Intermediate: Budgeted profit and loss account and balance sheet plus a description of how overheads are allocated to products A company is preparing an outline budget for the year ahead based upon some broad assumptions about its business. These assumptions are as follows:

Opening stock of finished goods 40000 units.

Closing stock of finished goods 50% increase over opening stock.

Stock turnover 6 times (based on average stock).

Gross profit to sales 40%.

Production Costs:

Raw materials Direct labour

£0.16 per unit

£0.20 per unit Fixed production overhead £0.18 per unit (based upon budgeted production volume)

Variable selling and administration expenses 4% of sales.

Rxed selling and administration expenses £81 000.

Opening stock of raw materials £20 000

(these are expected to remam at the same monetary value throughout the budget year).

Both opening and closing stocks of finished goods will be valued at the above total unit production cost.

Fixed production overhead includes depreciation of fixed assets of

£20 000 All fixed assets will be 2 years old at the end of the budget year and are depreciated on a straight-line basis at 10% per annum.

Creditors total £16 000, and are expected to remain at the same level. The balance of debtors at the beginning of the year is expected to be £20 000. The debtors collection period will be 30 days (assume that sales will be even, with 360 days in the year). A bank overdraft of £18000 is anticipated at the beginning of the budget year.

Required:

(a) Prepare the budgeted profit and loss account for the year ahead. (8 marks)

(b) Prepare the balance sheet as at the end of the budget year.

(c) Explain how the budgeted production overhead cost per unit of output would be established by a company which uses predetermined overhead rates for each production department in its factory, based upon direct labour hours