Question

A company produces two products XML, and ZML using two types of raw materials K and Q. The accountant is preparing budgets for the year ended 31 December 2012. Expectations for 2012 include the following:

1. Production and Sales

XML                ZML

                        Budgeted sales in units                              6 000              4 800

                        Budgeted unit selling price                        $500              $1 000

                        Opening stock finished goods

                        In units                                                600                 700

                        In dollars                                          $144 000       $182 000

                        Budgeted closing stock in units 1 250              650

Normal losses occur at the end of the production process and 5% of the outputs of both products have to be scrapped. It is company policy that stock of finished goods is valued on a first in first out basis. There is no opening or closing work in progress.

2. Direct materials

K                     Q

             Raw materials per unit of

production

                        XML                                                    10kg               5kg

                        ZML                                                    6kg                  8kg

                                                                                    XML                ZML

                        Opening stock of raw materials

                        In kg                                                   20 000            10 000

                        In dollars                                            200 000          120 000

                        Budgeted closing stock in kg        12 000            12 000

                        Budgeted purchase price per kg $10                 $12

3. Direct Labour

Standard direct labour time required for producing one unit of XML and ZML are 30 minutes and 45 minutes respectively. Labour is paid at the rate of $120 per hour.

4. Factory overheads

The budgeted factory overheads for the year 2012 are $362 500. These overheads are to be absorbed in the production cost on a direct labour hour basis.

            Required

            Prepare the following budgets for the year ended 31 December 2012:

            (a)       Sales budget for each of the two products                                              [2]

            (b)       Production budget (in units) for each of the two products.                  [4]

(c)        Direct material purchases budget for each of the two materials         [3]

(d)       Direct labour budget for each of the two products                                 [2]

(e)       Pre-determined factory overhead absorption rate                                  [1]

(f)        Factory cost of goods produced showing all cost elements for each of the two products    [5]

(g)       Unit production cost for each of the two products, rounded to the nearest dollar      [1]

(h)       Budgeted cost of goods sold for each of the two products                   [3]

(i)         Explain the reason why some companies normally prepare the sales budget first among all functional budgets while the other companies start with the labour or other budget first in the budgetary planning process. [4]

           

Answer 1

(a)       Sales budget for each of the two products	XML	ZML
Budgeted sales in units	6,000	4,800
Budgeted unit selling price	500	1,000
Sales Budget	3,000,000	4,800,000
(b)       Production budget (in units) for each of the two products.	XML	ZML
Budgeted sales in units	6,000	4,800
Closing stock finished goods	1,250	650
Opening stock finished goods	600	700
Production budget in units (Sale+Cl. St. -Op. St.)	6,650	4,750
(c)        Direct material purchases budget for each of the two materials	K	Q
Material required per unit (in Kgs) - XML	10.00	5.00
Material required per unit (in Kgs) - ZML	6.00	8.00
Material required total (in Kgs) - XML - for 6650 units	66,500.00	33,250.00
Material required total (in Kgs) - ZML - for 4750 units	28,500.00	38,000.00
Total Material required	95,000.00	71,250.00
Wastage - 5% of Material	4,750.00	3,562.50
Total Material required - after wastage	99,750.00	74,812.50
Add: Closing stock	12,000.00	12,000.00
Less: Opening stock	20,000.00	10,000.00
Material to be purchase in units	91,750.00	76,812.50
Per unit rate	10.00	5.00
Direct Material purchase budget	917,500.00	384,062.50
(d)       Direct labour budget for each of the two products	XML	ZML
Production in units	6,650	4,750
Labour time (In hour)	0.50	0.75
Labour rate per hour	120	120
Direct Labour budget (Units*time*perf hour)	399,000	427,500
(e)       Pre-determined factory overhead absorption rate	XML	ZML
Production in units	6,650.00	4,750.00
Labour time (In hour)	0.50	0.75
Total labour hours	3,325.00	3,562.50
Allocation of 362,500 in (3325+3562.5) hours = 52.63
Per units abosorbtion rate (Hourly rate * time)	26.32	39.47
(f)        Factory cost of goods produced showing all cost elements for each of the two products	XML	ZML
Production in units	6,650	4,750
Material K	665,000	285,000
Wastage of 5% on K	33,250	14,250
Material Q	399,000	456,000
Wastage of 5% on Q	19,950	22,800
Labour	399,000	427,500
Factory overhead	87,497	140,621
Total	1,603,697	1,346,171
(g)       Unit production cost for each of the two products, rounded to the nearest dollar	XML	ZML
Total Cost	1,603,697	1,346,171
Production in units	6,650	4,750
Per unit cost	241.16	283.40
(h)       Budgeted cost of goods sold for each of the two products	XML	ZML
Budgeted sales in units	6,000	4,800
Per unit cost	241.16	283.40
Total budgeted cost	1,446,945	1,360,341

(i) Company normally prepare sale budget first as sales budget is the base for preparation of other budgets.