Intermediate: Preparation of functional budgets BX Ltd manufactures two products, Plain and Fancy, using one basic raw
Question:
Intermediate: Preparation of functional budgets BX Ltd manufactures two products, Plain and Fancy, using one basic raw material and one grade of labour. Shown below are the actual operating results achieved for the eleven months ended November 1979.
The company operates a standard costing system and during the above period, the actual material consumption was as specified in the standard, which for Plain is 3 kg per unit, and for Fancy, 4 kg per unit. The standard wage rate is £3 per hour. The standard labour cost of Plain is £1 .50 per unit and Fancy £3 per unit. Labour achieved standard efficiency but, throughout the above period, the actual wage rate paid was higher than standard and consequently an adverse rate variance of £2000 was incurred. Overheads were as specified in the standard, variable overheads varying directly with labour hours worked. There was no change in any stock levels during the period.
Budgeted production for 1980 is 6000 units of Plain and 4000 units of Fancy. Material stocks are budgeted to decrease by 2000 kg, there will be no change in any other stocks. The standard material consumption per unit will be as specified in 1979 and, after careful consideration, it has been agreed that the 1980 standard material price will be the actual average price paid during the eleven months ended November 1979.
The actual wage rate for 1979 will be increased by 70p per hour for 1980, 50 per hour of which is the result of a productivity agreement which will enable the company to reduce its standard lime for each product by 20%. Budgeted overheads will be at the same rate as shown for 1979 and it may be assumed there are no wages included in overheads.
Required:
(a) Calculate the material purchase budget and the wages budget, showing both quantities and values for the year ended December 1980. (16 marks)
(b) Calculate the net cost savings which the company should achieve during 1980 as a result of the productivity agreement, assuming that there is no restriction on the number of labour hours which could be made available, if required.
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