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- 20 Marks
Question
Kikaw Ltd engages in the manufacturing and trading of two products namely: Product A and Product B. Kikaw Ltd is presently in the process of preparing budgets for the year ending 31 March 2023, and the following information was estimated.
Purchases: Material cost per unit:
| Product A | |
|---|---|
| Material X (GH¢200 per Kg) | GH¢550 |
Sales: The following quarterly sales have been forecasted. Monthly sales are evenly distributed within each quarter.
| Apr-Jun 2022 | Jul-Sep 2022 | Oct-Dec 2022 | Jan-Mar 2023 | Apr-Jun 2023 | |
|---|---|---|---|---|---|
| Product A (Units) | 84,000 | 88,200 | 93,000 | 96,000 | 100,800 |
| Product B (Units) | 63,000 | 66,000 | 67,800 | 69,000 | 72,000 |
Additional information:
- Kikaw Ltd operates FIFO method in issuing inventory and maintains a material inventory of 20% of the following quarter’s production requirement.
- The policy of the company is to maintain month-end inventory of finished goods equal to 50% of sales of the following month.
Required: a) Prepare a production forecast in units for Products A and B separately on quarterly basis, for the year ending 31 March 2023. (9 marks)
b) Prepare Material Purchase budget for material X in quantity for the first three quarters for product A only. (7 marks)
c) Identify FOUR (4) benefits Kikaw Ltd will gain from preparing budgets. (4 marks)
Answer
Answer: a) Production forecast for Product A and B:
| Apr-Jun 2022 | Jul-Sep 2022 | Oct-Dec 2022 | Jan-Mar 2023 | |
|---|---|---|---|---|
| Product A | ||||
| Sales | 84,000 | 88,200 | 93,000 | 96,000 |
| Add: Closing stock | 14,700 | 15,500 | 16,000 | 16,800 |
| Less: Opening stock | (14,000) | (14,700) | (15,500) | (16,000) |
| Production | 84,700 | 89,000 | 93,500 | 96,800 |
| Apr-Jun 2022 | Jul-Sep 2022 | Oct-Dec 2022 | Jan-Mar 2023 | |
|---|---|---|---|---|
| Product B | ||||
| Sales | 63,000 | 66,000 | 67,800 | 69,000 |
| Add: Closing stock | 11,000 | 11,300 | 11,500 | 12,000 |
| Less: Opening stock | (10,500) | (11,000) | (11,300) | (11,500) |
| Production | 63,500 | 66,300 | 68,000 | 69,500 |
| (9 marks) |
b) Material X Purchase budget (in kgs) for Product A:
| Apr-Jun 2022 | Jul-Sep 2022 | Oct-Dec 2022 | |
|---|---|---|---|
| Production | 84,700 | 89,000 | 93,500 |
| Requirement | (84,700 x 2.75) | (89,000 x 2.75) | (93,500 x 2.75) |
| Material required | 232,925 | 244,750 | 257,125 |
| Add: Closing stock | 48,950 | 51,425 | 53,240 |
| Less: Opening stock | (46,585) | (48,950) | (51,425) |
| Purchases | 235,290 | 247,225 | 258,940 |
| (7 marks) |
c) Benefits of preparing budgets:
- Planning: Helps in setting the objectives of the organization and designing measures to ensure their achievement.
- Coordination: Ensures the activities of various parts of an organization are coordinated towards a common goal.
- Communication: Communicates the plans to various responsibility center managers.
- Motivation: Motivates managers to strive to achieve the organizational goals.
- Control: Compares actual results with the budget and takes controlling measures. (4 points @ 1 mark each = 4 marks)
- Tags: Benefits of Budgeting, Material Purchase Budget, Production Forecast
- Level: Level 1
- Uploader: Joseph