A company producing and selling a single product expects the following trading results for the year just ending:

Budgets are now being prepared for the year ahead. The following information is provided:
(1) A selling price reduction from £9 to £8 per unit is expected to increase sales volume by 50%.
(2) Because of increased quantities purchased a 5% quantity discount will be obtained on the purchase of raw materials. Material usage per unit of output is expected to be 98% of the current year.
(3) Hourly direct wage rates will increase by 10%. Labour efficiency should remain the same. 20 000 units will be produced in overtime hours at a premium of 25%. Overtime premium is treated as a direct cost.
(4) Variable selling overhead is expected to increase in total proportionately with total sales revenue.
(5) Variable production and distribution overhead should increase in total in proportion to the increase in sales volume.
(6) Fixed overhead is forecast at 20% above the level for the current year.
(7) Monthly production will be scheduled so that finished goods stocks at the end of a month are sufficient to meet sales quantities forecast for the following one and a half months.
(8) Materials will be purchased so that closing stocks of materials at the end of a month are sufficient to meet production requirements in the following month.
(9) Monthly sales for the first six months are forecast as:

You are to assume that:
(i) Prices and efficiency have been at a constant level throughout the year just ending.
(ii) Stocks of materials and finished goods at the end of the current year are consistent with the above assumptions for the year ahead e.g.
closing stocks of raw materials will be sufficient for production requirements in month 1 of the new year.
Required:

(a) Prepare a budgeted profit statement for the year ahead in marginal costing format. (40 marks)

(b) A monthly production budget for the first quarter of the new year.

Transcribed Image Text:

000 000 Sales Costs: Materials: direct Labour: direct indirect fixed 900 200 120 38 Other production overhead: variable 50 fixed 80 Administration overhead: fixed 78 Selling overhead: variable 63 fixed 44 Distribution overhead: variable 36 fixed 20 729 Net profit 171