A company produces two products XML, and ZML using two types of raw materials K and Q. The accountant is preparing budgets for the year ended 31 December 2012. Expectations for 2012 include the following:

1. Production and Sales

XML ZML

Budgeted sales in units 6 000 4 800

Budgeted unit selling price $500 $1 000

Opening stock finished goods

In units 600 700

In dollars $144 000 $182 000

Budgeted closing stock in units 1 250 650

Normal losses occur at the end of the production process and 5% of the outputs of both products have to be scrapped. It is company policy that stock of finished goods is valued on a first in first out basis. There is no opening or closing work in progress.

2. Direct materials

K Q

Raw materials per unit of

production

XML 10kg 5kg

ZML 6kg 8kg

XML ZML

Opening stock of raw materials

In kg 20 000 10 000

In dollars 200 000 120 000

Budgeted closing stock in kg 12 000 12 000

Budgeted purchase price per kg $10 $12

3. Direct Labour

Standard direct labour time required for producing one unit of XML and ZML are 30 minutes and 45 minutes respectively. Labour is paid at the rate of $120 per hour.

4. Factory overheads

The budgeted factory overheads for the year 2012 are $362 500. These overheads are to be absorbed in the production cost on a direct labour hour basis.

Required

Prepare the following budgets for the year ended 31 December 2012:

(a) Sales budget for each of the two products [2]

(b) Production budget (in units) for each of the two products. [4]

(c) Direct material purchases budget for each of the two materials [3]

(d) Direct labour budget for each of the two products [2]

(e) Pre-determined factory overhead absorption rate [1]

(f) Factory cost of goods produced showing all cost elements for each of the two products [5]

(g) Unit production cost for each of the two products, rounded to the nearest dollar [1]

(h) Budgeted cost of goods sold for each of the two products [3]

(i) Explain the reason why some companies normally prepare the sales budget first among all functional budgets while the other companies start with the labour or other budget first in the budgetary planning process. [4]