Question

Question 1 Coro Ltd makes two products, Quara and Lock. The following data are relevant for the year ending 31st 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: 4,000 units 2,000 units Statement of financial position extracts for year ended 31st 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: Prepare all functional budgets and budgeted statement of profit or loss for the year ending 31st December 2020. 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? 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

a)

Sales Budget

Particulars	Quara	Lock
Number of units sold	5000	1000
Selling price per unit	GHS182	GHS161
sales	GHS910000	GHS161000
Total sales	GHS1071000

Production Budget

Particulars	Quara	Lock
Number of units sold	5000	1000
Less: Beginning inventory	(100)	(200)
Number of units should be produced	4900	800

Direct materials Budget

Particulars	Material M	Material N
Number of units should be produced;
Quara- 4900 units
Lock- 800 Units
Raw materials required per unit;
For Quara	12 units	6 units
For Lock	12 units	8 units
Units required for production;
For Quara	4900*12= 58800	4900*6= 29400
For Lock	800*12= 9600	800*8= 6400
Total units required for production	68400	35800
Add: Ending inventory	4000	2000
Less: Beginning inventory	(3000)	(4000)
Total units should be purchased	69400	33800
Material cost per unit	GHS2	GHS3
Total cost	GHS138800	GHS101400

Closing inventory= (4000*2)+(2000*3)= GHS14000

Direct material used = Opening inventory + Purchases -Closing inventory

= GHS20000+ (GHS138800+GHS101400)- GHS14000= GHS246200

Direct labor Budget

Particulars	Quara	Lock
Number of units should be produced	4900	800
Direct labor hours required per unit	7 Hours	10 Hours
Total labor hours required	34300	8000
Labor cost per hour	GHS10	GHS10
Total cost	GHS343000	GHS80000

Total Production overhead= GHS200000

Total direct labor hours= 34300+8000= 42300 Hours

Production overhead absorption rate

= Total Production overhead/ Total direct labor hours

= GHS200000/ 42300 Hours = GHS4.73

Selling and administration overhead= $75000

Cost of goods sold

Cost of goods manufactured= Direct material used+ Direct labor+ Production overhead= GHS246200+ (GHS343000+GHS80000) + GHS200000

= GHS869200

Cost of goods sold= Beginning inventory cost+ Cost of goods manufactured – Ending inventory cost

= GHS15000+ GHS869200 = GHS884200

Budgeted statement of profit & loss of Coro Ltd. For the year ending 31st December, 2020

Particulars	Amount	Amount
Sales		GHS1071000
Less: Cost of goods sold		GHS884200
Gross profit		GHS186800
Less: Selling and Administration overhead		(GHS75000)
Net profit		GHS111800

b)

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 to it. He thinks the costs far outweighs the benefits and the company could still operate effectively without any budget. Managing director’s view is not right, might be the company could still operate effectively without any budget. But a budget can foresee the company activities, so it can plan for its resources, expenses and for a better cost management plan. So it can’ be say that the costs far outweighs the benefits of budget. Budget sets a goal for the organization and it will motivate the organization to achieve its goal. It gives better control over money. It will helps the organization to plan for its resources. We can plan for any inefficiencies going to happen. It will enhance better cost management. It will helps to identify threats and opportunities, so we can utilize the opportunity and plan for the threats. In order to have a better control there should be a plan. Budget can be treated as a profit plan.

c)

The management accountant’s claim is right. In the present question there is not enough information to prepare cash budget. In the scenario sales information are available but nothing is mentioned about the collection pattern. So getting clarity about the cash receipts collection pattern is necessary. And nothing is mentioning about other cash receipts also. Information regarding Material purchases are available. But cash disbursement pattern is not available. And cash expenses in production and selling and administration overhead are also not available. All this cash payments are needed to identify the cash disbursements. Nothing is mentioning about other expenses and capital expenditures. Information regarding the minimum balance of cash required and short term credit lines available are also needed to prepare cash budget. So all information regarding cash receipts and payments are needed to prepare a cash budget. And the beginning balance of cash is also required.