SPJIMR|PGPM|MANAGEMENT ACCOUNTING|2023

Topic: Budgeting
1. J.K. Wood Company is promoted by an entrepreneur. It manufactures and sells snowboards. In
the summer of 2022 its accountant gathered the following data to prepare budgets for 2023:
Materials and labour requirements:

Direct Materials
Wood 5 board feet per snow board
Fiber Glass 6 yards per snowboard
Direct Manufacturing labour 5 hours per snowboard
J. K.’s CEO expects to sell 1,000 snowboards during 2023 at an estimated retail price of Rs. 1,000
per board. Further, he expects 2023 beginning inventory of 100 boards and would like to end 2023
with 200 snow boards in stock.
Direct material inventories:

Beginning Inventory 1/1/ 2023 Ending Inventory 31/12/2023

Wood 2,000 1,500
Fiber Glass 1,000 2,000
Variable manufacturing overhead is allocated at the rate of Rs. 14 per direct manufacturing labour –
hour. There are also Rs. 1,32,000 in fixed manufacturing overhead costs budgeted for 2023. J. K.
Combines both variable and fixed manufacturing overhead into a single rate based on direct
manufacturing labour- hours. Variable marketing costs are allocated at the rate of Rs. 2,500 per sales
visit. The marketing plan calls for 30 sales visits during 2023. Finally, there are Rs. 60,000 in fixed
non manufacturing costs budgeted for 2023.
Other data includes:

2022 Unit price 2023 Unit price

Wood Rs. 56 per board feet Rs. 60 per board feet
Fiber Glass Rs. 9.60 per yard Rs. 10 per yard
Direct manufacturing labour Rs. 24 per hour Rs. 25 per hour
The inventoriable unit cost for ending finished goods inventory on Dec.31 2023 is Rs. 647.60.
Assume J.K. uses a FIFO inventory method of both direct materials and finished goods. Ignore work
in process on you calculations.
Prepare:
i. 2023 Revenue budget in Rupees
ii. 2023 production budget in units
iii. Direct Materials usage and purchased budget
iv. Direct manufacturing labour budget
v. Manufacturing overhead budget
vi. What is the Budgeted manufacturing overhead rate?
vii. What is the budgeted manufacturing overhead cost per output unit?
viii. Calculate the cost of a snowboard manufactured in 2023
ix. Prepare an ending inventory budget for both direct materials and finished goods.
x. Prepare a COGS budget
xi. Prepare the budgeted income statement for J.K. for 2023

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SPJIMR|PGPM|MANAGEMENT ACCOUNTING|2023

2. The following information is for Retail Stationery Store. The Cash balance on 31.03.2022 is Rs.
12,000.
a. Recent and Anticipated sales:

March Rs. 40,000

April 48,000
May 60,000
June 80,000
July 36,000
b. Credit Sales: Sales are 75% cash and 25% on credit. Assume that credit accounts are all
collected within 30 days from sales.
c. Gross margin averages 30% of revenues. Store treats cash discounts on purchases in the
income statement as other income.
d. Operating Costs : Salaries and Wages average 15% of monthly revenues: rent, 5% other
operating costs, excluding depreciation, 4% . Assume that these costs are disbursed each
month. Depreciation is Rs. 1,000 per month.
e. Purchases: Store keeps a minimum inventory of Rs. 30,000. The policy is to purchase each
month additional inventory in the amount necessary to provide for the following month’s
sales. Terms on purchases are 2/10 net 30. Assume that payments are made in the month of
purchase and that all discounts are taken.
f. Light fixture: In April, Rs. 600 is planned to be spent for light fixtures and in May, Rs. 400 is
to be expended for this purpose. These amounts are to be capitalised.
Assume that a minimum cash balance of Rs. 8,000 must be maintained. Assume also that all
borrowing is effective at the beginning of the month and all repayments are made at the end of the
month of repayment. Loans are repaid when sufficient cash is available. Interest is paid only at the
time of repaying principal. The interest rate is 18% per year. The owner of store does not want to
borrow any more cash than is necessary and wants to repay as soon as cash is available.
Prepare a cash budget showing the amount of loan taken / repaid each month.

3. Budgets are projections. In the above mentioned case, assume each case independently:
i. If sales decline by 10% each month
ii. If sales decline by 5% each month
iii. If purchase price increases and gross margin reduces to 20%
Will Retail Stationery be able to cover its payments for the months into consideration?

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