Question

Orion Designs specialises in making one type of wedding dress – the Diana. In 2017 the average monthly sales figures were:

Units Selling Price

Diana              100                 $1,200

Orion Designs intends to lower the selling price per unit for the Diana dress due to increased competition to $1,000 per unit. It is hoped that this will increase sales in January by 20% compared to the December 2017 level and again by a further 20% from January to February 2018 and then remain at that level for the rest of the year. 80% of sales are on credit, and the remainder cash. Orion Design offers a 2% discount for credit customers who pay within the month and 10% of customers do so. Another 70% pay in the month following the sale and the remaining customers pay 2 months following the sale. Orion Designs does not have any problems with bad debts.

Each unit requires the following materials:

                                    Diana              Cost

Plain Fabric                5 m2               $10 per m2

Silk Fabric                  10 m               $2 per m

Cotton String             3 m2               $3 per m2

Sequins                      600               $0.02 each

Materials are paid for in the month after purchase. The amount of accounts payable at 31 December 2017 was $18,266.

Direct Labour required (at $15 per hour)

Diana

Labour hours            2        

Labour is paid for as incurred (in the month when the work is done).

Opening materials inventories:

Plain Fabric                100 m2

Silk Fabric                  10 m

Cotton String 20 m2

Sequins                     600

The desired materials ending inventory is 50% of that required for the next month’s production.

Opening finished goods inventories:

Diana

Finished dresses       20

For 2018 the desired ending finished goods inventory is equal to the 50% of following month’s sales in units.

Variable manufacturing overheads are expected to be $22 per unit manufactured in a month. These are paid for as incurred. Fixed manufacturing overheads are expected to be $13,000 per month (including $500 for depreciation). These are paid for as incurred. Other expenses are estimated at $50,000 per month, also paid as incurred. A $20,000 loan will be repaid in February. A $6,000 tax expenses will be paid in March. Interest received on an investment is due to be paid into the business bank account in January, totalling $300. The cash at bank balance at 31st December was a credit balance (overdraft) of $40,000.

Required:

a) Prepare a sales budget in units and dollars for the 3 months and the total

quarter for the Diana dresses.

b) Prepare a production budget in units for the 3 months and the total quarter for the Diana dresses.

c) Prepare a materials usage budget in units for each of the four materials

(separate budgets) and calculate the dollar purchases for each, showing the 3

months and the total quarter for the Diana dresses.

d) Calculate the total value of materials purchases each month.

e) Prepare a direct labour budget.

f) Prepare a schedule of collection of sales.

g) Prepare a cash budget showing each month and the quarter total.

Answer 1

Sales Budget
	Jan	Feb	Mar
Sales	120	144	144
Selling Price /Unit	$1,000	$1,000	$1,000
Sales Value	$120,000	$144,000	$144,000

Statement Showing Production Budget
	Apr	May	Jun
Sales	120	144	144
Desired Ending inventory	72	72	72
Total Unit Needed	192	216	216
Less: Beg. Inventory	60	72	72
Production required	132	144	144

Statement Showing Material Budget-Plan Fabric
	Apr	May	Jun
Production Required (in Unit)	132	144	144
Raw Material in m 2/Unit	5	5	5
RM for Production	660	720	720
Desired Ending inventory	360	360	360
Total Raw material needed	1020	1080	1080
Beg. RM Inventory	330	360	360
RM to be purchased	690	720	720
Price/m2	$10.00	$10.00	$10.00
Cost of Purchase	$6,900.00	$7,200.00	$7,200.00

Statement Showing Material Budget-Silk Fabric
	Apr	May	Jun
Production Required (in Unit)	132	144	144
Raw Material in m 2/Unit	10	10	10
RM for Production	1320	1440	1440
Desired Ending inventory	720	720	360
Total Raw material needed	2040	2160	1800
Beg. RM Inventory	660	360	360
RM to be purchased	1380	1800	1440
Price/m2	$2.00	$2.00	$2.00
Cost of Purchase	$2,760.00	$3,600.00	$2,880.00

Statement Showing Material Budget-Cotton String
	Apr	May	Jun
Production Required (in Unit)	132	144	144
Raw Material in m 2/Unit	3	3	3
RM for Production	396	432	432
Desired Ending inventory	216	216	360
Total Raw material needed	612	648	792
Beg. RM Inventory	198	360	360
RM to be purchased	414	288	432
Price/m2	$3.00	$3.00	$3.00
Cost of Purchase	$1,242.00	$864.00	$1,296.00

Statement Showing Material Budget-Sequins
	Apr	May	Jun
Production Required (in Unit)	132	144	144
Raw Material in Pcs	600	600	600
RM for Production	79200	86400	86400
Desired Ending inventory	43200	43200	360
Total Raw material needed	122400	129600	86760
Beg. RM Inventory	39600	360	360
RM to be purchased	82800	129240	86400
Price/Pcs	$0.02	$0.02	$0.02
Cost of Purchase	$1,656.00	$2,584.80	$1,728.00

Statement Showing Direct Labour Budget
	Apr	May	Jun
Prod Req.	132	144	144
Direct Labour Hour/Unit	2	2	2
Direct Labour Hour Required	264	288	288
Direct Labour Rate	$15	$15	$15
Total Direct Labour Cost	$3,960	$4,320	$4,320