budjet prepartion problem and solution

[wadah bushra sulieman]

Budget Preparation

The following information is availed to you by Gumana Ltd, a manufacturing company which is producing and selling a single product, during the month of December, 2006 a time at which the company is in the process of preparing its budget for the 1st half of the year ending 31st December 2007.

(1) Sales Forecast

Month sales Forecast (unit)

January 28000

February 27000

May 29000

April 31000

May 26000

June 25000

July 23000

August 27000

(2) The unit content

The production of one unit of the product requires the usage of 6 kilograms of direct material at an estimated purchase price of LS 8 per kilogram and 5 direct labour working hours at an estimated wage rate of LS 6 per direct labour hour. Variable production overheads are charged into the cost of production of the unit produced at the rate of LS 4 per direct labour hour. Fixed production overheads are estimated for the 1st half of the year 2007 at LS 4118750 and are absorbed into the cost of production of the unit produced by an absorption rate calculated on the basis of the budgeted direct labour hours for the period.

(3) The company’s polices

In respect of the closing stock of finished goods, the company’s policy is to keep on hand at the end of each month a closing stock equivalent to 25% of the sales forecast quantity in the month that follows the month at the end of which the stock is held. As for the direct material closing stock the company’s policy is to keep on hand at the end of each month an equivalent of 20% of the productions’ requirements of the material in the month that follows the month at the end of which the stock in held. These policy requirements will be adhered to by the end of December, 2006. Sales overheads and administration overheads are estimated and charged into the cost of sales at LS 8and LS 5 per unit respectively. The selling price per unit is determined by adding a profit margin of 20 % of the total budgeted cost of the unit to that cost.

Required

1- Prepare monthly by month and in total for the 1st half of the year2007 the following.

(i) Production budget.

(ii) Material usage budget.

(iii) Material purchase budget.

(iv) Direct labour budget.

(v) Variable production overheads budget.

2- Calculate the budgeted fixed production overheads absorption rate.

3- Calculate the production cost, the total cast and the budgeted selling price per unit.

4- Prepare in full details the budgeted profit and loss account as it would appear on 30th June 2007.