Question

QUESTION 3 30 MARKS  


Namic Inclusive CC is currently preparing budgets for the three months of the trading year. You have been provided with the following information:

Trading;

January February March Sales in Units 50 000 units 55 000 units 60 000 units

Sales are expected to increase to 75 000 units per month from 1 April as the company increases production capacity. The selling price for each unit has been set at N$90.00 per unit. All sales are on credit. 30% of sales is received in the month that the sale is made and the balance is received in the following month.

The following notes were also presented.

1. The cost of raw material for each unit of production is N$ 30.00. Namic inclusive cc holds a closing stock equal to 40% of raw material required for the next month`s production. Raw material is paid in the month following the purchase.

2. The company values closing stock of units produced on a variable costing basis. Company policy is to hold a maximum of 20% of finished units required for sales in the forthcoming month as closing stock.

3. Labour cost of production are variable at N$ 20.00 per unit. All costs are paid in the month incurred.

4. Other manufacturing overhead are N$ 8.00 per unit variable and N$ 12.00 per unit fixed. The fixed component is based on a production level of 55 000 units per month. Depreciation amounting to N$ 30 000.00 per month is included in this figure. All overheads are paid for the in the month incurred.

5. Other company costs excluding interest payable amount to N$ 5.00 variable per unit sold and further N$ 250 000.00 fixed per month. These costs are paid for in the month incurred.

Page 11 of 12

Statement of Financial Position as at 01 January 2017

Issued Share Capital N$ 10 000 000 Accumulated Profit N$ 1 517 000 N$ 11 517 000 Fixed Assets Land and Building N$ 5 000 000 Machinery and equipment N$ 2 750 000 Other Assets N$ 1 000 000 Current Assets Stock – Raw Material N$ 612 000 Stock – Finished goods N$ 580 000 Debtors – Sales N$ 2 835 000 Cash and Bank N$ 180 000 Less: Current Liabilities Creditors – Raw Material N$ 1 440 000 N$ 11 517 000

The company will raise long term loan on the 01 February 2017 for N$ 500 000 at an annual interest rate of 12% payable monthly as incurred. The interest charge has not been included in the information provided above. Interest is paid in the month after it is incurred.

Machinery costing N$ 350 000 will be purchased on 01 March 2017, monthly depreciation on the asset is budgeted to be N$ 5000.00 per month. The depreciation has not been accounted for in the information provided above.

REQUIRED:

3.1 Prepare a sales budget (3) 3.2 Prepare a production budget (4) 3.3 Indicate the closing value of debtors and closing stock for the months of January to march 2017 inclusive (3) 3.4 Prepare a material purchases budget by units as well as in value also indicate the closing creditors budget for each month of January to March 2017 (10) 3.5 Prepare a cash budget for each month of January to March 2017 inclusive (10)

Answer 1

3.1 Sales Budget:

	January	February	March	Quarter
Unit Sales	50,000	55,000	60,000	165,000
Unit Selling Price	$ 90	$ 90	$ 90	$ 90
Budgeted Sales Revenue	$ 4,500,000	$ 4,950,000	$ 5,400,000	$ 14,850,000

3.2.Production Budget :

	January	February	March	Quarter
Unit Sales	50,000	55,000	60,000	165,000
Add: Desired Ending Inventory	11,000	12,000	15,000	15,000
Total Inventory Needs	61,000	67,000	75,000	180,000
Less: Beginning Inventory	10,000	11,000	12,000	10,000
Budgeted Production in Units	51,000	56,000	63,000	170,000

3.3.

	January	February	March
Closing Value of Debtors	$ 3,150,000	$ 3,465,000	$ 3,780,000
Closing Value of Finished Goods Inventory	$ 638,000	$ 696,000	$ 870,000

3.4 Materials Purchases Budget:

	January	February	March	Quarter
Value of Raw Materials needed in production	$ 1,530,000	$ 1,680,000	$ 1,890,000	$ 5,100,000
Add: Desired Ending Inventory	672,000	756,000	900,000	900,000
Total Inventory Needs	2,202,000	2,436,000	2,790,000	6,000,000
Less : Beginning Inventory	612,000	756,000	900,000	612,000
Budgeted Raw Materials Purchases	1,590,000	1,680,000	1,890,000	5,388,000