Intermediate: Sales forecasting removing seasonal variations, flexible budgets and budget preparation You work as the assistant to
Question:
Intermediate: Sales forecasting removing seasonal variations, flexible budgets and budget preparation You work as the assistant to the management accountant for Henry Limited, a medium-sized manufacturing company. One of its products, product P, has been very successful in recent years, showing a steadily increasing trend in sales volumes. Sales volumes for the four quarters of last year were as follows:
A new assistant has recently joined the market¬ ing department and she has asked you for help in understanding the terminology which is used in preparing sales forecasts and analysing sales trends. She has said: ‘My main problem is that I do not see why my boss is so enthusiastic about the growth in product P’s sales volume. It looks to me as though the rate of growth is really slowing down and has actually stopped in quarter 4.1 am told that I should be looking at the deseasonalized or seasonally adjusted sales data but I do not under¬ stand what is meant by this.’
You have found that product P’s sales are subject to the following seasonal variations:
Task 1
(a) Adjust for the seasonal variations to calculate deseasonalized or seasonally adjusted sales volume (i.e. the trend figures) for each quarter of last year.
(b) Assuming that the trend and seasonal vari¬ ations will continue, forecast the sales volumes for each of the four quarters of next year.
Task 2 Prepare a memorandum to the marketing assistant which explains:
(a) what is meant by seasonal variations and deseaonalized or seasonally adjusted data;
(b) how they can be useful in analysing a time series and preparing forecasts.
Use the figures for product P’s sales to illustrate your explanations.
Task 3 Using the additional data below, prepare a further memorandum to the marketing assistant which explains the following:
(a) why fixed budgets are useful for planning but flexible budgets may be more useful to enable management to exercise reflective control over distribution costs,
(b) two possible activity indicators which could be used as a basis for flexing the budget for distribution costs,
(c) how a flexible budget cost allowance is calcu¬ lated and used for control purposes. Use your own examples and figures where appropriate to illustrate your explanations.
Additional data:
The marketing assistant has now approached you for more help in understanding the company’s plan¬ ning and control systems. She has been talking with the distribution manager, who has tried to ex¬ plain how flexible budgets are used to control distribution costs within Henry Limited. She makes the following comment. ‘I thought that budgets were supposedto provide atarget to plan ouractivities and against which to monitor our costs. How can we possibly plan and control our costs if we simply change the budgets when activity levels alter?’
Product Q is another product which is manu¬ factured and sold by Henry Limited. In the process of preparing budgetary plans for next year the following information has been made available to you.
1. Forecast sales units of product Q for the year= 18 135 units.
2. Closing stocks of finished units of product Q at the end of next year will be increased by 15% from their opening level of 1200 units.
3. All units are subject to quality control check. The budget plans are to allow for 1% of all units checked to be rejected and scrapped at the end of the process. All closing stocks will have passed this quality control check.
4. Five direct labour hours are to be worked for each unit of product Q processed, including those which are scrapped after the quality control check. Of the total hours to be paid for, 7.5% are budgeted to be idle time.
5. The standard hourly rate of pay for direct employees is £6 per hour.
6. Material M is used in the manufacture of product Q. One finished unit of producing Q contains 9 kg of M but there is a wastage of 10% of input of material M due to evapora¬ tion and spillage during the process.
7. By the end of next year stocks of material M are to be increased by 12% from their opening level of 8000 kg. During the year a loss of 1000 kg is expected due to deterioration of the material in store.
Task 4 Prepare the following budgets for the forthcoming year:
(a) production budget for product Q, in units;
(b) direct labour budget for product Q, in hours and in £;
(c) material usage budget for material M, in kg;
(d) material purchases budget for material M, in kg.
Task 5 The supplier of material M was warned that avail¬ able supplies will be below the amount indicated in your budget for Task 4 part
(d) above. Explain the implications of this shortage and suggest four possible actions which could be taken to overcome the problem. For each suggestion, identify any problems which may arise.
AAT Technicians Stage
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