- 20 Marks
Question
a) QR uses an activity based budgeting (ABB) system to budget product cost. It manufactures two products, product Q and product R. The budget details for these two products for the forthcoming period are as follows:
Product Q | Product R | |
---|---|---|
Budgeted production (units) | 80,000 | 120,000 |
Number of machine setups per batch | 4 | 3 |
Batch size (Units) | 5,000 | 4,000 |
The total budget cost of setting up the machine is GH¢74,400.
Required: i) State and explain THREE (3) objectives of budgeting. (6 marks)
ii) Calculate the budgeted machine setup cost per unit of product Q and R. (5 marks)
iii) State THREE (3) benefits and TWO (2) limitations of using an activity-based budgeting system. (5 marks)
b) A company has annual sales revenues of GH¢30 million and the following working capital periods:
Period | Months |
---|---|
Inventory conversion period | 2.5 |
Accounts receivable collection period | 2.0 |
Accounts payable payment period | 1.5 |
Production costs represent 70% of sales revenue.
Required: Calculate the total amount held in working capital excluding cash and cash equivalents. (4 marks)
Answer
a) i) Objectives of a budgetary control system:
- To compel planning: Budgeting ensures that managers plan for the future by producing detailed plans to implement the company’s long-term goals.
- To coordinate activities: Budgeting aligns the activities of different departments into a common plan, ensuring efficient resource allocation and scaling production based on anticipated changes.
- To communicate activities: Budgets formalize management expectations and facilitate communication between different departments.
ii) Calculation of budgeted machine setup cost per unit:
- Number of batches for Product Q = 80,000 / 5,000 = 16
- Number of batches for Product R = 120,000 / 4,000 = 30
- Machine setups per batch: Product Q = 4, Product R = 3
- Total number of setups: Product Q = 64, Product R = 90, Total = 154
- Budgeted cost per setup = GH¢74,400 / 154 = GH¢483.12Budgeted cost per unit:
- Product Q: (64 setups x GH¢483.12) / 80,000 units = GH¢0.39 per unit
- Product R: (90 setups x GH¢483.12) / 120,000 units = GH¢0.36 per unit
iii) Benefits of Activity-Based Budgeting:
- Clear cost-activity linkage.
- Better resource allocation.
- Enhanced capacity utilization review.
Limitations:
- Time-consuming and resource-intensive.
- Requires expert team and sophisticated software.
b) Working Capital Calculation:
- Inventory: (GH¢30m x 0.7 x 2.5) / 12 = GH¢4.375m
- Accounts receivable: (GH¢30m x 2) / 12 = GH¢5m
- Accounts payable: (GH¢30m x 0.7 x 1.5) / 12 = GH¢2.625m
- Total working capital = GH¢4.375m + GH¢5m – GH¢2.625m = GH¢6.75m
- Topic: Budgeting, Cost and Cost Behaviour, Relevant Cost and Revenue
- Series: MAY 2021
- Uploader: Joseph