Question

Periwinkle plc manufactures Product X using three different raw materials. The product details are as follows:
i. Selling price per unit £250. Seventy-five percent of sales are collected in the first month and these customers receive a 0.5% discount. The remainder is collected in the following month.
ii. Direct labour per unit 8 hrs
iii. Labour rate 7.50 per hour
iv. Materials requirement per unit:
Material Required Price

A 3  kg $3.50 per kg
B 2 kg $5.00 per kg
C 4 kg $4.50 per kg
v. The company is considering its budgets for next year and has made the following
estimates of sales demand for Product X for July to October:
June 350 units
July 400 units
August 300 units
September 600 units
October 450 units
November 300 units
vi. It is company policy to hold stocks (inventories) of finished goods at the end of each month equal to 50 per cent of the following month’s sales demand.
vii. Raw material stocks (inventories) are expected to be 40% of the following month’s requirements. Material is paid for on a cash basis.
viii. Labour is paid on an hourly rate based on attendance. In addition to the unit direct labour hours shown above.
i$4.50 per kg
v. The company is considering its budgets for next year and has made the following
estimates of sales demand for Product X for July to October:
June 350 units
July 400 units
August 300 units
September 600 units
October 450 units
November 300 units
vi. It is company policy to hold stocks (inventories) of finished goods at the end of each
month equal to 50 per cent of the following month’s sales demand.
vii. Raw material stocks (inventories) are expected to be 40% of the following month’s
requirements. Material is paid for on a cash basis.
viii. Labour is paid on an hourly rate based on attendance. In addition to the unit direct
labour hours shown above.

Overheads for the period are expected to be:
Variable Overheads
Production $40 per unit
Selling and Administration $35 per unit
Fixed Overheads (monthly)

Production overheads $10 000 (including $3000 depreciation)

Selling and Administration $4000 (including $300 depreciation)

x. In September, Periwinkle plans to dispose of machinery. This is expected to realize $15 000. This machinery will be replaced in August with a new piece of

equipment at a cost of $45 000, to be paid in two equal instalments in August and September.

xi. The company will receive a tax refund of $6 000 Equipment.

xii. Periwinkle’s policy is to maintain a minimum cash balance of $10 000. The company can draw down (In multiples of $1 000) on a line of credit at a rate of $15%

per annum. This is repaid when there is surplus cash. Borrowing occurs on the first day of the month, repayments are made on the last day of the month.
Requirements:
a) Prepare the following budgets for the quarter from July to September inclusive:
i. Sales budget
ii. Schedule of cash collections
iii. Production budget in units
iv. Raw material purchases budget in kgs and value
v. Labour requirements budget in hours and value.
vi. Production overhead budget
vii. Selling and Administration Budget
viii. Cash budget

Answer 1

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Periwinkle plc
Answer i	June	July	August	September	Total
Budgeted Sales units	350.00	400.00	300.00	600.00
Sell price per unit	250.00	250.00	250.00	250.00
Budgeted Sales Revenue	87,500.00	100,000.00	75,000.00	150,000.00	325,000.00
Answer ii
Collection Budget	June	July	August	September	Total
Budgeted Sales Revenue	87,500.00	100,000.00	75,000.00	150,000.00	325,000.00
75% of Credit sale in the same month after 0.50% discount		74,500.00	55,875.00	111,750.00	242,125.00
25% of Credit sale in the following same month		21,875.00	25,000.00	18,750.00	65,625.00
Total Scheduled Collections		96,375.00	80,875.00	130,500.00	307,750.00

Answer iii
Production Budget	June	July	August	September	Total	October	November
Budgeted Sales units	350.00	400.00	300.00	600.00		450.00	300.00
Add: Closing	200.00	150.00	300.00	225.00		150.00
Less: Opening	175.00	200.00	150.00	300.00		225.00
Production Budget	375.00	350.00	450.00	525.00		375.00

Answer iv
Material Purchase Budget- A	July	August	September	Total	October
Production Budget	350.00	450.00	525.00		375.00
Material required per unit	3.00	3.00	3.00		3.00
Material required	1,050.00	1,350.00	1,575.00		1,125.00
Add: Closing	540.00	630.00	450.00
Less: Opening	420.00	540.00	630.00
Material Purchase Budget	1,170.00	1,440.00	1,395.00
Cost per kg	3.50	3.50	3.50
Direct Material cost- A	4,095.00	5,040.00	4,882.50	14,017.50
Material Purchase Budget- B	July	August	September	Total	October
Production Budget	350.00	450.00	525.00		375.00
Material required per unit	2.00	2.00	2.00		2.00
Material required	700.00	900.00	1,050.00		750.00
Add: Closing	360.00	420.00	300.00
Less: Opening	280.00	360.00	420.00
Material Purchase Budget	780.00	960.00	930.00
Cost per kg	5.00	5.00	5.00
Direct Material cost- B	3,900.00	4,800.00	4,650.00	13,350.00
Material Purchase Budget- C	July	August	September	Total	October
Production Budget	350.00	450.00	525.00		375.00
Material required per unit	4.00	4.00	4.00		4.00
Material required	1,400.00	1,800.00	2,100.00		1,500.00
Add: Closing	720.00	840.00	600.00
Less: Opening	560.00	720.00	840.00
Material Purchase Budget	1,560.00	1,920.00	1,860.00
Cost per kg	4.50	4.50	4.50
Direct Material cost- C	7,020.00	8,640.00	8,370.00	24,030.00
Total Direct Material cost	15,015.00	18,480.00	17,902.50	51,397.50