ACTIVITY BASED BUDGETING

Fauji Fertilizer Ltd. manufactures Nitro-phosphorus Fertilizer.

Sales are seasonal due to different crops. The expected pattern of sales for the next year (2021) is as follows:

Quarter 1st 2nd 3rd 4th Year

Sales in tons 500 1,500 2,000 1,000 5,000

• Each ton sells for Rs.25,000. All sales are on account, and Faujis experience with cash collections is that 55% of each quarters sales are collected during the same quarter as the sale. The remaining 45% of sales is collected in the quarter after the sale. Fauji experiences negligible bad debts, and so this is ignored in the budgeting process.

• Sales in the fourth quarter of 2020 are Rs25,000,000 (1000 tons).

• Fauji desires to have 10% of the following quarters sales needs in finished-goods inventory at the end of each quarter. In first quarter of 2022, Fauji expects to have sales of 600 tons. (On December 31, 2020, Fauji expects to have 80 tons fertilizer in inventory.)

• Each ton Fertilizer requires two tons of raw material. Fauji desires to have 10% of the next quarters raw material in inventory at the end of each quarter. In first quarter of 2022, Fauji expects to have production of 650 tons. (On December 31, 2020, Fauji expects to have 105 tons of raw material in inventory.)

• The raw material price is Rs.5,000 per ton. The company buys its raw material on account and pays 65% of the resulting accounts payable during the quarter of the purchase. The remaining 35% is paid during the following quarter. (The raw-material purchases in the fourth quarter of 2020 are expected to be Rs.10,000,000.)

• Each ton of fertilizer requires 5 labor hours, whereas one labor hour costs Rs.200.

• Manufacturing-Overhead estimates for the year 2021 are as follows

Quarter 1st 2nd 3rd 4th Year

Unit-level costs:

Indirect material 24,000 72,000 96,000 48,000 240,000

Utilities 5,000 15,000 20,000 10,000 50,000

Batch-level costs:

Production runs 10 30 40 20 100

Setup 4,800 14,400 19,200 9,600 48,000

Purchasing 6,000 18,000 24,000 12,000 60,000

Quality control 6,000 18,000 24,000 12,000 60,000

Product-level costs:

Chemical engineering 10,000 10,000 10,000 10,000 40,000

Facility- and general-operations-level costs:

Supervisory salaries 100,000 100,000 100,000 100,000 400,000

Insurance 50,000 50,000 50,000 50,000 200,000

Maintenance 50,000 50,000 50,000 50,000 200,000

Utilities 80,000 80,000 80,000 80,000 320,000

Depreciation 200,000 200,000 200,000 200,000 800,000

• Selling, General & Administrative Expense estimates for the year 2021 are as follows

Quarter 1st 2nd 3rd 4th Year

Unit-level expenses:

Sales Commission 15,000 45,000 60,000 30,500 150,000

Customer-level expenses:

Sales Salaries 90,000 270,000 360,000 180,000 900,000

Operator Salaries 50,000 150,000 200,000 100,000 600,000

Facilities and General Operations Expenses:

Packaging Design 19,200 19,200 19,200 19,200 76,800

Facility- and general-operations-level costs:

Manager salaries 152,500 152,500 152,500 152,500 610,000

Advertising 100,000 100,000 100,000 100,000 400,000

Admin. Salaries 147,500 147,500 147,500 147,500 590,000

• Following is Investing and Financing estimate for the year 2021 are as follows

Quarter 1st 2nd 3rd 4th Year

Bank Loan (12%) 100,000,000

Loan Repayment 25,000,000 25,000,000 25,000,000 25,000,000 100,000,000

Plant Addition 20,000,000 50,000,000 12,000,000 5,000,000 87,000,000

Assuming same opening and ending balance in WIP, prepare all the budget schedules for 2021 except Balance Sheet (12 schedules). Include a column for each quarter, and for the year. This project should be done in MS Excel.