Question

Question

Simple Life Food Ltd is a manufacturer of ‘ready to eat meal’ and sells to various food outlets for credit and cash basis. The management wants to prepare a master budget for the first ten months of the year ending 31 October 2019, and has compiled the following data:

1. The firm sells a single type of set menu at a price of $24 per set. The sales forecast (in sets) prepared by the marketing department for the ten months 30 October 2019 is as follows:

Number of set meals

January 12 000

February 12 000

March 12 500

April 13 000

May 14 000

June 14 000

July 15 500

August 16 000

September 18 000

October 24 000

2. 40% of the sales are collected in the month of sale, 40% are collected in the following month, and 20% are collected in the second month following the sale.

3. The beginning inventories on 1 April 2019 will be 4200 units of finished goods and no raw materials. The ending finished goods inventory should equal 20% of the sales requirements for the next 3 months, and the raw materials ending inventory should equal 40% of the next month’s production.

4. 80% of the food ingredients purchases (materials) are paid in the quarter of purchase and 20% are paid in the following quarter. The amount owing for purchases at 1 April 2019 is $82 000.

5. Variable selling expenses are 5% of sales. Administrative expenses are $52 500 per quarter, of which $8200 represents depreciation expense and $40000 is wages. Fixed selling expenses are $15 200 each quarter. All selling and administrative expenses are paid in the quarter in which they are incurred.

6. The production requirements are:   

Per unit Direct materials / 1 kg

Direct labour / 0.4 hour   

The direct materials are purchased for $4 a kilogram. The direct labour wage rate is $16 an hour. The factory overhead cost is $64 000 per month, and is paid in the month incurred (except for depreciation of $12 000).

7. The 1 April 2019 cash balance is expected to be $16 800.

Required:
A. Prepare a sales budget by month for the period February to June 2019.

B. Determine estimated cash collections from receivables for the second quarter of the financial year commencing 1 April 2019.

C. Calculate the number of units to be produced in the second quarter of the financial year commencing 1 April 2019.

D. Prepare a direct materials budget for the second quarter of the financial year commencing 1 April 2019.

E. Prepare a cash budget for the second quarter of the financial year commencing 1 April 2019including any necessary schedules.

F. Prepare a budgeted income statement for the second quarter of the financial year commencing 1 April 2019.

G. Briefly discuss (any 5) advantages and (any 3) disadvantages of preparing budgets forhospitality industry business.

H. Proper referencing

Answer 1

Solution A:

Sales Bugget
Particulars	February	March	April	May	June
Sales units	12000	12500	13000	14000	14000
Selling Price	$24.00	$24.00	$24.00	$24.00	$24.00
Total Sales	$288,000.00	$300,000.00	$312,000.00	$336,000.00	$336,000.00

Solution B:

Schedule of Cash collection from Receivables
Particulars	April	May	June	Quarter 2019
Budgeted Sales	$312,000.00	$336,000.00	$336,000.00	$984,000.00
Collection of cash against sales (40% same Month, 40% next month, 20% second month):
Cash collection of Receivable of February month	$57,600.00			$57,600.00
Cash collection of Receivable of March month	$120,000.00	$60,000.00		$180,000.00
Cash collection of April Sales	$124,800.00	$124,800.00	$62,400.00	$312,000.00
Cash collection of May Sales		$134,400.00	$134,400.00	$268,800.00
Cash collection of June Sales			$134,400.00	$134,400.00
Total Expected Cash Collection	$302,400.00	$319,200.00	$331,200.00	$952,800.00

Therefore estimated cash collection for the second quarter = $952,800

Solution C:

Number of units to be produced in second quarter = Sales units in Second quarter + Ending Finished goods inventory - Beginning Finished goods inventory

Sales units in second quarter = 13000+14000+14000 = 41000 units

Ending Finished goods inventory = 20% of sales requirement for next 3 months = (15500+16000+18000)*20% = 9900 units

Therefore, Number of units to be produced in second quarter = 41000 +9900 - 4200 = 46,700 units

Solution D:

Direct Material Budget
Particulars	April	May	June	July
Sales units	13000	14000	14000	15500
Add: Desired ending Finished Goods inventory (20% of next 3 months sales)	8700	6220	9900	11600
Total Needs	21700	20220	23900	27100
Less: Opening Inventory	4200	8700	6220	9900
Nos of units to be produced	17500	11520	17680	17200
Direct Material needed per unit (Kg)	1	1	1	1
Direct material needed for units to produce	17500	11520	17680	17200
Add: Desired units of Direct material in ending inventory (40% of Production needs of next month)	4608	7072	6880
Total needs	22108	18592	24560
Less: units of material in beginning inventory	0	4608	7072
Units of Direct material to purchase	22108	13984	17488

Total Direct Material to purchase = 22108+13984+17488 = 53,580 units