.
2) For the appropriate allocation of the resources.
3) It helps the organisation to manage the funds effectively.
4) It helps the managers to keep a track and manage well the financial and operational performance.
5) It increases the coordination and promotes effective communication.
6) It helps the organization to control costs.
7) It helps in evaluation of the achievement of organizational goals.
Solution e
Four approaches to budgeting
1) Output/ Input approach
Under this method, the output required is initially planned and then the inputs are budgeted based on the level of output planned.
For eg., production of 1 unit of output requires 2 units of raw materials costing $ 10 each. The output level planned is 20 units. The budgeted input is 40 units raw materials costing $ 400.
2) Incremental approach
Under this approach, the costs are budgeted for the next year as a percentage change of the current year's budgeted/ actual cost.
For example, if the entity incurred $ 5000 towards purchases this year and if the entity expects the costs to go up by 5% by the next year, the purchases for the next year would be budgeted at a cost of $ 5000+ (5% * 5000).
3) Activity based approach
Under this approach, the costs are budgeted for the planned activities those are expected to be used in production, service etc . The costs are estimated by summing up the cost of activity cost drivers that are expected to be consumed by a particular product or a service.
4) Minimum level approach
Under this approach, a minimum level or a base is set by the entity for budget item. If any amount budgeted crosses this limit, an explanation for the same is to be provided.