“Armin Production” produces cookies for resale at grocery stores throughout the country. The company is currently in the process of establishing a master budget on a quarterly basis for this coming fiscal year, which ends December 31, 2021
Note: As the management accountant you have to prepare the budget FY 2021 (on a quarterly basis).
Prior year quarterly sales were as follows:
------First quarter 65300 units
------Second quarter 79500 units
------Third quarter 97100 units
------Fourth quarter 83800 units
Sales quantity of each quarter are expected to increase by 25 percent compared to those of the previous year, and each unit is expected to sell for BDT 9. The management prefers to maintain ending finished goods inventory equal to 20 percent of next quarter’s sales. Assume finished goods inventory at the end of the fourth quarter budget period is estimated to be 9000 units and ending inventory Dec 31, 2020 is 6000 units.
Requirements:
(i) Prepare a sales budget for “Armin Production”. [2 marks]
(ii) Prepare a production budget for “Armin Production”. [2 marks]
“Armin Production”, now intends to prepare the budget for direct materials purchases, direct labor, and manufacturing overhead. Each unit of product requires 1.5 pounds of direct materials per unit, and the cost of direct materials is BDT 3 per pound. Management prefers to maintain ending raw materials inventory equal to 20 percent of next quarter’s materials needed in production. Assume raw materials inventory at the end of the fourth quarter budget period is estimated to be 40700 pounds and ending inventory as on December 31, 2020 is 35600 pounds. Each unit of product requires 0.4 direct labor hours at a cost of BDT 11 per hour.
Variable overhead costs are:
------Indirect materials BDT 0.30000000000000004 per unit
------Indirect labor BDT 0.1 per unit
------Other BDT 0.35000000000000003 per unit
Fixed overhead costs each quarter are:
------Salaries BDT 27800
------Rent BDT 20000
------Depreciation BDT 20000
Requirements:
(iii) Prepare a direct material purchases budget for “Armin Production”. [3 marks]
(iv) Prepare a direct labour budget for “Armin Production”. [3 marks]
(v) Prepare a manufacturing overhead budget for “Armin Production”. [3 marks]
“Armin Production” estimates that all selling and administrative costs are fixed. Quarterly selling and administrative cost estimates for the coming year are

 ------Salaries BDT 14100
------Rent BDT 55400
------Advertising BDT 6900
------Depreciation BDT 8760
------Other BDT 840
Requirements:
(vi) Prepare a selling and administrative budget for “Armin Production. [2 marks]
(vii) Prepare a budgeted income statement for “Armin Production”. [4 marks]
The company plans to purchase selling and administrative equipment totalling BDT 18800 and production equipment totalling BDT 26000. Both will be purchased at the end of the fourth quarter and will not affect depreciation expense for the coming year.
All sales are on credit. The company expects to collect 50 percent of sales in the quarter of sale, 20 percent of sales in the quarter following the sale, and 30 percent will not be collected (bad debts). Accounts receivable at the end of last year totalled BDT 190000, all of which will be collected in the first quarter of this coming year. All direct materials purchases are on credit. The company expects to pay 70 percent of purchases in the quarter of purchase and rest in the following quarter. Accounts payable at the end of last year totalled BDT 4200, all of which will be paid in the first quarter of this coming year.
The cash balance at the end of last year totaled BDT 18000.
Requirements:
(viii) Prepare a cash budget for “Armin Production”. [5 marks]
(ix) The COO (chief operating officer) of Armin Production emphasised that any surplus amount of cash must be used to pay off previously borrowed money. In contrast, the CMO (chief marketing officer) argued that doing such would not fulfil our minimum cash balance target at the end of each month/quarter. Do you agree with CMO? Why or why not? What will be the optimum solution? [3 marks]
The following account balances are expected at the end of the fourth quarter:
------Property, plant, and equipment (net): BDT 309000
------Common stock: BDT 414000
Retained earnings at the end of last year totalled BDT 54050 and no cash dividends are anticipated for the budget period ending December 31, 2020.
Requirements:
(x) Prepare the Assets and Liabilities sections of the budgeted balance sheet for “Armin Production” (You don’t need to prepare the complete balance sheet, but only the Assets and Liabilities Sections). [4 marks]

Part B
(i) “Levi Corporation” has forecasted purchases on account to be BDT 209000 in March, BDT 261000 in April, BDT 313000 in May, and BDT 365000 in June. 80 percent of purchases are paid for in the month of purchase, the remaining are paid in the following month. What are budgeted cash payments for April? [3 marks]
(ii) "Mikasa Ltd" intends to produce special type of leather handbags for the upcoming season. The production budget for the next four months is: June 5800 units, July 6600 units, August 7100 units, September 8100 units. Each handbag requires 0.5 square meters of leather. Its leather inventory policy is 40 percent of next month's production needs. On June 1 leather inventory was expected to be 1900 square meters. Leather is expected to cost BDT 6 per square meter in June. What is the expected cost of leather purchases in June? [3 marks]
(iii) You have been hired as a trainee accountant by the AOT group. and you are given the task of preparing a monthly budget for the production department. What factors will you consider in setting production requirements? Why inventories are important in production budgets? [4 marks]
(iv) Eren group operates in such a dynamic environment that the top management stresses achieving the targets under all situations. What consequences of such an approach may have on Eren’s operations? How can the budgetary slack cause negative consequences on Eren’s long-term operations? [4 marks]