1 12 -) ( + ) 65.5% Quesuon Plus Products Ltd is preparing its annual budgets fo
ID: 2530829 • Letter: 1
Question
1 12 -) ( + ) 65.5% Quesuon Plus Products Ltd is preparing its annual budgets for the year ending 31 December 2013. The company manufactures one product, which currently sells for £ 70 per unit. The Sales Director believes that the price can be increased by 10 % with effect from 1t July 2013 The sales volumes for each quarter are expected to be as follows: Sales Volume (units) Quarter 1 Quarter 2 Quarter 3 Quarter 4 9000 8 000 Sales for the first quarter of the year 2014 are estimated to be 6 000 units Each unit of the finished product requires 4 kgs of material. The curent price per kilogram of material is £ 8. The price however is expected to increase as of I April 2013 by 10%. Assembly of each unit requires 6 hours of direct labour. Labour is currently paid a rate of £ 8 per hour although the personnel department anticipates a wage rise of 10 % to take effect from 1" July 2013. Stock at 31t December 2012 is expected to be 4 000 units. Closing stock at the end of each quarter is expected to be 25 % ofnext quarter's sales. (Question continues on the next page) 8: 4Explanation / Answer
Plus Products ltd
1
Budgeting in its general sense is the act of quantifying objectives in financial terms. Budgeting assists managers in decision making process in an organization. It is the function of the management accountant to provide information needed in budgeting process. A management accountant must be happy with the functions of budgeting described here
Help in financial planning Monitoring and controlling scarce resources through performance measurement
7 FUNCTIONS OF BUDGET
FORECASTING: this entails making at calculated attempt into knowing what the future holds. Forecasting may not be perfect as evidence has shown but it is better to have a forecast to work with than not having any as this will help you get prepared. There are many statistical tools developed over the years to help managers and accountants make better forecast.
PLANNING: generally speaking, planning depends on forecast that has been made in the past to make decision about the future. The estimated data generated by forecasting are used to make plans. Government agencies, for example health authorities use forecast from estimated population to plan on the number of health centers to open in a community and the number of beds and other health equipment that will be put in that hospital.
COMMUNICATION: budgeting in an organization acts as a communication tool in the following ways:
1. 1. Gathering information: information about a company and the activities of its competitors are gathered during the process of making all kinds of budget. It is quite impossible for a single individual to gather all these information that are needed to make a functional budget. Managers and other non managerial staff will need to be consulted and information obtained from them. This information will then be analyzed, challenged and criticised in order to come up with filtered information.
2. 2. Disseminating information: budgets when not acted upon are useless, so, the budgetary system has an inbuilt information dissemination ability that ensures that responsible managers actually got the budget which they will work with.
Budgeting committee is usually formed to act as a forum where representatives from different parts of the business will assemble to iron out issues that relates to resource planning of the business.
MOTIVATION: motivation is the driving force that makes people to run towards their goals rather than trudge towards it. Motivation is a relative and subjective term, we are not here to discuss motivation but, to see how budgeting affects the motivation of staff.
Two factors needs to be considered here: how to make people follow a budget, and setting the difficulty level of budgeting. There are two main approaches that companies can employ to make their staff heed towards a budget, each having its advantages and disadvantages. They are Authoritarian method and participatory method, these two approaches represent two extremes. The ideal method that is actually used in practice is the one that strive to achieve a balance between the two extremes
EVALUATION: evaluation means to judge something with a sort of standard. The budget represents that target performance which will then be compared with actual performance. And this will then lead to corrective action being taken. Evaluation in real life is not as easy as I have presented it here.
CONTROL/ CO-ORDINATION: this function budgeting is very important for an organization to grow. Co-ordination simply means ensuring that different parts of the business work in congruence. For example, it will be useless employing sales force that can sell 2,000,000 units of an item when all that your company has the capacity of producing is 1,200,000 units of that product. This is not to say that plans cannot be made to get the remaining 800,000 units from an alternative source, in fact, this is one of the functions of budgeting to expose weakness so that plans can be made to cover for it.
AUTHORIZATION: budgeting helps to minimize misappropriation and embezzlement that would have characterize corporations if a system of authorization does not exist. Through authorization, managers are made more accountable for their spending. A manager that has been authorized to spend $5,000 dollars in a way will be looking for trouble if she or he spends $5,001 without further authorization. In fact, budgeting helps to prevent fraud
Plus Products ltd
1
a) Sales Budget Quarter Particulars 1 2 3 4 Total Sales Units 6,000 9,000 10,000 8,000 33,000 Price 70 70 77 77 Total Sales 4,20,000 6,30,000 7,70,000 6,16,000 24,36,000 b) Production Budget Quarter Particulars 1 2 3 4 Forecastes Sales 6,000 9,000 10,000 8,000 Closing Balance 2,250 2,500 2,000 1,500 Less: Opening Balance -4,000 -2,250 -2,500 -2,000 Total production required (units) 4,250 9,250 9,500 7,500 C) Material usage budget in kgs Quarter Particulars 1 2 3 4 Total Production units 4,250 9,250 9,500 7,500 30,500 Material required per unit 4 4 4 4 Total Material reuired in kgs 17,000 37,000 38,000 30,000 1,22,000 d) Material Price budget in GBP Quarter Particulars 1 2 3 4 Total Total Material required in kgs 17,000 37,000 38,000 30,000 1,22,000 Rate per Kg 8 8.8 8.8 8.8 Total Material Price 1,36,000 3,25,600 3,34,400 2,64,000 10,60,000 e) Labour Usage budget in hrs Quarter Particulars 1 2 3 4 Total Units produced 4,250 9,250 9,500 7,500 Hourly required 6 6 6 6 Total Hrs 25,500 55,500 57,000 45,000 1,83,000 f) Labour Price budget in GBP Quarter Particulars 1 2 3 4 Total Labour hrs required 25,500 55,500 57,000 45,000 Hourly rate 8 8 8.8 8.8 Total Labour Price 2,04,000 4,44,000 5,01,600 3,96,000 15,45,600 2) Budget Importance & FunctionsRelated Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.