Question

Discount Furniture Pty Ltd manufactures a variety of desks, chairs, tables and shelf units which are sold to public school systems throughout Queensland. The accountant of the company’s School Desk Division is currently preparing a budget for the first quarter of 2018. The following sales forecast has been made by the division's sales manager.

          January 
   5,000 desk and chair sets

          February 
   6,000 desk and chair sets

          March 
   7,500 desk and chair sets

          April 
    7,500 desk and chair sets

Each desk and chair set requires 10 metres of pine planks and 1.5 hours of direct labour. Each set sells for $50. Pine planks cost $0.50 per metre and the division ends each month with enough wood to cover 10 per cent of the next month's production requirements. The division incurs a cost of $20.00 per hour for direct labour wages and fringe benefits. The division ends each month with enough finished goods inventory to cover 20 per cent of the next month's sales. Also, assume that April's production will total 8,000 units.

Required:

(a) Prepare the Production Budget for Discount Furniture Pty Ltd for January, February and March, using the information provided.

(b) Prepare the Direct Materials Purchases Budget for January February, and March, using the information provided. 


(c) Outline three purposes of preparing budgets such as the Production and Direct Materials Purchases budgets considered here. 


Answer 1

Answer a.
Production Budget
	Jan	Feb	Mar	Total
Sales in Set	5,000	6,000	7,500	18,500
Add: Ending Inventory in Set	1,200	1,500	1,500	1,500
Total Needs	6,200	7,500	9,000	20,000
Less: Beginning Inventory in set	(1,000)	(1,200)	(1,500)	(1,000)
Desired Production in Set	5,200	6,300	7,500	19,000
Answer b.
Material Purchase Budget
	Jan	Feb	Mar	Total
Desired Production in Set	5,200	6,300	7,500	19,000
Material Required per Set (in mtrs)	10	10	10	10
Total Material required for Production in mtrs	52,000	63,000	75,000	190,000
Desired Ending Materials Inventory -10%	6,300	7,500	8,000	8,000
Total Mtrs be available	58,300	70,500	83,000	198,000
Beginning Materials Inventory (in mtrs)	(5,200)	(6,300)	(7,500)	(5,200)
Total Materials to be Purchased (in mtrs)	53,100	64,200	75,500	192,800
Material price per mtr	0.50	0.50	0.50	0.50
Total Material Purchased (in $)	26,550	32,100	37,750	96,400
Answer c.
Benefits of Production Budget:
1. Helps Company to track costs
2. Product Demand
3. Cost Factors
Benefits of Direct Material Purchase Budget:
1. Shows the quantity and cost o material to be purchased
2. Helps to maintain a safety stock
3. Gives a control over the material required and the time of purchase of raw material.