Question:

Annie manufactures exclusive office equipment and is attempting to prepare a

budget for March. The following information is relevant:

Opening Budgeted sales in

Selling price
inventory in units units March
Chairs 63 290 120
Desks 36 120 208
Stools 90 230 51

Annie requires that her closing inventory be 30% of that month's sales. All three
products are made using wood, plastic, unskilled labour, skilled labour and other
overheads. The quantities are as follows:

Unskilled Skilled labour

Wood M3 Plastic M3
labour hr hr
Chairs 4 2 3 2
Desks 5 3 5 8
Stools 2 1 2 -
Cost $12 $7 $4 $6

Annie's opening inventory of raw materials is 142 cubic metres of wood and 81 cubic
metres of plastic. She intends to increase this during March, however, so that she
always has sufficient raw materials to produce 50 units of each item of equipment.

Other overheads are recovered on the basis of $1 per labour hour.

Required:

a) Prepare functional budgets for March for:

I. Sales budget in dollars
II. Production budget in units
III. Materials usage budget in units
IV. Labour usage budget in dollars
V. Materials quantity purchased and cost budget
b) Prepare a budgeted profit and loss account down to gross profit for the
month ending 31 March.

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 Solution:

a) Functional budgets for March:

(I) Sales budget

Chairs Desks Stools Total ($)

Quantity 290 120 230
Price $120 $208 $51
Value $34,800 $24,960 $11,730 $71,490

(II) Production budget in units

Chairs Desks Stools

Sales 290 120 230
Add: Closing inventory (30% of sales) 87 36 69
377 156 299
Less: Opening inventory (63) (36) (90)
Production 314 120 209

(III) Materials usage in units

Wood M3 Plastic M3
Chairs (314 x 4) 1,256 (314 x 2) 628
Desks (120 x 5) 600 (120 x 3) 360
Stools (209 x 2) 418 (209 x 1) 209
2,274 1,197

(IV) Labour usage

Total hours Unskilled hours Skilled hours

Chairs (314 x 3) 942 (314 x 2) 628
Desks (120 x 5) 600 (314 x 8) 360
Stools (209 x 2) 418 - -------
1,960 1,588
Cost per hour x $4 x $6
Total Cost ($) $7,840 $9,528

(V) Materials purchase quantity and cost ($)

Wood M3 Plastic M3
Usage 2,274 1,197
Add: Closing inventory: 50 x (4+5+2) 550
50 x (2+3+1) 300
2,824 1,497
Less: Opening inventory (142) (81)
Quantity purchased 2,682 1,416

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 Cost per M3 x $12 x $7
Total purchase $32,184 $9,912

b) Budgeted profit and loss for the month ending 31st March:

$ $
Sales 71,490
Less: Cost of Sales
Wood (2,274 x $12) 27,288
Plastic (1,197 x $7) 8,379
Unskilled labour 7,840
Skilled labour 9,528
Overheads ($1 per labour hour) ($1,960+$1,588) 3,548
56,583
Add: Opening inventory of finished goods (W) 15,255
Less: Closing inventory of finished goods (W) (16,578)
(55,260)
Gross profit 16,230

Workings

Chairs ($) Desks ($) Stools ($) Total ($)

Wood (12 x 4) 48 (12 x 5) 60 (12 x 2) 24
Plastic (7 x 2) 14 (7 x 3) 21 (7 x 1) 7
Unskilled labour (4 x 3) 12 (4 x 5) 20 (4 x 2) 8
Skilled labour (6 x 2) 12 (6 x 8) 48 -
Overhead (1 x 5) 5 (1 x 13) 13 (1 x 2) 2
Cost per unit 91 162 41
Opening inventory units 63 36 90
Opening inventory of finished goods 5,733 5,832 3,690 15,255
Closing inventory units 87 36 69
Closing inventory of finished goods 7,917 5,832 2,829 16,578