Question

Budgets & Budgetory Controls

The management accountant for Wow Wheels, a manufacturer of sports bikes, is in the midst of preparing the master budget for the upcoming year. The company’s managers are forecasting an increase in the sales because of the success of their current advertising campaign. Relevant data about revenues, inventories and production costs from last period’s accounting records are presented, together with information pertaining changes in sales volumes and prices, production processes, manufacturing costs and support department costs. Details are as follows:

The managers forecasted that 100,000 bikes would be sold at a price of RM800 each.

According to the prior accounting records, beginning finished goods inventory consists of 2,500 bikes at a cost per unit of RM454.75, or RM1,136,875 in total. Given the anticipated increase in sales volume, the managers want to increase finished goods inventory to 3,500 units.

Direct materials beginning inventory consists of:

Wheels and tyresRM20,000

The cost per unit of direct materials is expected to be:

Wheels and tyresRM20

The managers want ending inventories to be:

Wheels and tyresRM25,000

The quantity and cost of direct labour per unit is expected to be:

Direct labourHoursCost per hour

For overheads, you use information that you collected from last year’s operations and update it with current prices. The cost per unit of variable manufacturing overhead is expected to be as follows:

Variable overhead (cost per unit):

Indirect labourRM37.50

You expect a total of RM20,200,000 to be spent on fixed manufacturing overhead costs as follows: Depreciation: RM4,040,000; Property taxes: RM1,010,000; Insurance: RM1,414,000; Plant supervision: RM5,050,000; Fringe benefits: RM7,070,000; Miscellaneous: RM1,616,000. Overheads are absorbed by budgeted volume of production.

You also estimate other operating costs for all the support departments. All support costs for Wow Wheels happen to be fixed as follows: Administration: RM16,478,215; Marketing: RM9,886,929; Distribution: RM4,943,465; Customer service: RM1,647,821.

Income taxes are expected to be at the rate of 30%.

Required:

(a) As the management accountant at Wow Wheels, develop a master budget for the review of the entity’s controller, so that it can then be presented at a meeting with the CEO and the various department heads. Create individual /functional budgets in the following order:         

Sales revenue budget                                                                                                              (1.5 marks)

Production budget                                                                                                                         

Direct materials usage and purchases budget                                                                          

Direct labour budget                                                                                                                      

Manufacturing overhead budget                                                                                                

Ending inventories budget                                                                                                         (3.5 marks)

Cost of goods sold budget                                                                                                           

Support department budget                                                                                                      (0.5 marks)

Budgeted income statement                                                                                                    (3.5 marks)

                             

(Total: 22 marks)

(b) Explain how cash budgets help in:

               (i) forecasting future needs;

(ii) controlling cash expenditure;

(iii) evaluation of performance; and

(iv) acting as a sound dividend policy.

[GRAND TOTAL: 30 MARKS]

Answer 1

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1. Sales Budget
		Year
Budgeted No of Units		100000
Selling Price		800
Budgeted Total Sale		80,000,000
2. Production Budget
		Year
Budgeted No of Units		100,000
Add: Desired Ending Inventory		3,500
Total Need		103,500
Less: Beginning Inventory		-2,500
Budgeted Production		101,000
3. Direct Material Purchase Budget and Usage
		Wheels & Tyres
Budgeted Production		101,000
per unit usage		2.00
Total Mat Required		202,000
Add: Desired Ending Inventory	25000/20	1,250
Total Need		203,250
Less: Beginning Inventory	20000/20	-1,000
Budgeted Purchase of Raw Maat Units		202,250
Per Unit Price		$                    20
Budgeted Purchase of Raw Mat$		$        4,045,000
4. Direct Labor Budget
		Assembly	Testing	Total
Budgeted Production		101,000	101,000
per unit Hour		1.5	0.15
Total HOurs Required		151500	15150
Per Hour Price		25	15
Budgeted Direct Labor Cost		3,787,500	227,250	$   4,014,750
5. Factory Overhead Budget:
		Year
Variable Overhead	37.5 Budgeted Production	3,787,500
Fixed Overhead:
Depreciation		4,040,000
Property Tax		1,010,000
Insurance		1,414,000
Plant Supvervision		5,050,000
Fringe Benefits		7,070,000
Miscellandous		1,616,000
Total Overheads	a	23,987,500
Budgeted Volume production	b	101,000
Predetermined Overhead Rate	a/b	237.50
6.Support Department Budget:
		Year
Administration		$     16,478,215
Marketing		$        9,886,929
Distribution		$        4,943,465
Customer Service		$        1,647,821
Total Support Deparment Budget		$     32,956,430
7. Ending Inventory Budget
	Units	Rate per Unit	Total Cost
Wheels and Tyre Inventory	1250	20.00	25,000
	Needed/Bike	Input Unit	Cost/Bike
Wheels	2	20.00	40.00
Labor-Assembly	1.5	25.00	37.50
Labor-Testing	0.15	$                    15	2.25
Overheads			237.50
Cost per Bike			317.25
Ending Inventory			3,500.00
Cost of Ending Inventory			1,110,375
8. Cost of Goods Sold Budget:
Beginning Raw Material Inventory	$                                  20,000
Purchases	$                             4,045,000
Raw maaterial Available	$                             4,065,000
Ending Raw Material Inventory	$                                  25,000
Raw Material used		$        4,040,000
Labor		$        4,014,750
Overhead		$     23,987,500
Total Manufacturing Cost			$             32,042,250
Beginning work in process inventory			$                             -
Total Work in process inventory			$             32,042,250
Ending work in process inventory			$                             -
Cost of Goods manufactured			$             32,042,250
Beginning Finished goods			$               1,136,875
Goods Available			$             33,179,125
Ending Finished Goods			$               1,110,375
Cost of Goods Sold			$             32,068,750
9. Budgeted Income Statement:
Sales Revenue		$     80,000,000
Less: Cost of Goods Sold		$     32,068,750
Gross Profit		$     47,931,250
Less: Support Expenses		$     32,956,430
Income before tax		$     14,974,820
Less: Income Tax	30%	$        4,492,446
Net Income		$     10,482,374