Question

Alpha company produces two products, X and Y, that are sold to retailers. The budgeted sales volumes for the next quarter are as follows: Product Unit X 32000 Y 56000 The inventory of finished goods is budgeted to increase by 1000 units of X and decrease by 2000 units of Y by the end of that quarter. Materials A and B are used in production of both products. The quantities required of each material to produce one unit of the finished product and the purchase prices are shown in the table below: A B X 8kg 4kg Y 4kg 3kg Purchase price per kg $1.25 $1.80 Budgeted Opening Inventory 30000kg 20000kg The company plans to hold inventory of raw materials at the end of the quarter equal to 5% of the quarter's material usage budget. Required: A) Prepare the following budgets for the quarter: i) the production budget in units ii) the material usage budget (in kg) iii) the material purchases budget (in kg and $) B) What is the Master Budget and why is it useful?

Answer 1

A)
i)	PRODUCTION BUDGET IN UNITS:	X	Y
	Sales volume in units	32000	56000
	Increase/(Decrease) in inventory	1000	-2000
	Budgeted production in units	33000	54000
ii)	MATERIAL USAGE BUDGET IN KG:	A	B
	KG required for X/Unit	8	4
	KG required for Y/Unit	4	3
	Material usage for Product X	264000	132000
	Material usage for Product Y	216000	162000
	Total material usage in KG	480000	294000
iii)	MATERIAL BUDGET IN KG:
	Desired ending inventory	24000	14700
	Add: Usage	480000	294000
	Total material needed in KG	504000	308700
	Less: Opening inventory	30000	20000
	Budgeted material purchases in KG	474000	288700
	Budgeted price per KG	$            1.25	$            1.80
	Budgeted material purchases in $	$   5,92,500	$    5,19,660
B)	A Master Budget is a summary budget in that, it is the summing up of all
	the functional budgets of an organization. It includes the Budgeted Income
	Statement, the Budgeted Balance Sheet, the Budgeted Cash Flow Statement
	and the Capital Expenditure Budget in addition to the functional budgets.
	The MB depicts the future course of action in financial terms and in a nut
	shell.
	It is useful for the below mentioned reasons:
	*It is a sanction to commit resources of the organization.
	*It conveys the targets to be met and sets out the conditions.
	*It is a control tool as performance is measured against it.
	*As the master budget is the plan for the entire organization, it highlights
	the interrelationship between the functional budgets and provides for the
	functional coordination.