Question

Coro Ltd makes two products, Quara and Lock. The following data are relevant for the year ending 31^st December 2020:

Material prices

Material M      GHS2 per unit

Material N       GHS3 per unit

Direct labour is paid GHS10 per hour.

Production overhead cost is estimated to be GHS 200,000. Production overhead cost is absorbed into product costs using a direct labour hour absorption rate. Selling and administration overhead is budgeted to be GHS 75,000.

Each unit of finished product requires:

			Quara		Lock
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 Quara and Lock will be 5,000 and 1,000 units respectively during the year 2020. The selling prices will be as follows:

Quara                         GHS182 per unit Lock                    GHS161 per unit

She estimates that there will be opening inventory of 100 units of Quara and 200 units of Lock. At the end of the year 2020, the company does not intend holding any inventory of Quara and Lock.

The Production Director estimates that the opening inventories of raw materials will be 3,000 units of M and 4,000 units of material N. At the end of the year 2020, the inventories of these raw materials are to be:

13. 4,000 units
14. 2,000 units

Statement of financial position extracts for year ended 31^st December 2019 are as follows:

Inventory of finished goods                                       GHS 15,000

Inventory of Raw materials                                        GHS 20,000

Retained earnings                                                       GHS 81,000

The Finance Director advises that the rate of tax to be paid on profits during the year 2020 is likely to be 30%.

Required:

1. 1. Prepare all functional budgets and budgeted statement of profit or loss for the year ending 31^st December 2020.
   2. The Managing Director of Coro Ltd is of the view that the budget preparation and presentation process is a waste of resources considering the time and money invested into it. He thinks the cost far outweighs the benefits and the company could still operate effectively without any budget. Do you agree with him? Explain why?
2. 2. The Management Accountant suggested that cash budget need to be prepared in addition to the functional budgets and the budgeted statement of Profit or Loss to make the budgeting process complete. Meanwhile, he claims he does not have enough information to prepare the cash budget. Advise him on the process and sources of information for preparation of a cash budget.

Answer 1