SCENARIO You are the management accountants of a group of companies and your Managing Director has asked you to explore the possibilities of introducing appropriate budgeting and costing methods in the operating companies Based on information given below, you are required to compile a report to managing director which covers the following: Francis Ltd manufactures and sells products only, F03 and F04 They are manufactured in processes, cost centres 14 and 15 The product must be manufactured to high standards and as results reject rates are high, particularly in cost centre 14 A At the beginning of year 12, stocks of each product were: Finished stocks: Units ready for sale Work-in-progress: good units at end Of cost centre 14 F03 900 £58, 500 F04 200 £10,200 100 £5,800 40 £1,280 The sales budget for Year 12 shows 9,400 units of F03 for sales revenue of £705,000 and 12,200 units of F04 for sales revenue of £817,400 Finished stocks ready for sale at the end of year 12 are budgeted as 1,000 units of F03 and 600 units of F04 Work-in-progress stocks are to be increased to 156 units of F03 and 103 units of F04, completed in cost centre 14 and ready to be passed to cost centre 15 Reject rates arising from an inspection at the end of each cost centre’s work are: End of cost centre 14 End of cost centre 15 F03 20% 5% F04 30% 10% Manufacturing times per unit in each cost centre are budgeted as: Cost centre 14 Cost centre 15 F03 1.20hrs 0.90hrs F04 0.40hrs 1.50hrs The material cost for each unit made costs £35 for a unit of F03 and £20 for a unit of F04 There is no recoverable cost from any kind of scrap Conversion costs are budgeted as: Cost centre Variable-per hour Fixed-in total 14 £ 6.50 104,040 15 £ 4.90 123,000 Task • • • Explain the purpose and nature of the budgeting process (3 a) Select appropriate budgeting methods for the organizations and its budgeting needs (3b) Prepare budgets according to the chosen budgeting method (3c) Hints: Prepare the production budget, cost centre utilization budgets (in hours), conversion cost budgets Material cost budget Product costs (using absorption costing), and a profit and loss account showing the production profit for each product and in total (A FIFO flow of costs can be assumed.) B Keith Whitaker has a business supplying and erecting garden fencing He has £1,200 in his business account at 31 December 2011 He is owed £780 by his customers for sales during the month of December He owes £370 to his trade suppliers for goods purchased in November and £240 for goods purchased in December He has a telephone bill of £84 outstanding, which he intends to pay in January of the next year His next telephone bill of £90 is due in March and he realistically expects to pay it in April He estimates his sales for January will be £800, rising to £950 in February and £1,000 in March 20% of sales are for cash, 80% of customers receive month’s credit He is also planning to sell garden ornaments on a commission basis and hopes to receive £50 per month from this venture starting in January He estimates that his purchases each month will be 60% of sales and he takes two months credit from his suppliers He rents storage space at £75 per month, payable at the end of each month His transport expenses total £100 per month and are payable in the month in which they occur In addition, he has miscellaneous expenses of £50 per month also payable in the month in which they occur His annual insurance premium of £500 falls due and will be paid in March Task Prepare a cash budget (3d) C Bradley-Allen Ltd makes one standard product Its budgeted operating statements for May is as follows: £ Sales (volume and revenue): Direct Materials: Direct Labour: Overheads: Budgeted operating profit 800 units Type A Type B Skilled Unskilled (All fixed) The standard costs were as follows: Direct materials Type A Type B Direct Labour Skilled Unskilled £ 64.000 (12,000) (16,000) (4,000) (10,000) (12,000) (54,000) 10,000 £50/kg £20/m £10/hour £8/hour During May, the following occurred: 1) 2) 3) 4) 5) 6) 950 units were sold for a total of £73,000 310 kilos (costing £15,200) of type A material were used in production 920 metres (costing £18,900) of type B material were used in production Skilled workers were paid £4,628 for 445 hours) Unskilled workers were paid £11,275 for £1,375 hours Fixed overheads cost £11,960 There were no inventories of finished production or of work in progress at either the beginning or end of May Task Calculate variances, identify possible causes and recommend corrective actions (4a) Hints (a) Prepare a statement that reconciles the budgeted to the actual profit of the business for May, through variances Your statement should analyze the differences between the two profit figures in as much detail as you are able • Prepare operating statements reconciling budgeted and actual results (4b) • Report findings to management in accordance with identified responsibility centres (4c) •