QUESTION TWO Allsorts Lemonade Ltd is planning to produce a special release of a

Question

QUESTION TWO Allsorts Lemonade Ltd is planning to produce a special release of a new Kiwifruit and Apple drink and in the next four months its expected sales are as follows: Month one Month two Month three Month four 2,500 bottles 3,000 bottles 3,500 bottles 4,000 bottles Each bottle will be sold for $5. As this is a special promotion for just four months, no more Kiwifruit and Apple drink will be sold after the fourth month. At the beginning of month one, the company expects to have no bottles of Kiwifruit and Apple drink in stock ready for sale. However, it wants to increase its finished goods inventory to 500 bottles at the beginning of month two and to 800 at the beginning of months three and four. At the end of the fourth month it should have no finished stock on hand. Each bottle requires 50 grams of sugar. At the beginning of month one it is expected the company will have 10,000 grams of sugar in its raw materials inventory. In future it has decided the company's closing inventory of sugar should be equivalent to ten per cent of the following month's production requirements. Required: Produce a sales budget in dollars for each of month one, month two, month three and month four (a) 4 marks) Produce a production budget in bottles for each of month one, month two, month three and month four (b) (4 marks) Produce a budget in grams for purchases of sugar for each of month one, month two, month three and month four (c) (4 marks) (d) Explain the differences and challenges of top-down and bottom-up budgeting 4 marks)

Explanation / Answer

Answer for a)

Sales budget in dollars

Answer for b)

Production budget in bottles

month one

(Bottles)

Month two

(Bottles)

Month three

(Bottles)

Month four

(Bottles)

500

Answer for c)

Sugar purchases budget in grams

Month one

(Grams)

Month two

(Grams)

Month three

(Grams)

Month four

(Grams)

150000

(3000bottles×50grams)

165000

(3300bottles×50grams)

175000

(3500bottles×50grams)

160000

(3200bottles×50grams)

16500

(165000grams×10%)

17500

(175000grams×10%)

16000

(160000grams×10%)

Answer for d)

Difference between top down and bottom up budgeting:

1)Here as the name indicate in tip down budgeting the budget is prepared by top level management where as in bottom up budget the operations level prepare the budget.

2) In top down budgeting the total budget is prepared and then split for different departments where as in bottom up budgeting the individual budget is collected first and then combined to make company budget.

3) In top down budgeting there must be some flexibility provided as the top management may not be aware of every thing about operation level where as in bottom up budgeting the flexibility will be provided if and only if there is strong supporting there for such variation.

Challenges:

In top bottom approach the main challenge is that the budget is prepared on basis of reality?

In bottom down Approach the main challenge is that whether the budget is prepared on basis for utilisation of full resources completely and properly.

Particulars month one month two month three month four Sales(in bottles)[A] 2500 3000 3500 4000 Price per bottle[B] $5 $5 $5 $5 Sales($)([A]×[B]) $12500 $15000 $17500 $20000

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