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Zeresh Limited provides the following information from its sales budget for 2014. Prepare the production budget, purchases budget, calculate inventory values, prepare manufacturing and trading accounts, and state advantages/disadvantages of budgetary control.

Accounting

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Step-by-step solution

18 steps

Part (a)(i): Production Budget

  1. Calculate desired ending finished goods inventory for each month.

    Desired ending inventory is 20%20\% of the following month's sales.

    • January: 0.20×11,000 units (Feb sales)=2,200 units0.20 \times 11,000 \text{ units (Feb sales)} = 2,200 \text{ units}
    • February: 0.20×11,000 units (Mar sales)=2,200 units0.20 \times 11,000 \text{ units (Mar sales)} = 2,200 \text{ units}
    • March: 0.20×12,000 units (Apr sales)=2,400 units0.20 \times 12,000 \text{ units (Apr sales)} = 2,400 \text{ units}
    • April: 0.20×12,000 units (May sales)=2,400 units0.20 \times 12,000 \text{ units (May sales)} = 2,400 \text{ units}
    • May: 0.20×14,000 units (Jun sales)=2,800 units0.20 \times 14,000 \text{ units (Jun sales)} = 2,800 \text{ units}

  2. Calculate beginning finished goods inventory for each month.

    Beginning inventory for a month is the ending inventory of the previous month. For January, it's 20%20\% of January sales.

    • January: 0.20×10,000 units (Jan sales)=2,000 units0.20 \times 10,000 \text{ units (Jan sales)} = 2,000 \text{ units}
    • February: 2,200 units (Jan ending inventory)2,200 \text{ units (Jan ending inventory)}
    • March: 2,200 units (Feb ending inventory)2,200 \text{ units (Feb ending inventory)}
    • April: 2,400 units (Mar ending inventory)2,400 \text{ units (Mar ending inventory)}
    • May: 2,400 units (Apr ending inventory)2,400 \text{ units (Apr ending inventory)}

  3. Calculate production units for each month.

    Production = Sales + Desired Ending Inventory - Beginning Inventory.

    MonthSales (Units)Add: Desired End Inv (Units)Less: Beg Inv (Units)Production (Units)January10,0002,2002,00010,200February11,0002,2002,20011,000March11,0002,4002,20011,200April12,0002,4002,40012,000May12,0002,8002,40012,400\begin{array}{|l|r|r|r|r|r|} \hline \textbf{Month} & \textbf{Sales (Units)} & \textbf{Add: Desired End Inv (Units)} & \textbf{Less: Beg Inv (Units)} & \textbf{Production (Units)} \\ \hline \text{January} & 10,000 & 2,200 & 2,000 & 10,200 \\ \text{February} & 11,000 & 2,200 & 2,200 & 11,000 \\ \text{March} & 11,000 & 2,400 & 2,200 & 11,200 \\ \text{April} & 12,000 & 2,400 & 2,400 & 12,000 \\ \text{May} & 12,000 & 2,800 & 2,400 & 12,400 \\ \hline \end{array}

    The production budget for January to May 2014 is:

    • January: 10,200 units\boxed{\text{10,200 units}}
    • February: 11,000 units\boxed{\text{11,000 units}}
    • March: 11,200 units\boxed{\text{11,200 units}}
    • April: 12,000 units\boxed{\text{12,000 units}}
    • May: 12,400 units\boxed{\text{12,400 units}}

    Part (a)(ii): Raw Materials Purchases Budget

  4. Calculate raw materials needed for production for each month (in kg).

    Each unit requires 0.5 kg0.5 \text{ kg} of raw materials.

    • January: 10,200 units×0.5 kg/unit=5,100 kg10,200 \text{ units} \times 0.5 \text{ kg/unit} = 5,100 \text{ kg}
    • February: 11,000 units×0.5 kg/unit=5,500 kg11,000 \text{ units} \times 0.5 \text{ kg/unit} = 5,500 \text{ kg}
    • March: 11,200 units×0.5 kg/unit=5,600 kg11,200 \text{ units} \times 0.5 \text{ kg/unit} = 5,600 \text{ kg}
    • April: 12,000 units×0.5 kg/unit=6,000 kg12,000 \text{ units} \times 0.5 \text{ kg/unit} = 6,000 \text{ kg}
    • May: 12,400 units×0.5 kg/unit=6,200 kg12,400 \text{ units} \times 0.5 \text{ kg/unit} = 6,200 \text{ kg} (for April's ending inventory)

  5. Calculate desired ending raw materials inventory for each month (in kg).

    Desired ending inventory is half a month's expected usage in the following month.

    • January: 0.5×5,500 kg (Feb usage)=2,750 kg0.5 \times 5,500 \text{ kg (Feb usage)} = 2,750 \text{ kg}
    • February: 0.5×5,600 kg (Mar usage)=2,800 kg0.5 \times 5,600 \text{ kg (Mar usage)} = 2,800 \text{ kg}
    • March: 0.5×6,000 kg (Apr usage)=3,000 kg0.5 \times 6,000 \text{ kg (Apr usage)} = 3,000 \text{ kg}
    • April: 0.5×6,200 kg (May usage)=3,100 kg0.5 \times 6,200 \text{ kg (May usage)} = 3,100 \text{ kg}

  6. Calculate beginning raw materials inventory for each month (in kg).

    Beginning inventory for a month is the ending inventory of the previous month. For January, it's half of January's usage.

    • January: 0.5×5,100 kg (Jan usage)=2,550 kg0.5 \times 5,100 \text{ kg (Jan usage)} = 2,550 \text{ kg}
    • February: 2,750 kg (Jan ending inventory)2,750 \text{ kg (Jan ending inventory)}
    • March: 2,800 kg (Feb ending inventory)2,800 \text{ kg (Feb ending inventory)}
    • April: 3,000 kg (Mar ending inventory)3,000 \text{ kg (Mar ending inventory)}

  7. Calculate raw materials purchases in kg for each month.

    Purchases (kg) = Materials Needed for Production + Desired Ending Inventory - Beginning Inventory.

    MonthNeeded for Prod (kg)Add: Desired End Inv (kg)Less: Beg Inv (kg)Purchases (kg)January5,1002,7502,5505,300February5,5002,8002,7505,550March5,6003,0002,8005,800April6,0003,1003,0006,100\begin{array}{|l|r|r|r|r|} \hline \textbf{Month} & \textbf{Needed for Prod (kg)} & \textbf{Add: Desired End Inv (kg)} & \textbf{Less: Beg Inv (kg)} & \textbf{Purchases (kg)} \\ \hline \text{January} & 5,100 & 2,750 & 2,550 & 5,300 \\ \text{February} & 5,500 & 2,800 & 2,750 & 5,550 \\ \text{March} & 5,600 & 3,000 & 2,800 & 5,800 \\ \text{April} & 6,000 & 3,100 & 3,000 & 6,100 \\ \hline \end{array}

  8. Calculate raw materials purchases in dollars for each month.

    Raw material cost is $3 per kilo.

    • January: 5,300 \text{ kg} \times \3/kg = $15,900$
    • February: 5,550 \text{ kg} \times \3/kg = $16,650$
    • March: 5,800 \text{ kg} \times \3/kg = $17,400$
    • April: 6,100 \text{ kg} \times \3/kg = $18,300$

    The raw materials purchases budget for January to April 2014 is:

    • January: \boxed{\text{5,300 kg, \15,900}}$
    • February: \boxed{\text{5,550 kg, \16,650}}$
    • March: \boxed{\text{5,800 kg, \17,400}}$
    • April: \boxed{\text{6,100 kg, \18,300}}$

    Part (b): Inventory Valuation

  9. Calculate finished goods inventory value.

    The total production cost per unit is $11.

    • 1 January 2014 (Beginning FG Inventory):
      • Units: 2,000 units2,000 \text{ units} (from a(i) Step 2)
      • Value: 2,000 \text{ units} \times \11/unit = \boxed{$22,000}$
    • 30 April 2014 (Ending FG Inventory):
      • Units: 2,400 units2,400 \text{ units} (from a(i) Step 1 for April)
      • Value: 2,400 \text{ units} \times \11/unit = \boxed{$26,400}$

  10. Calculate raw materials inventory value.

    Raw material cost is $3 per kilo.

    • 1 January 2014 (Beginning RM Inventory):
      • Kilos: 2,550 kg2,550 \text{ kg} (from a(ii) Step 3)
      • Value: 2,550 \text{ kg} \times \3/kg = \boxed{$7,650}$
    • 30 April 2014 (Ending RM Inventory):
      • Kilos: 3,100 kg3,100 \text{ kg} (from a(ii) Step 2 for April)
      • Value: 3,100 \text{ kg} \times \3/kg = \boxed{$9,300}$

    Part (c)(i): Summarised Manufacturing Account (Jan 1 - Apr 30, 2014)

  11. Calculate total raw materials consumed for the period.

    • Opening Raw Materials (1 Jan 2014): \7,650$ (from part b)
    • Total Purchases of Raw Materials (Jan-Apr): \15,900 + $16,650 + $17,400 + $18,300 = $68,250$
    • Closing Raw Materials (30 Apr 2014): \9,300$ (from part b)
    • Direct Materials Consumed = Opening RM + Purchases - Closing RM
      • = \7,650 + $68,250 - $9,300 = $66,600$

  12. Calculate total conversion costs for the period.

    • Direct materials cost per unit: 0.5 \text{ kg/unit} \times \3/kg = $1.50/\text{unit}$
    • Conversion cost per unit: Total production cost per unit - Direct materials cost per unit
      • = \11/unit - $1.50/\text{unit} = $9.50/\text{unit}$
    • Total Production Units (Jan-Apr): 10,200+11,000+11,200+12,000=44,400 units10,200 + 11,000 + 11,200 + 12,000 = 44,400 \text{ units}
    • Total Conversion Costs = 44,400 \text{ units} \times \9.50/unit = $421,800$

  13. Prepare the summarised manufacturing account.

    Zeresh LimitedSummarised Manufacturing AccountFor the four months ended 30 April 2014$Opening Raw Materials (1 Jan 2014)7,650Add: Purchases of Raw Materials68,250Less: Closing Raw Materials (30 Apr 2014)(9,300)Direct Materials Consumed66,600Add: Conversion Costs421,800Cost of Goods Manufactured488,400\begin{array}{|l|r|} \hline \textbf{Zeresh Limited} & \\ \textbf{Summarised Manufacturing Account} & \\ \textbf{For the four months ended 30 April 2014} & \textbf{\$} \\ \hline \text{Opening Raw Materials (1 Jan 2014)} & 7,650 \\ \text{Add: Purchases of Raw Materials} & 68,250 \\ \text{Less: Closing Raw Materials (30 Apr 2014)} & (9,300) \\ \textbf{Direct Materials Consumed} & \textbf{66,600} \\ \text{Add: Conversion Costs} & 421,800 \\ \textbf{Cost of Goods Manufactured} & \boxed{\textbf{488,400}} \\ \hline \end{array}

    Part (c)(ii): Trading Account Section of Income Statement (Jan 1 - Apr 30, 2014)

  14. Calculate total sales revenue for the period.

    • January: 10,000 \text{ units} \times \20/unit = $200,000$
    • February: 11,000 \text{ units} \times \20/unit = $220,000$
    • March: 11,000 \text{ units} \times \21/unit = $231,000$
    • April: 12,000 \text{ units} \times \21/unit = $252,000$
    • Total Sales Revenue = \200,000 + $220,000 + $231,000 + $252,000 = $903,000$

  15. Calculate cost of goods sold for the period.

    • Opening Finished Goods (1 Jan 2014): \22,000$ (from part b)
    • Cost of Goods Manufactured: \488,400$ (from part c(i))
    • Closing Finished Goods (30 Apr 2014): \26,400$ (from part b)
    • Cost of Goods Sold = Opening FG + Cost of Goods Manufactured - Closing FG
      • = \22,000 + $488,400 - $26,400 = $484,000$

  16. Prepare the trading account section.

    Zeresh LimitedTrading Account Section of Income StatementFor the four months ended 30 April 2014$Sales Revenue903,000Less: Cost of Goods SoldOpening Finished Goods (1 Jan 2014)22,000Add: Cost of Goods Manufactured488,400Less: Closing Finished Goods (30 Apr 2014)(26,400)Cost of Goods Sold(484,000)Gross Profit419,000\begin{array}{|l|r|} \hline \textbf{Zeresh Limited} & \\ \textbf{Trading Account Section of Income Statement} & \\ \textbf{For the four months ended 30 April 2014} & \textbf{\$} \\ \hline \text{Sales Revenue} & 903,000 \\ \text{Less: Cost of Goods Sold} & \\ \text{Opening Finished Goods (1 Jan 2014)} & 22,000 \\ \text{Add: Cost of Goods Manufactured} & 488,400 \\ \text{Less: Closing Finished Goods (30 Apr 2014)} & (26,400) \\ \textbf{Cost of Goods Sold} & \textbf{(484,000)} \\ \textbf{Gross Profit} & \boxed{\textbf{419,000}} \\ \hline \end{array}

    Part (d): Advantages and Disadvantages of Budgetary Control System

  17. State two advantages.

    • Planning and Coordination: Budgetary control systems compel management to plan for the future and coordinate activities across different departments, ensuring alignment towards organizational goals.
    • Performance Evaluation: Budgets provide clear benchmarks against which actual performance can be measured, allowing for identification of variances and corrective actions to improve efficiency.

  18. State two disadvantages.

    • Time-Consuming and Costly: The process of preparing, implementing, and monitoring budgets can be extensive, requiring significant time and resources from management.
    • Inflexibility: Budgets can become rigid, especially in dynamic business environments, potentially hindering a company's ability to respond quickly to unforeseen changes or new opportunities.
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