Preparation of functional budgets X plc manufactures Product X using three different raw materials. The product details are as follows:

The company is considering its budgets for next year and has made the following estimates of sales demand for Product X for July to October:

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.
At the end of the production process the products are tested: it is usual for 10% of those tested to be faulty. It is not possible to rectify these faulty units.
Raw material stocks are expected to be as follows on 1 July:

Stocks are to be increased by 20% in July, and then remain at their new level for the foreseeable future.
Labour is paid on an hourly rate based on attendance. In addition to the unit direct labour hours shown above, 20% of attendance time is spent on tasks which support production activity.
Required:

(a) Prepare the following budgets for the quarter from July to September inclusive:
(i) sales budget in quantity and value;
(ii) production budget in units;
(iii) raw material usage budget in kgs;

(iv) raw material purchases budget in kgs and value;
(v) labour requirements budget in hours and value. (16 marks)

(b) Explain the term ‘principal budget factor’ and why its identification is an important part of the budget preparation process. (3 marks)

(c) Explain clearly, using data from part (a)
above, how you would construct a spreadsheet to produce the labour requirements budget for August. Include a specimen cell layout diagram containing formulae which would illustrate the basis for the spreadsheet.

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Selling price per unit 250 Material A 3 kgs Material B 2 kgs material price 3.50 per kg material price 5.00 per kg Material C 4 kgs material price 4.50 per kg Direct labour 8 hours labour rate 8.00 per hour