Question

Question 1.1
C Ltd makes two products, Alpha and Beta. The following data is relevant for year 3:
Material M
£2 per unit
Material N
£3 per unit
Direct labour is paid £10 per hour.
Production overhead cost is estimated to be £200,000, which includes £25,000 for depreciation of property and equipment. Production overhead cost is absorbed into product costs using a direct labour hour absorption rate.
Each finished unit requires:
Alpha Beta

Material M 12 units   12 units

Material N 6 units   8 units

Direct labour 7 hours   10 hours


The sales director has forecast that sales of Alpha and Beta will be 5,000 and 1,000 units, respectively, during year 3.
The selling prices will be:
Alpha £182 per unit

Beta   £161 per unit

She estimates that the inventory at 1 January, year 3, will be 100 units of Alpha and 200 units of Beta. At the end of year 3 she requires the inventory level to be 150 units of each product.
The production director estimates that the raw material inventories on 1 January, year 3, will be 3,000 units of material M and 4,000 units of material N.
At the end of year 3 the inventories of these raw materials are to be:
M: 4,000 units
N: 2,000 units
The finance director advises that the rate of tax to be paid on profits during year 3 is likely to be 30%. Selling and administration overhead is budgeted to be £75,000 in year 3, which includes £5,000 for depreciation of equipment.

A quarterly cash-flow forecast has already been completed:

Year 3 Quarter 1 Quarter 2 Quarter 3 Quarter 4 £ £ £ £
Receipts:
196,000
224,000
238,000
336,000
Payments:
Materials
22,000
37,000
40,000
60,000
Direct wages
100,000
110,500
121,000
117,000
Overhead
45,000
50,000
70,000
65,000
Taxation
5,000
Machinery purchase

The company's balance sheet at 1st January year 3 is expected to be as follows:
£ £ £
Non-current assets:
Cost
Depreciation
NBV
Land
50,000
50,000
Building and Equipment
400,000
75,000
325,000
450,000
75,000
375,000
Current assets:
Inventories
Raw materials
20,000
Finished goods
15,000
35,000
Receivables (Debtors)
25,000
Cash at bank
10,000
70,000
less Current liabilities:
Payables
9,000
Taxation
5,000
14,000
Working Capital
56,000
431,000
Financed by:
Share capital
350,000
Retained earnings
81,000
431,000
Required:
You are required to prepare the company's budgets for year 3 including a budgeted Income Statement for the year and a Balance Sheet at 31 December, year 3.
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Question 1.2
The budgeted balance sheet data of Umbago Ltd is as follows:
Balance sheet as at 1st March £ £ £
Non-Current assets:
Cost
Depreciation
NBV
Land and Building
500,000
500,000
Machinery and Equipment
124,000
84,500
39,500
Motor vehicles
42,000
16,400
25,600
666,000
100,900
565,100
Current Assets
Stock of raw materials (100 units)
4,320
Stock of finished goods (110 units)a
10,450
Debtors (January £7,680, February £10,400)
18,080
Cash and Bank
6,790
39,640
Less current liabilities
Creditors (raw materials)
3,900
Working Capital
35,740
600,840
Financed by:
Ordinary share capital (fully paid £1 per share)
500,000
Share premium
60,000
Profit and loss account
40,840
600,840
a The stock of finished goods was valued at marginal cost
The estimates for the next four-month period are as follows:
March April May June
Sales (units)
80
84
96
94
Production (units)
70
75
90
90
Purchase of raw materials (units)
80
80
85
85
Wages and variable overheads @ £65 per unit
£4,550
£4,875
£5,850
£5,850
Fixed overheads
£1,200
£1,200
£1,200
£1,200
The company intends to sell each unit for £219 and has estimated that it will have to pay £45 per unit for raw materials. One unit of raw material is needed for each unit of finished product.
All sales and purchases of raw materials are on credit. Debtors are allowed two months' credit and suppliers of raw materials are paid after one month's credit. The wages, variable overheads and fixed overheads are paid in the month in which they are incurred.
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Cash from a loan secured on the land and building of £120,000 (at 7.5% interest rate) is due to be received on 1st May. Machinery costing £112,000 will be received in May and paid for in June.
The loan interest is payable half yearly from September onwards. An interim dividend to 31 March of £12,500 will be paid in June.
Depreciation for the four months, including that on the new machinery, is:
Vehicle and equipment
£15,733 Motor vehicle
£3,500
The company uses the FIFO method of stock valuation. Ignore taxation.
Required:
a) Calculate and present the raw materials budget and finished goods budget in terms of units, for
each month from March to June inclusive.
b) Calculate the corresponding sales budget, the production cost budgets and the budgeted closing
debtors, creditors and stocks in terms of value.
c) Prepare and present a cash budget for each of the four months.

d) Prepare a master budget, i.e. Budgeted trading profit and loss account, for the four months to 30
June, and budgeted balance sheet as at 30 June
e) Advise the company about possible ways in which it can improve its cash management.
Total 35 Marks
(questions from ACCA Managerial Finance exam)
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Answer 1

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1. Sales Budget:
	Alpha	Beta
Estimates Sales Units	5000	1000
Estimated Selling Price	$                     182	$            161
Estimated Sale	$             910,000	$    161,000
2. Production Budget:
Estimated Sale	5000	1000
Add: Ending Inventory	150	150
Units Required	5150	1150
Less: Beginning Inventory	-100	-200
Production needed	5050	950
3. Material Budget: M
	Alpha	Beta	Total
Production Needed	5050	950
Per unit of FG needed "M"	12	12
Total Raw Material needed	60600	11400	72000
Add: Ending Inventory			4000
Units Required			76000
Less: Beginning Inventory			-3000
Estimated Purchase of M			73000
4. Material Budget: N
	Alpha	Beta	Total
Production Needed	5050	950
Per unit of FG needed "N"	6	8
Total Raw Material needed	30300	7600	37900
Add: Ending Inventory			2000
Units Required			39900
Less: Beginning Inventory			-4000
Estimated Purchase of N			35900
5. Direct Labor Budget
	Alpha	Beta	Total
Production Needed	5050	950
Per unit of FG needed Hours	7	10
Total Labor Hours Needed	35350	9500	44850
Labor Rate per Hour			10
Total Direct Labor Budget			448500
Production Overhead Rate	200000/44850	4.46
6. Budgeted Income Statement:
Sale			$               1,071,000
Less: Cost of Goods Sold
Alpha	5000*161.22	806,076
Beta	1000*180.59	180,593	$                 -986,669
Gross Margin			$                     84,331
Less: Selling and Administration Expenses			$                    -75,000
Net Operating Income			$                        9,331
Less: Tax 30%			$                      -2,799
Net Income			$                        6,532
Cost of Goods Sold:	Alpha				Beta
	Quantity/Hours	Per Q/Hour	Total Cost per unit		Quantity/Hours	Per Q/Hour	Total Cost per unit
Material "M"	12	2	24		6	2	12
Material "N"	12	3	36		8	3	24
Labour	7	10	70		10	10	100
Overheads	7	4.46	31.22		10	4.46	44.59
Total Cost Per Unit			161.22				180.59