Question

1) The Top Shop Company produces T-shirts. Each T-shirt requires 1.30 m of fabric, which company obtains at a cost of $5 per meter. The company sells the T-shirts for $12 per T-shirt. The Company would like to maintain an ending stock of fabric equal to 10% of the next month’s requirements. The company would also like to maintain an ending stock of finished T-shirts equal to 20% of the next month’s sales. Sales (in units) are projected to be as follows for the first three months of the year:

Month January February March 1st Quarter
Unit Sales 7,200 11,600 17,600 ?

Requirements:
Prepare the following budgets for the first three months of the year, as well as a summary budget for the quarter:
a) Prepare the sales budget, including a separate section that details the type of sales made. For this section, assume that 10% of the company’s T-shirts are cash sales, while the remaining 90% are sold on credit terms.
b) Prepare the production budget. Assume that the company anticipates selling 21,600 units in April.
c) Prepare the direct materials purchases budget. Assume the company needs 20,800 m of fabric for production in April.
d) Prepare the direct labour budget for the first three months of the year. Assume that each T-shirt requires 0.50 of an hour. Direct labourers are paid $25 per hour.
e) Assume April sales are projected to be $259,200. Credit collections are 15% two months following the sale, 45% in the month following the sale and 35% in the month of sale. The remaining 5% is expected to be uncollectible.
f) Calculate the Cost of Goods Sold and the Gross Profit assuming that,
i. manufacturing cost pe unit is $10 and,
ii. the management sets its prices to achieve an overall 45% gross profit. Management would like to maintain an ending inventory equal to 10% of the next month’s Cost of Goods Sold. The December 31 balance is 10% of January’s Cost of Goods Sold.

Answer 1

Sales Budget
Particular	Jan		Feb		Mar		Quarter
	units	rupees	units	rupees	units	rupees	units	rupees
Cash	720	8640	1160	13920	1760	21120	26200	314400
Credit	6480	77760	10440	125280	15840	190080	235800	2829600
Total sales	7200	86400	11600	139200	17600	211200	262000	3144000

Production Budget
Particular	Jan	Feb	Mar	Quarter
Budgeted Sale	7200	11600	17600	36400
Opening inventory	1440	2320	3520	1440
Ending inventory Required	2320	3520	4320	4320
Budgeted Production	8080	12800	18400	39280
note:Opening inventory of Jan assumed to be 0 since no data given
Direct Material Purchase Budget
Particular	Jan	Feb	Mar	Quarter
Budgeted Production	8080	12800	18400	39280
fabric required per unit	1.3	1.3	1.3	1.3
fabric required for production	10504	16640	23920	51064
opening stock	1050.4	1664	2392	1050.4
Ending stock	1664	2392	2080	2080
material to be purchased	11117.6	17368	23608	52093.6
note:Opening inventory of Jan assumed to be 0 since no data given
Direct Labour Budget
Particular	Jan	Feb	Mar	Quarter
Budgeted Production	9520	12800	18400	39280
Labour Hour Required per unit	0.5	0.5	0.5	0.5
Budgeted Labour hours	4760	6400	9200	19640
wages/hour	25	25	25	25
Budgeted Labour hours	119000	160000	230000	491000
Cost of Goods sold
Particular	Jan	Feb	Mar	Quarter
Budgeted Sale	7200	11600	17600	36400
fabric required per unit	1.3	1.3	1.3	1.3
cost per meter	5	5	5	5
Total material cost	46800	75400	114400	236600
labour cost per hour	25	25	25	25
labour hour req per unit	0.5	0.5	0.5	0.5
Total labour cost	90000	145000	220000	455000
Production overhead per unit	10	10	10	10
Total production cost	72000	116000	176000	364000
COGS	208800	336400	510400	1055600
opening inventory	20880	33640	51040	20880
Ending inventory	33640	51040	16982.07	16982.07
total cost per month	221560	353800	476342.1	1051702
baddebts	.05sp	.05sp	.05sp	.05sp
sales	338171	540011	727048.4	1605229
No.of units sold	7200	11600	17600	36400
selling price	46.9681	46.5526	41.30957	44.09971
note : profit considered 45% on cost after All adjustment including baddebt