1 ILLUSTRATIVE QUESTION ON BUDGETING PAK Engineering produces two products, Cake and Coke. The budget for the forthcoming year to 31 March 2008 is to be prepared. Expectations for the forthcoming year include the following. a) PAK ENGINEERING STATEMENT OF FINANCIAL POSITION AS AT 1 APRIL 2007 ASSETS GHS GHS Non-Current assets Land and buildings 45,000 Plant and equipment at cost 187,000 Less accumulated depreciation 75,000 112,000 Current assets Raw materials 7,650 Finished goods 23,600 Receivables 19,500 Cash 4,300 55,050 212,050 EQUITY AND LIABILITIES Equity Share capital 150,000 Accumulated profits 55,250 205,250 Current liabilities Payables 6,800 212,050 b) Finished products The sales director has estimated the following. Cake Coke i. Demand for the company's products 4,500 units 4,000 units ii. Selling price per unit GHS32 GHS44 iii. Closing inventory of finished products at 31/03/2008 400 units 1,200 units iv. Opening inventory of finished products at 1/04/2007 900 units 200 units v. Unit cost of this opening inventory GHS20 GHS28 vi. Amount of plant capacity required for each unit of product Machining 15 min 24 min Assembling 12 min 18 min vii. Raw material content per unit of each product Material A 1.5 kilos 0.5 kilos Material B 2.0 kilos 4.0 kilos 2 viii. Direct labour hours required per unit of each product 6 hours 9 hours Finished goods are valued on a FIFO basis at full production cost c) Raw materials Material A Material B i. Closing inventory requirement in kilos at 31 March 2008 600 1,000 ii. Opening inventory at 1 April 2007 in kilos 1,100 6,000 iii. Budgeted cost of raw materials per kilo GHS1.50 GHS1.00 Actual costs per kilo of opening inventories areas budgeted cost for the coming year. d) Direct labour The standard wage rate of direct labour is GHS1.60 per hour e) Production overhead Production overhead is absorbed on the basis of machining hours, with separate absorption rates for each department. The following overheads are anticipated in the production cost centre budgets. Machining Assembling department department GHS GHS Supervisors' salaries 10,000 9,150 Power 4,400 2,000 Maintenance and running costs 2,100 2,000 Consumables 3,400 500 General expenses 19,600 5,000 39,500 18,650 Depreciation is taken at 5% straight line on plant and equipment. A machine costing the company GHS20,000 is due to be installed on 1 October 2007 in the machining department, which already has machinery installed to the value of GHS100,000 (at cost). Land worth GHS180,000 is to be required in December 2007. f) Selling and administration expenses GHS Sales commissions and salaries 14,300 Travelling and distribution 3,500 Office salaries 10,100 General administration expenses 2,500 30,400 g) There is no opening or closing work in progress and inflation should be ignored. 3 h) Budgeted cash flows are as follows. Quarter 1 Quarter 2 Quarter 3 Quarter 4 Receipts from customers 70,000 100,000 100,000 40,000 Payments: Materials 7,000 9,000 10,000 5,000 Wages 33,000 20,000 11,000 15,000 Other costs and expenses 10,000 100,000 205,000 5,000 Required: Prepare the following for the year ended 31 March 2008 for PAK Engineering Ltd. a) Sales budget b) Production budget (in quantities) c) Plant utilisation budget d) Direct material usage budget e) Direct labour budget f) Factory overhead budget g) Computation of the factory cost per unit for each product h) Direct material purchases budget i) Cost of goods sold budget j) Cash budget k) A budgeted income statement account and statement of financial position