Question

Question 2: Budget (20 marks in total) Lulu Company has the following budgeted sales for the next six-month period: Month Unit Sales January 48,000 February 84,000 March 60,000 April 72,000 May 48,000 June 80,000 There were 69,000 units of finished goods in inventory at the beginning of January. Plans are to have an inventory of finished products that equals 100% of the following month sales plus 25% of the second month sales. Two kilograms of raw materials are required for each unit produced. From January, each kilogram of material costs $20 (up from $18 in December last year). Inventory levels for materials are equal to 40% of the needs for the next month. Lulu Company uses a FIFO inventory method for both raw material and finished goods. Required: 2a. Prepare a production budgets in units for January and February 2b. Prepare a materials usage budget in kilograms and dollars for January 2c. Prepare a materials purchases budget in kilograms and dollars for January 2d. List and explain some benefits to an organisation of preparing an operating budget, use the textbook and other relevant sources to support your answer

Answer 1

Solution 2a:

Production Budget - Lulu Company
Particulars	January	February
Sales units	48000	84000
Add: Desired ending inventory (100% of following month sales + 25% of Second month sales)	99000	78000
Less: Opening Inventory	69000	99000
Budgeted production units	78000	63000

Solution 2b:

Material Usage Budget - Lulu Company
Particulars	January	February
Budgeted production units	78000	63000
Material needed per unit (In Kg)	2	2
Budgeted usage of material (In Kg)	156000	126000
Budgeted usage of material in dollar:
Cost of material used in beginning inventory (156000*40%*$18)	$1,123,200.00
Cost of material used from purchase made in january (156000*60%*$20)	$1,872,000.00
Total usage of material in dollar	$2,995,200.00

Solution 2c:

Material Purchase Budget - Lulu Company
Particulars	January
Budgeted usage of material (In Kg)	156000
Add: Desired units of material in ending inventory (40% of next month production needs) (126000*40%)	50400
Less: units of material in beginning inventory	62400
Budgeted purchase of material (In Kg)	144000
Cost per Kg of material	$20.00
Budgeted cost of raw material purchases in dollar	$2,880,000.00

Solution 2d:

There are various benefits to an organization of preparing the operating budget. Some of are as under:

1. Operating budget helps organization to set direction of various functions. On the basis of budget targets were set for various departmenta and same help in their performance measurement.

2. Operating budget helps the organization in performance evaluation of the company. At the end of reporting period, actual results were compared with budget and root cause is identified if performance in not as per budget and responsibility is fixed.

3. Operating budget also helps in managing the cash flow. After preparing the budget, you have idea regarding collection and payments required for a particulars month and accordingly you can arrange the funds.

4. Operating budget helps the various function to execute the activities as per plan. If things are not happening as per plan, it will help respective function to take necessary steps.