Endeavour Twoplise Ltd.

Question 1
a) Raw Materials Budget (Kilos)
  July Aug Sept Oct
Opening Stock 100 100 90 80
Purchases 100 110 100 60
  200 210 190 140
Production - 100 - 120 - 110 - 70
Closing Stock 100 90 80 70
         
Finish Goods Budget (Cogs)        
Opening Stock 110 100 105 105
Purchases 100 120 110 70
  210 220 215 175
Sales - 110 - 115 - 110 - 80
Closing Stock 100 105 105 95

b) Sales Budget

  July Aug Sept Oct Total

  R R R R R
Sales (R250 per Cog) 27,500 28,750 27,500 20,000 103,750
           
Production Cost Budget July Aug Sept Oct Total
  R R R R R
Material (R45 per Cog) 4,500 5,400 4,950 3,150 18,000
Wages/Var o/h 6,500 7,800 7,150 4,550 26,000
  11,000 13,200 12,100 7,700 44,000

Closing Stock at 31.10.00 R

Raw Materials (70kg x R45) 3,150
Cogs ( 95cogs x R110) 10,450

Debtors at 31.10.00 R
September Sales 27,500
October Sales 20,000
47,500

Creditors at 31.10.00 R
October purchases 2,700
C) Cash Budget from July to October 2000
  July Aug Sept Oct
  R R R R
Receipts        
Loan   130,000    
Sales 5,900 13,100 27,500 28,750
Total Receipts 5,900 143,100 27,500 28,750
         
Payments        
Equipment Purchases   110,000    
Raw Material Purchases 3,900 4,500 4,950 4,500
Wages, Variable Overhead 6,500 7,800 7,150 4,550
Fixed Overheads 3,000 3,000 3,000 3,000
Total Payments 13,400 125,300 15,100 12,050
         
         
Receipts Less Payment - 7,500 17,800 12,400 16,700
Balance Brought Forward (Opening Balance) - 17,250 - 24,750 - 6,950 5,450
  - 24,750 - 6,950 5,450 22,150

Question 2
MEMORANDUM
FROM: Brenda
TO: Andy
RE: Budgetary Control

The budgeting information which you have prepared has proved to most useful in the
recent past as an aid to planning and for negotiations with our lenders.
Now, we can make further use of this information by using it as a means of
controlling actual activities. We can record the actual activities of the business and
compare this with the plan of activities. If we discover any differences (or variances)
between the two we can undertake an investigation to discover why actual activities
are not as planned and take remedial action where necessary.
In order that we can identify the individuals responsible for the variances, the
information must be reported in responsibility-centre format. Therefore, I require you
to disaggregate the monthly budget figures into the following departments: stores,
production, selling and distribution and administration. Each report should only
include those revenues and costs for which the manager is responsible. So, for
example, the stores department report should not include admin. overhead. Then,
each month, prepare a report for each department using the following layout.
   Monthly Values   Cumulative Values
  R R R   R R R
Cost Line              

Where appropriate, ensure that the report includes non-financial information, such as
number of units produced, to support the financial data. Within ten days of each
period end, forward the reports on stores and production to Sam and the other two
directly to me. This timing is very important because it ensures that corrective action
can be taken, where necessary, as soon as possible. I know that Sam will be
reluctant to use the information at first. He may feel that you are 'spying' on him and
that as he has been successful in his role up to now without this information, he may
question why it has become necessary all of a sudden. When you give him the
reports you must explain to him that they are designed to be used by him as a tool
for controlling his areas of responsibility. They show him the financial consequences
of his operational decisions. He has nothing to fear from the reports and they will
form the basis of discussions between us on a regular basis in the future. In
instigating the new system, you must be prepared to change and adapt the reports
as our knowledge of the business improves. Be prepared to amend the reports on
the basis of the users' comments and in the light of their changing needs. Thank you
for your co-operation.

Question 3
The newly purchased plant was delivered and installed in July and paid for in
August. The purchase price of £110,000 was met through the debenture issue of
£130,000, the additional £20,000 presumably being to cover installation and
commissioning costs. The extra investment of £35,000 is presumably not to
purchase equipment to replace the newly acquired plant, but to enhance its
capabilities, since it will still be able to produce the cog mechanisms required for
ready-mixed concrete trucks.
The enhanced equipment will be capable of manufacturing cog mechanisms for use
with automated waste collection vehicles: on information given, this is a new market
for Endeavour Twoplise Ltd.
Students should therefore discuss the following points:
Effect on Existing Production Requirements
There is 35% spare capacity and additional production should not theoretically pose
any difficulties unless demand outstrips total production capacity. However, it may
not be possible to utilise full capacity, and so careful production scheduling may be
called for. In addition, Endeavour will have current contractual commitments to meet
and must schedule additional orders to avoid disruption. The nature and extent of the
spare capacity can be determined by examining production schedules and records.
Maintenance records would be of little use here because the machinery is new.

Staffing
The company employs four full-time operatives in the factory, in addition to Sam the
supervisor, hiring additional operatives as required. If production shortfalls occur
regularly, current labour may be insufficient to produce the new cog mechanisms,
and the cost of hiring additional labour will reduce the profitability of entering the new
market. Brenda could examine standard cost data for current production to
determine labour requirements and also investigate wage records for recent months,
comparing it with manufactured output.

Expertise
Brenda will need to be sure that the company has the expertise to produce the new
cog mechanisms, since it would be disastrous if adequate customer support could
not be provided to new clients. Repeat orders might not be forthcoming. Consultation
of personnel records and discussion with Sam, the factory supervisor, may indicate
the expertise of current staff. This point may be irrelevant if the new cog machines
are substantially the same as those currently produced. Purchase Consideration
The purchase price of the new equipment will have to be met and so availability of
finance will have to be investigated. Leasing may be an alternative. Brenda should
discuss this with Andy.
Benefit to the Company
Even if the investment is an enhancement of existing productive capacity, the
benefits to the company should be compared with the cost to determine the net
benefit to the firm. For such a small amount, Discounted Cash Flow methods are
inappropriate and simple payback may suffice. However, expected future benefits, in
the form of incremental revenues less incremental cost, will need to be determined.
Brenda should make trade enquires about how much she will be able to charge for
the new cog mechanisms and the likely size and frequency of orders. The cost of
direct materials and labour, as well as variable production overheads, will need to be
estimated, perhaps by Andy using existing cost records. Andy will need to bear in
mind that use would be being made of existing spare capacity and so care will need
to be taken to ensure that only relevant costs of production are included.
New Market
Entering new markets is risky, but utilisation of existing spare capacity reduces the
risk to the company's current operations. Brenda will need to investigate the
proposed new market, perhaps by talking with managers of companies currently in
the field. This might be through local trade contacts or professional contacts. An
alternative to entering the market as a new competitor would be to determine
whether any current manufacturers of cog mechanisms for waste collection vehicles
had excess demand, and so were looking to find someone to subcontract the work
to. This would give Brenda an assured outlet for the extra production without the
need to secure new customers, although there would be a lower price to balance
against the increased convenience and security.
Sam the Supervisor
It is not clear whether Brenda is aware of Sam's resistance to change, but he could
clearly make things very difficult as far as the production of new items was
concerned. As a general point, Brenda should make enquiries among key members
of staff concerning the proposal, in order to encourage them to feel part of the
decision-making process. Such a consultation could help Sam to feel that the
proposed change was an enhancement of his position.

Question 4
Budget Profit and Loss Account for the Period July - October 2000

  R
   
Sales 103,750
Cost of sales  
Opening Stock 12 100  
Production costs 44 000  
Less Cost of sales - 10 450 - 45,650
Gross Profit 58,100
   
Expenses - 32,933
Fixed Costs (3000x4) - 12,000
Depreciation (333+15200+5400) - 20,933
   
Operating Profit 25,167
Accrued Debenture Interest (130000x10% =
13000/12x3) - 3,250
Profit Before Interest 21,917
Proposed Dividends (100000x5%) - 5,000
Retained Profit for the year 16,917
Retained Profit Brought Forward 56,450
Retained Profit Carried Forward 73,367
Budgeted Balance Sheet as at 31 October 2000  
   R
Non-Current Asset (120000-20333+160000-
59200+52000-21400) 231,067
   
Current Assets 83,250
Inventory (3150+10450) 13,600
Trade and other receivables 47,500
Cash and Cash equivalents 22,150
   
   
Total Assets 314,317
   
Equity 173,367
Ordinary Share Capital 100,000
Retained Earnings 73,367
   
Non-Current Liabilities 130,000
10% Debentures 130,000
   
Current Liabilities 10,950
Trade and Other Payables 2,700
Proposed Dividend 5,000
Debenture Interest Rate 3,250
   
   
Total Equity and Liability 314,317