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In: Accounting

(c) Concise Limited makes a component for one of the engines that it builds. It uses,...

(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

Solutions

Expert Solution

1
CALCULATION OF ECONOMIC BATCH QUANTITY
DEMAND 2000 UNITS
PER UNIT COST $16 PER UNIT
SETUP COST $320
HOLDING COST $       1.60 : 10 % OF PER UNIT COST
EBQ= √ 2UXP/S
WHERE U= ANNUAL DEMAND
P= SETTING UP COST PER BATCH
S= STORAGE OR INVENTROY CARRYING COST PER ANNUM
EBQ= √ 2 X2000X320/1.60
EBQ= 895 UNITS PEE BATCH

2

SEVEN KEY PURPOSE OF BUDGETING SYSTEM

(i) Efficiency: It brings efficiency and economy in the working of the business enterprises. The budget is an impersonal policeman that maintains ordered efforts and bring about efficiency in results.

(ii) Accountability: It establishes divisional and departmental responsibility. It thus prevent buck passing when the budget figures are not met.

(iii) Coordination: It coordinates the various division of a business namely, production ,marketing ,financial and administrative decision. It forces executives to think and think as a group. This Results in smoother operation of the entire plant.

(iv) Profitability : It helps in management in obtaining the most profitable combination of different of production. This Result in more economical use of capital.

(v) Safety: It acts as a safety signal for the management. It shows when to proceed cautiously and when manufacturing or merchandising expansion can be safely undertaken.

(vi) Guidance : It guards against undue optimism leading to over expansion because the targets are fixed by the executives after cool and careful thought.

(vii) Uniformity : It provides uniform policy without the disadvantage of military type of business organisation which can be pursued by all division of the business by means of centralisation of budgetary control.

Four Approaches to budgeting system:

Incremental budgeting

It is the type of budgeting where the budgeting is based on the incremental changes from the preceding budgeting. This is a simplified approach to the budgeting system where management does not need to spend a great deal of time formulating budgets. It is based on the recent financial result or recent budget. It is a strategic reassessment of a business when constructing a budget.

Zero based Budgeting:

It is a method of Budgeting which requires the cost element of each product to be specifically justified though the the activities

to which the budget relates are being undertaken for the first time, without approval, the budget allowance is zero.It is an activity based Budgeting system where budget is prepared for each activity and the justification in the form of cost benefits for the activity is necessary to be given.

Performance budgeting :

It is based on the classification of managerial level for the purpose of establishing a budget for each level. The individual in charges of the level should be made responsible and held accountable for its performance over a given period of time.

The starting point of the performance Budgeting rests with the organisation chart in which the speheres of jurisdiction have been determined.

Rolling budgeting:

It is also known as continuous budgeting which changes continuously throughout the year .

It is a type of budgeting where the continuous budget is updated regularly when the earlier budget period expires, which is also can be said as an extension fo previous budget,


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