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7/31/2019 Budgeting Illustration
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Management Accounting and Business
Lecture 7, Topic 5
Lecture Illustration –
Budgeting for a Retail Firm
Amelia and King, a small retailer has provided you with the following estimates forthe coming period:
Month Sales (Units)March 10,000
April 15,000
May 10,000June 15,000
July 10,000
Budgeted selling price is $15 per unit.
Management has a policy that closing inventory must equal 25% of that month’s
sales.
The price of purchases is currently $7.00 per unit and is expected to increase to$7.50 per unit on 1 June.
Collections from customers are as follows:
o 60% in the month following the month of sale
o 30% two months after the month of sale
o 10% three months after the month of sale
The following information regarding operating expenses is available:o Marketing expenses are estimated to be $20,000 per month.
o In addition to marketing expenses, sales commission of 5% of sales is paid inthe month following the month of sale.
o Administration expenses are estimated to be $12,000 per month, includingdepreciation of $900 per month.
o Administration expenses include insurance of $6,000 per annum, paid in June
of each year.o All expenses and purchases are paid in the month incurred, unless otherwise
specified.
Required:
a) Prepare a purchases budget in units and dollars for the months of June and July
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e) Calculate the budgeted operating expenses for the months of June and July.
Note: Expenses are recorded using the principles of accrual accounting.
f) Calculate the budgeted cash outflow for operating expenses for the months of June
and July.Note: Cash outflow is recognised in the period in which the cash payment ismade.
a) Purchases Budget for the months of June and July
June July
Sales (units)+ Closing inventory (units) 25% of current month’s sales
= Required units
- Opening inventory (units) 25% of previous month’s sales
= Purchases (units)x price per unit
= Purchases ($)
b) Budgeted Cost of Goods Sold Schedule for June
Units sold
Units from opening inventory
Units from purchases (15,000 – 2,500)Cost of goods sold
c) Valuing closing inventory using FIFO for June
Closing inventory (units)
x purchase price
Value of closing inventory using FIFO
Valuing closing inventory using Weighted Average for June
Closing inventory (units)
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Management Accounting and Business
Lecture 8, Topic 5 cont.
Lecture Illustration – Budgeting for a Manufacturing Firm
A firm’s budget reveals the following estimated monthly sales in units:
January 10,000February 12,000March 15,000April 18,000May 20,000
The firm’s management has an inventory policy for finished goods of holding, at thestart of any particular month, 20% of that month’s expected sales. Closing inventoryis valued at the average cost of the current month’s production. Assume openinginventory of finished goods for January is valued at $50 per unit.
To produce one unit of finished product the manufacturer requires:
• 3 kgs of direct material
• 2 hours of direct labour (@ $10 per hour)
• variable manufacturing overhead is $5 per unit
On 1st March the purchase price of direct materials will increase from $8 to $9 per
unit.
The firm’s inventory policy for direct materials is that opening inventory each monthmust equal 10% of that month’s expected production requirements. Materials areissued to production using the first in first out (FIFO) method of inventory valuation.Assume opening inventory of direct materials is valued at $8 per kilogram.
Fixed overhead is applied to production using a predetermined plant-wide rate basedon direct labour hours. Annual budgeted fixed overhead is $180,000. Annualbudgeted direct labour hours is 360,000 hours.
Assume WIP inventory is negligible and therefore ignore.
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MAB – Lecture 8, Topic 5 cont. Illustration Page 3 of 4
Cost of Direct Materials Used Budget for quarter ending 31 March
January February March Total
Direct material usage (kg) 15. From purchases budget
- opening inventory (kg) 16. From purchases budget
= current month's purchases (kg) 17. Calculation
Cost of materials from inventory 18. Opening stock kg x prev month’s price
Cost of materials from purchases 19. Current mth’s purch (kg) x current price
Total Cost of Materials Used 20. Calculation (total)
Direct Labour Budget for quarter ending 31 March
January February March Total
Estimated production (units) 21. From production budget
x direct labour hours per unit 22. Given
Total direct labour hours 23. Calculation
x cost per hour 24. Given
= Direct Labour Cost 25. Calculation (to COGM budget)
Predetermined fixed overhead rate = 180,000/360,000 = $0.50 per direct labour hour
Manufacturing Overhead Budget for quarter ending 31 March
January February March Total
Production (units) 26. From production budget
x variable cost per unit 27. Given
= variable overhead 28. Calculation
+ fixed cost 29. Predetermined rate x direct labour hours
Total Overhead 30. Calculation (to COGM budget)
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