ACMB223 Management Accounting

BUDGETING AND PLANNING

Learning Outcomes
At the end of this lecture, students should be able to:
1. Describe the different purposes of budgets
2. Describe the various stages in the budget process
3. Prepare functional/operational and master budgets
4. Prepare cash budget
Introduction

• A budget is a quantified plan of action for a specified accounting period.

• Budgeting is an essential tool for management accounting for both planning and controlling future
activities.
• Generally most companies prepare budgets once a year.
• The role of accounting during the budgeting process is to:
➢ provide historical data on revenues, costs, and expenses
➢ express management's plans in financial terms, and
➢ prepare periodic budget reports.

Purposes of Budget

1. To aid the planning of actual operations:

• by forcing managers to consider how conditions might change and what steps should be
taken now.
• by encouraging managers to consider problems before they arise.
2. To co-ordinate the activities of the organization:
• by compelling managers to examine relationships between their own operation and those of
other departments.
3. To communicate plans to various responsibility centre managers:
• everyone in the organization should have a clear understanding of the part they are expected
to play in achieving the annual budget.
• by ensuring appropriate individuals are made accountable for implementing the budget.
4. To motivate managers to strive to achieve the budget goals:
• by focusing on participation
• by providing a challenge/target.
5. To control activities:
• by comparison of actual with budget (attention directing/management by exception).
6. To evaluate the performance of managers:

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 • by providing a means of informing managers of how well they are performing in meeting
targets they have previously set.

Budgeting Process

1. Identify the objectives of the

organization.
2. Identify potential strategies.
3. Evaluate alternative strategic options.
4. Select course of action.
5. Implement the long-term plan in the
form of the annual budget.
6. Monitor actual results.
7. Respond to divergencies from plan.

Budgetary Control System

• Budgetary control system is a system for the establishment of budgets relating to the responsibilities
of managers to deliver the organizational plan, and the continuous comparison of actual with
budgeted results either to secure appropriate remedial action or as a basis for the revision of targets
• Budgets exist within the overall organizational planning and control framework, which is commonly
divided into:
1. Strategic planning - the process of deciding on the goals of the organization and the
formulation of strategies to be followed to achieve the aims and objectives set. It is a creative
medium/long term top management activity grounded in an appraisal of strengths and
weaknesses and the external environment including the market, customers and competitors
2. Management Control - the process by which management ascertains that the organization
carries out its strategies. It is a more routine short term middle management activity.
3. Operational control - the process of ensuring that specific tasks are carried out efficiently and
effectively. It is a very short-term activity for junior management and addresses their targets
for day to day activity both financial and non-financial.

Master Budgets

• A master budget is a set of interconnected budgets of sales, production costs, purchases, incomes,
etc. and it also includes budgeted financial statements.
• Two classes of budget in the master budget.
1. Functional or Operational budgets include the individual budgets – sales, production (material,
labour & overheads) and selling & administrative expenses.
2. Financial budgets comprises of cash budget, budgeted income statement and budgeted
balance sheet.
• Before financial budgets can be drawn the functional budgets has to be completed first starting with
the targeted sales i.e., sales budget, which will influence the production budget and its components
and selling & administrative budget.

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Comprehensive Example
Mersing Manufacturing Sdn Bhd (MMSB) manufactures two products Product A and Product B. the
following information applies to budget preparation for the year ending 31 December 2022. The balance
sheet for the year ended 31 December 2021 is as follows:

RM RM RM
Non-current assets
Land and buildings 1,250,000
Machinery 47,500
Less: Accumulated Depreciation (9,375) 38,125
Office equipments 18,300
Less: Accumulated Depreciation (7,320) 10,980
Investment 890,000
Net non-current assets 2,189,105
Current assets:
Stock: Material 71,000
Finished goods 889,750
Debtors 189,000
Cash 35,670
1,185,420
Less: Current liabilities
Creditors 23,640
Tax 62,500 86,140
Net current assets 1,099,280
Net assets 3,288,385
Financed by:
Share Capital 2,700,000
Retained profit 588,385
Total capital employed 3,288,385

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The following information is available for the year 2022:
1. Finished goods
Product A Product B
Material per unit
Material X 6 kg 6 kg
Material Y 3 kg 4 kg
Labour hours per unit 7 hours 10 hours
Estimated sales 22,500 units 50,000 units
Selling price per unit RM200 RM250
Opening stock 2,250 units 2,500 units
Closing stock 2,550 units 3,000 units

2. Materials
Material X Material Y
Opening stock 4,250 kg 3,500 kg
Closing stock 4,000 kg 3,250 kg
Price per kg RM6 RM13

3. Labour rate per hour is RM12

4. Overhead will include:

RM
Indirect labour 38,750
Indirect material 42,340
Utilities (10% fixed) – 80% production and 20% administrative 16,400
Production supervisory 70,000
Administrative salary 28,000
Salesmen salary and commission (0.1% of sales) 54,560
Machinery maintenance (20% fixed) 6,800
Depreciation of machinery 4,750
Depreciation of office equipment 1,820
Rates (25% administrative and 75% production) 1000
Building insurance (25% administrative and 75% production) 1,200
Warehousing 4,700
Advertising 4,200

5. Overhead is absorbed on the basis of direct labour hours.

6. The amount received from customers are:

RM
Quarter 1 Payment from 2021 debtor and 15% from sales
Quarter 2 30% from sales
Quarter 3 35% from sales
Quarter 4 19% from sales

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7. Payments:
i Material (direct and indirect): Creditor balance from 2021 will be paid in the first quarter and 1%
of material purchase will be paid in the first quarter of the following year. Other material
purchase payment will be made equally over the four quarters.
ii Wages and salaries (direct and indirect) as well as other expenses are paid equally over the four
quarter
iii Additional purchase of machinery RM290,000 will be made in the second quarter.
iv Tax of 2021 will be paid in the first quarter.
v Dividend of RM233,200 will be paid in the second quarter.
vi Investment of RM800,000 and RM1,000,000 will be undertaken in the second and third quarters
respectively.
8. Ignore work-in-progress.
9. Tax rate for 2022 is 26%

Required:
As far as the information permits, prepare the following budgets for MMSB for the year to 31 December
2022:
i. Sales budget
ii. Production budget
iii. Direct materials usage budget
iv. Direct materials purchases budget
v. Direct labour budget
vi. Production overhead budget
vii. Non-manufacturing overhead budget
viii. Cash budget
ix. Budgeted Income Statement

• Sales Revenue Budget

The sales budget is the first budget prepared. It is derived from the sales forecast, and it represents
management's best estimate of sales revenue for the budget period. It is prepared by multiplying
the expected unit sales volume for each product by its anticipated unit selling price.

Product A Product B
Units to sell
x Selling price per unit
Total Revenue (RM)

• Production Budget
The production budget shows the units that must be produced to meet anticipated sales. It is
derived from the budgeted sales units plus the desired ending finished goods units less the
beginning finished goods units.
Product A Product B
Units to sell
(+) Planned closing stock
= Total units required for sales and stock
(-) Planned opening stock
Units to be produced

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• Direct Material Usage Budget
The direct materials budget (Usage & Purchase) contains both the quantity and cost of direct
materials to be purchased. It is derived from the direct materials units required for production plus
the desired ending direct materials units less the beginning direct materials units.
Material X Material Y
Direct material required for production:
Product A (production units x usage per
unit)
Product B (production units x usage per
unit)
Total direct materials required for
production

• Direct Material Purchase Budget

Mat. X Mat. Y
Quantity necessary to meet production (from direct material
usage budget)
(+) Planned closing stock
Total amount required for production & stock
(-) Planned opening stock
Total units to be purchased
x Budgeted unit purchase price (RM)
Total purchase (RM)

• Direct Labour Budget

The direct labor budget contains the quantity (hours) and cost of direct labor necessary to meet
production requirements. The direct labor budget is critical in maintaining a labor force that can
meet expected levels of production.

Product A Product B
Budgeted production (from production budget)
x Hours per unit
Total budgeted hours
x Budgeted wage rate per hour
Total direct labor cost

• Overhead Budget
The factory overhead budget shows the expected manufacturing overhead costs. The selling and
administrative expense budget projects anticipated operating expenses. Both budgets distinguish
between fixed and variable costs.

Non-Production Overhead Required – In practice, separate budget should be prepared i.e. sales
manager will be responsible for the selling expenses budget, the distribution manager will be
responsible for distribution expenses, and chief administrative officer will be responsible for the
administration budget. Each of this budget could have both fixed and variable elements

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Factory overhead budget Variable Fixed
RM RM

Selling and administrative expense budget Variable Fixed

RM RM

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 • Production Cost Budget (also known as departmental budget)
The direct labor budget, materials usage budget, and factory overhead budget are combined to
determine production cost budget
For cost control purposes, these three budgets are sometimes combined into separate departmental
budget (departmental budget)

• Product A Product B Total (RM)

•
Direct material costs:
Material X (kg) 136,800 303,000
Cost per unit (RM) 6 6
Total cost of Material X (RM) 820,800 1,818,000 2,638,800
Material Y (kg) 68,400 202,000
Cost per unit (RM) 13 13
Total cost of Material Y (RM) 889,200 2,626,000 3,515,200
Direct labour costs 1,915,200 6,060,000 7,975,200
Total variable production overhead 23,940 75,750 99,690
Fixed production overhead 19,152 60,600 79,752
Total Production Costs 3,668,292 10,640,350 14,308,642

Cash Budget
The cash budget shows anticipated cash flows. It contains three sections (cash receipts, cash
disbursements/payments, and financing) and the beginning and ending cash balances. Data for preparing
this budget are obtained from the other budgets.

Q1 Q2 Q3 Q4 Year
Cash receipt
(-) Cash disbursement
Material
Wages and salaries
Other expenses
Purchase of additional machinery
Tax
Dividend
Investment
Total cash outflow
Net cash flow
(+) Beginning cash
Ending cash
(-) Minimum cash balance
Excess (deficit) in cash
Required financing / investment

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Budgeted Income Statement
• Budgeted Income Statement is prepared by using the budgeted revenue from sales budget and the
costs and expenses from the other budgets (material, labour and overheads).
• It will indicate the expected profitability/performance of operation for the budgeted period.

RM RM
Sales 17,000,000 Sales budget
Opening stock 889,750 Balance sheet
+ manufacturing cost 14,306,610 Man/production cost budget
- closing stock 1,043,550 (Total cost production/unit produce)
x unit in production budget A & B
COGS 14,152,810
Gross profit 2,847,190
Less expenses
Utilities 3,280 Selling and admin budget
Administrative salary 28,000 Selling and admin budget
Salesmen salary and commission 54,560 Selling and admin budget
Depreciation of office equipment 1,820 Selling and admin budget
Rates 250 Selling and admin budget
Building insurance 300 Selling and admin budget
Warehousing 4,700 Selling and admin budget
Advertising 4,200 97,110 Selling and admin budget
Net profit 2,750,080
Tax 715,021
Net profit after tax 2,035,059

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Budgeted Balance Sheet
• It shows the future financial position of the business, detailing the elements of assets, liabilities and
capital.
• This budget is prepared from the information gathered from the various operational budgets, cash
budget, budgeted income statement and the preceding year balance sheet.

• Balance Sheet as at 31 December 2022

Non-current assets
Land and buildings 1,250,000
47,500 + 290,000
Machinery 337,500
assume 10 year 9370 + 4750
Less: Accumulated Depreciation (14,125) 323,375
depreciation

Office equipment 18,300

7320 + 1830
Less: Accumulated Depreciation (9,150) 9,150
Investment 2,690,000
Net non-current assets 4,272,525
Current assets:
Material budget (4000 x 6) + 3250 x 13 =
Stock: Material
66,250
As I/s closing
Finished goods 1,043,550
1% x RM17m
Debtors 170,000
from cash budget
Cash 314,842
1,594,642
Less: Current liabilities
Creditors1% x 6191590 61,916
Tax 715021 776,937
Net current assets 817,705
Net assets 5,090,230*
Financed by:
Share Capital 2,700,000
Retained profit 2,390,230
Total capital employed 5,090,230*

• *Rounding error of RM2,032 due to rounding of OAR to nearest sen.

Variable (RM) Fixed (RM) Total (RM)
Original overhead 98,338 79,072 177,410
Overhead charged to product using OAR 99,690 79,752 179,442
Difference 2,032

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 Budgeting in Non-manufacturing Companies

• The major differences in the master budget of a merchandiser and a manufacturer are that a
merchandiser (a) uses a merchandise purchases budget instead of a production budget and (b) does
not use the manufacturing budgets (direct materials, direct labor, and manufacturing overhead).

• In service enterprises, the critical factor in budgeting is coordinating professional staff needs with
anticipated services. Budget data for service revenue may be obtained from expected output or
expected input.

• In the budget process for non-profit organisations, the emphasis is on cash flows rather than on a
revenue and expense basis. For governmental units, the budget must be strictly followed, and
overspending is often illegal.

Tutorial Exercises

Question 1
Unicorn Sdn. Bhd. manufactures single product. The management accountant is preparing quarterly
budgets for year 2015. The following information is available:
1) The sales volume is forecast to be 10,000 units for January. This is expected to grow by 200 units a
month. The selling price is RM2.00 per unit.
2) The firm’s inventory policy is to hold enough units of finished goods at the end of each month to
cover 40 per cent of the forecast sales for the next month. Each unit of finished goods requires 3kg
of raw material, which costs RM0.15 per kg, and 0.1 hours of direct labour, which costs RM7.50
per hour. The opening finished goods inventory at the start of January is forecast to be 3,000 units.
3) The company’s inventory policy is to hold enough raw material at the end of each month to meet
30 per cent of the forecast production for the following month. The opening raw material inventory
in January is forecast to be 11,000kg.

Required:
Using the information given, you as an assistant management accountant is required to prepare the
following budgets for the month of January, February and March 2015:
(i) sales in quantity and value
(ii) production quantities
(iii) material usage quantities
(iv) material purchases in quantity and value
(v) labour budget in hours and value.

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Question 2
MO is a building supplies company that sells products to trade and private customers. Budget data for
each of the six months to March are given below:

October November December January February March

Credit sales 250,000 250,000 250,000 260,000 260,000 280,000
Cash sales 60,000 60,000 65,000 75,000 80,000 90,000
Credit purchases 170,000 180,000 180,000 200,000 200,000 200,000
Other operating costs 90,000 90,000 90,000 122,000 123,000 123,000
(excluding depreciation)

• 80% of the value of credit sales is received in the month after sale, 10% two months after sale and
8% three months after sale. The balance is written off as a bad debt.
• 75% of the value of credit purchases is paid in the month after purchase and the remaining 25% is
paid two months after purchase.
• All other operating costs are paid in the month they are incurred.
• MO has placed an order for four new forklift trucks that will cost RM25,000 each. The scheduled
payment date is in February.
• The cash balance at 1 January is estimated to be RM15,000.

Required: Prepare a cash budget for each of the THREE months of January, February and March.

Question 3
Explain THREE (3) benefits that organisations gain from using budgetary planning systems.

Question 4
ABC Sdn. Bhd. has the following budgeted unit sales figures for the three months from July 2015 to
September 2015:
July 800
August 600
September 700

The company makes and sells one product only, the unit costs and selling price of which are:

Selling price RM70

Material A: 2kgs at RM5 per kg 10
Material B: 1.5 kgs at RM6 per kg 9
Labour: 2 hours at RM10 per hour 20

On 31 Jun 2015, the stocks in hand are expected to be:

Finished Goods 100 units

Raw Materials A 200 kgs
B 150 kgs

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The following information is also available:
i) The selling price of the product is expected to increase by 5% on 1 September 2015.
ii) The company anticipates an increase in labour rate by RM1 per hour. The new rate will take effect
starting 1 September 2015.
iii) The closing stocks of finished goods and raw materials are expected to show a 10% increase on the
opening stocks each month.

Required:
Prepare for July, August and September:
a) Sales Budget (in units and RM)
b) Production Budget (units only)
c) Raw Material Usage Budget for Materials A and B (kgs).
d) Labour Budget (in RM)
e) Cash budget

Question 5
In the near future a company will purchase a manufacturing business for RM315,000, this price to include
goodwill (RM150,000), equipment and fittings (RM120,000), and stock of raw materials and finished
goods (RM45,000). A delivery van will be purchased for RM15,000 as soon as the business purchase is
completed. The delivery van will be paid for in the second month of operations.

The following forecasts have been made for the business following the purchase of the manufacturing
business:

1. Sales (before discounts) of the business’s single product, at a mark-up of 60% on production cost,
will be:
Month RM
January 88,000
February 96,000
March 92,000
April 100,000
May 104,000

25% of sales will be for cash; the remainder will be on credit, for settlement in the month
following that of sale. A discount of 10% will be given to selected credit customers, who represent
30% of gross sales.

2. Production cost will be RM5.00 per unit. The production cost will be made up of:
Raw materials RM2.50
Direct labour RM1.50
Fixed overhead RM1.00

3. Production will be arranged that closing stock at the end of any month is sufficient to meet sales
requirements in the following month. A value of RM30,000 is placed on the stock of finished
goods which was acquired on purchase of the business. This valuation is based on the forecast
of production cost per unit given in (2) above.

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4. The single raw material will be purchased so that stock at the end of a month is sufficient to meet
half of the following month’s production requirements. Raw material stock acquired on purchase
of the business (RM15,000) is valued at the cost per unit which is forecast as given in (2) above.
Raw materials will be purchased on one month’s credit.

5. Costs of direct labour will be met as they are incurred in production.

6. The fixed production overhead rate of RM1.00 per unit is based upon a forecast of the first year’s
production of 150,000 units. This rate includes depreciation of equipment and fittings on a
straight-line basis over the next five years. The fixed production overhead is paid in the month
incurred.

7. Selling and administration overheads are all fixed, and will be RM208,000 in the first year. These
overheads include depreciation of the delivery van at 30% per annum on a reducing balance
basis. All fixed overheads will be incurred on a regular basis and paid in the month incurred.

Required:
(a) Prepare a monthly cash budget for the month of January, February and March. You should
include the business purchase and the first 3 months of operations following the purchase of the
manufacturing business. [17 marks]

(b) Describe zero-based budgeting and two of its advantages. [3 marks]

Question 6
SPSB manufactures product “BBC” using three different raw materials. The product details are as
follows:

Material A 3 kgs material price RM3.50 per kg

Material B 2 kgs material price RM5.00 per kg
Material C 4 kgs material price RM4.50 per kg
Direct labour 8 hours labour rate RM8.00 per hour

The company is considering its budgets for next year and has made the following estimates of sales
demand for product “BBC” for July to October:

July August September October

400 units 300 units 600 units 450 units

Selling price per unit is RM250. It is company policy to hold stocks of finished goods at the end of each
month equal to 50% of the following month’s sales demand, and it is expected that the stock at the start
of the budget period will meet this policy.

Raw material stocks are expected to be as follows on 1 July:

Material A 1000 kgs
Material B 400 kgs
Material C 600 kgs
Stocks are to be increased by 20% in July, and then remain at their new level for the foreseeable future.

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Required:
Prepare the following budgets for the quarter from July to September inclusive:
a) sales budget in quantity and value;
b) production budget in units;
c) raw material usage budget in kgs;
d) raw material purchases budget in kgs and value;
e) labour requirements budget in hours and value.

Question 7
Sine Bhd produces a single product, Product DG, and is preparing budgets for the next three-month
period, July to September. The current cost data for Product DG is as follows.

RM
Direct Material X 1·5 kg at RM3·50 per kg 5·25
Direct labour 12 minutes at RM8·00 per hour 1·60
Variable production overhead RM1·00 per unit 1·00
Fixed production overhead RM3·00 per direct labour hour 0·60
Total costs per unit 8·45

Sine Bhd experiences seasonal changes in sales volumes and forecast sales for the next four months are
expected to be as follows:

Month July August September October

Sales (units) 30,000 35,000 60,000 20,000

It has been decided that opening stocks of finished goods in August and September must be 20% of the
expected sales for the coming month. Closing stocks of finished goods in September must be 10% of the
expected sales in October. Stocks of finished goods at the start of July are expected to be 4,000 units.

There will be 30,000 kg of Material X in stock at the start of July. These stocks will be bought in June at
the current prices per kilogram. Further supplies of Material X will need to be purchased for the higher
prices of RM3·80 per kg due to supplier price increases. Stocks of Material X will increase by 10% in July
and remain at the same level until August and will increase by 5% more in September.

In any given month, any hours worked in excess of 8,000 hours are paid at an overtime rate of RM12·00
per hour. Sine Ltd operates a FIFO (first in, first out) stock valuation system.

Required:
(a) Prepare the following budgets for July, August and September:
(i) Production budget, in units;
(ii) Material usage budget, in kilograms;
(iii) Material purchase budget, in kilograms and RM
(iv) Production cost budget detailing all production elements.

(b) Explain 3 purposes of budget.

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Question 8
Amirul will set up a new business as a sole trader on 1 January 2014 making decorative glassware. Amirul
is in the process of planning the initial cash flows of the business. He estimates that there will not be any
sales demand in January 2014 so production in that month will be used to build up stocks to satisfy the
expected demand in February 2014. Thereafter it is intended to schedule production in order to build up
sufficient finished goods stock at the end of each month to satisfy demand during the following month.
Production will, however, need to be 5% higher than sales due to expected defects that will have to be
scrapped. Defects are only discovered after the goods have been completed. The company will not hold
stocks of raw materials or work in progress. Amirul has estimated the demand in 2014 as follows:

RM
February 22,000
March 26,000
April 30,000
May 29,000
June 35,000

It is expected that 10% of the total sales value will be cash sales, mainly being retail customers making
small purchases. The remaining 90% of sales will be made on two months’ credit. A 2.5% discount will,
however, be offered to credit customers settling within one month. It is estimated that half of the credit
customers (representing half of credit sales by value) will take advantage of the discount while the
remainder will take the full two months to pay.

Variable production costs (excluding costs of rejects) per RM1,000 of sales are as follows:

RM
Labour 300
Materials 200
Variable overhead 100

Labour is paid in the month in which labour costs are incurred. Materials are paid one month in arrears
and variable overheads are paid two months in arrears. Fixed production and administration overheads,
excluding depreciation, are RM7,000 per month and are payable in the same month as the expenditure
is incurred.

Amirul employed a firm of consultants to give him initial business advice. Their fee of RM12,000 will be
paid in February 2014. Smelting machinery will be purchased on 1 January 2014 for RM200,000 payable
in February 2014. Further machinery will be purchased for RM50,000 in March 2014 payable in April
2014. This machinery is highly specialized and will have a low net realisable value after purchase.

Amirul has redundancy money from his previous employment and savings totalling RM150,000, which
he intends to pay into his bank account on 1 January 2014 as the initial capital of the business. He realises
that this will be insufficient for his business plans, so he has applied RM100,000 loan from MARA for small
business financing. He expects he will receive the money in March 2014.

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Required:
(a) Prepare a monthly cash budget for Amirul’s business for each of the four months period ending
30 April 2014.

(b) Briefly comment on any TWO (2) matters concerning the liquidity situation, which should be
drawn to the attention of Amirul.

Question 9
Kiddos Enterprise (KE) is a company that produces and sells two high-quality kid’s toy called Smart Kid
(SK) and Genius Kid (GK). The budgeted sales volumes and prices for the month of December 2018 are as
follows:

Product Units Price

SK 4300 RM73
GK 8500 RM92

Closing stock of finished products will be sufficient to meet 10% of sales for the month. Opening stocks
of product SK is 400 units and GK 800 units.

The purchased materials called C01 and C02 are used in the products shown below:
Product (per unit) C01 C02
SK 5 units 6 units
GK 7 units 3 units
Price (per unit) RM7 RM3

The opening materials stocks for C01 and C02 are expected to be 400 units and 750 units respectively. It
is the company’s policy to hold stocks of materials at the end of each month equal to 15% of production
requirements for the month.

The standard direct labour hours and rates for two departments, Assembly and Finishing for December
2018 are as follows:

Product (per unit) Assembly Finishing

SK 10 minutes 12 minutes
GK 8 minutes 10 minutes
Labour rate (per hour) RM15 RM10

Manufacturing overhead cost for the month is RM6,500 for Assembly and RM2,530 for Finishing
Department. Every month a predetermined direct labour hour rate is computed in each department for
manufacturing overhead and applied to items produced in that month.

Required:

Prepare the following budgets for the month of December:

(a) Sales budget in units and values.

[1.5 marks]

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(b) Production budget in units.
[2.5 marks]
(c) Materials usage and purchase in units and values.
[5.5 marks]
(d) Direct labour budget in hour and values.
[4.5 marks]
(e) Manufacturing overhead rate.
[1 mark]

Question 10
Cemerlang Sdn Bhd (CSB) is a small enterprise making individually design bookshelf. The company
prepares its budgets in advance for each quarter. The accountant has provided a range of information
for the next quarter to 31 December 2018 for one of its products, Lava bookshelf, as follows:

1. Projected sales of Lava bookshelf for the next four months:

October November December January

RM675,000 RM369,000 RM540,000 RM432,000

The recommended selling price for a unit of Lava bookshelf is RM90.

2. To reduce the risk of disruption to manufacturing, CSB has a policy of maintaining 20% of the next
month’s unit sales in closing inventory of Lava bookshelf.

3. The standard cost card for each of the bookshelf is shown below:
RM
Direct materials:
- Birch plywood sheets (@ RM24 per sheet) 36.00
- Wooden dowels (@ RM0.10 each) 2.80

The cost of the plywood sheets and wooden dowels has not changed in the past two years and is
not expected to change until March 2019.

4. The company estimates that at 1 October 2018 inventory levels will be 2,000 sheets of birch
plywood and 5,000 units of wooden dowels. For both direct materials, the company intends to
double inventory held at 1 October 2018 and maintain this level of closing inventory each month
until 31 March 2019.

Required:
(a) Prepare a production budget in units for October, November and December 2018.

(b) Prepare a monthly materials usage (in unit) and materials purchase budget (in RM) for October,
November and December 2018.

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Question 11
Viano Sdn. Bhd. (VSB) is a company that manufactures and sells a Covid19 high-tech device in the form
of a wristband called Cotrack. The device is aimed to control movement and it’s mandatory for three
categories, namely individuals who have tested positive for Covid-19, persons under investigation (PUI)
or close contacts of Covid-19 patients and persons under surveillance (PUS). Cotrack can be worn for 10
days.

VSB is excited about the future profits that the business will generate. They have forecasted that sales
will grow to 26,000 units of Cotrack per month within five months and will be at that level for the
remainder of the second year of operation. However, VSB realizes that the business has insufficient
capital for their business plans, and they have applied loan from finance institution amount of
RM500,000. They expect to receive the money in February. Extracts from the company’s business plan
are shown below.

Sales: The forecast sales for the first five months are:
Month (Year 2) January February March April May
Cotrack (units) 10,000 15,000 20,000 24,000 26,000

The selling price has been set at RM200 per Cotrack.

Sales receipts: Sales will be mainly to large retail outlets. The pattern for the receipt of payment is
expected to be as follows:
Time of payment % of sales value
Immediate 15
One month later 25
Two months later 40
Three months later 15

The balance represents anticipated bad debts. A 4% discount will be given for immediate payment.

Production: The budget production volumes in units are:

Month Units
January 14,500
February 16,500
March 21,200
April 24,600

Variable production cost: The budgeted variable production cost comprising:

RM
Direct materials per unit 30.00
Direct wages per hour 5.00
Variable production overheads per unit produced 20.00

Direct materials: Payment for purchases will be made in the month following receipt. To produce Cotrack,
2 units of materials will be used. Ending inventory of materials in December year one equal to 50% of
the following month’s material requirement. It is the company policy to hold inventory at the end of each

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month equal to 20% at of the following month’s material requirements. The direct materials cost includes
the cost of an essential component that will be bought in from a specialist manufacturer.

Direct wages: To produce Cotrack, 3 labour hours will be used, and the direct wages will be paid in the
month in which the production occurs.

Variable production overheads: 65% will be paid in the month in which production occurs and the
remainder will be paid one month later.

Fixed overhead costs: Fixed overheads are estimated at RM840,000 per annum and are expected to be
incurred in equal amounts each month. 60% of the fixed overhead costs will be paid in the month in
which they are incurred and 15% in the following month. The balance represents depreciation of non-
current assets.

Required:

(a) Prepare sales receipts schedule for the month of January, February, and March.
[4.5 marks]

(b) Prepare material purchases budget and material payment schedule for January, February, and
March.
[5 marks]

(c) Prepare a cash budget for month of January, February, and March and for that three-month
period in total. (Show all workings)
[15.5 marks]

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