You have recently been appointed as the management accountant to Alderley Ltd, a small company manufacturing two products, the Elgar and the Holst. Both products use the same type of material and labour but in different proportions.
In the past, the company has had poor control over its working capital. To remedy this, you have recommended to the directors that a budgetary control system be introduced.
This proposal has, now, been agreed.
Because Alderley Ltd’s production and sales are spread evenly over the year, it was agreed that the annual budget should be broken down into four periods, each of 13 weeks, and commencing with the 13 weeks ending 4 April. To help you in this task, the sales and production directors have provided you with the following information:
1 Marketing and production data:

2 Production labour:
The 24 production employees work a 37-hour, 5-day week and are paid £8 per hour. Any hours in excess of this involve Alderley in paying an overtime premium of 25 per cent. Because of technical problems, which will continue over the next 13 weeks, employees are only able to work at 95 per cent efficiency compared to standard.
3 Purchasing and opening inventory:
The production director believes that raw materials will cost £12 per kg over the budget period. He also plans to revise the amount of inventory being kept. He estimates that the inventory levels at the commencement of the budget period will be as follows:

4 Closing inventory:
At the end of the 13-week period closing stocks are planned to change. On the assumption that production and sales volumes for the second budget period will be similar to those in the first period:
• Raw materials stocks should be sufficient for 13 days’ production.
• Finished stocks of the Elgar should be equivalent to 6 days’ sales volume.
• Finished stocks of the Holst should be equivalent to 14 days’ sales volume.
Task 1 Prepare in the form of a statement the following information for the 13-week period to 4 April:

(a) the production budget in units for the Elgar and Holst

(b) the purchasing budget for Alderley Ltd in units

(c) the cost of purchases for the period

(d) the production labour budget for Alderley Ltd in hours

(e) the cost of production labour for the period.
Note: Assume a 5-day week for both sales and production.
The managing director of Alderley Ltd, Alan Dunn, has also only recently been appointed. He is keen to develop the company and has already agreed to two new products being developed. These will be launched in 18 months’ time. While talking to you about the budget, he mentions that the quality of sales forecasting will need to improve if the company is to grow rapidly. Currently, the budgeted sales figure is found by initially adding 5 per cent to the previous year’s sales volume and then revising the figure following discussions with the marketing director. He believes this approach is increasingly inadequate and now requires a more systematic approach.
A few days later, Alan Dunn sends you a memo. In that memo, he identifies three possible strategies for increasing sales volume. They are:
• more sales to existing customers • the development of new markets • the development of new products.
He asks for your help in forecasting likely sales volumes from these sources.
Task 2 Write a brief memo to Alan Dunn. Your memo should:

(a) identify four ways of forecasting future sales volume

(b) show how each of your four ways of forecasting can be applied to one of the sales strategies identified by Alan Dunn, and justify your choice

(c) give two reasons why forecasting methods might not prove to be accurate.

Transcribed Image Text:

Budgeted sales for 13 weeks (units) Material content per unit (kg) Labour per unit (standard hours) Elgar Holst 845 1,235 7 8 8 5