Budgets: Discussion question

RD Ltd. is in the process of preparing its budgets for 2020. The company produces and sells a single product, Z, which currently has a selling price of 100 for each unit.

The budgeted sales units for 2020 are expected to be as follows:

Jan	Feb	Mar	Apr	May	Jun	July	Aug	Sep	Oct	Nov	Dec
5,000	5,500	6,000	6,000	6,250	6,500	6,250	7,000	7,500	7,750	8,000	7,500

The company expects to sell 7,000 units in January 2021.

The selling price for each unit will be increased by 15% with effect from 1 March 2020.

1,000 units of finished goods are expected to be in stock at the end of 2019. It is company policy to hold a closing stock balance of finished goods equal to 20% of the following months sales.

Each unit of Z produced requires 3 kgs of material X, which currently costs 5 for each kg. The price for each kg is expected to increase by 10% on 1 June 2020.

Stock of raw material at the end of 2019 is expected to be 3,750 kgs. The company wishes to avoid any stock-outs and requires the closing stock of raw materials to be set at 20% of the following months production requirements.

A purchase of fixed asset will be made in March, 50,000 payment will be made in four equal installments starting in June. Opening cash balance of 20, 000.

The production of each unit of Z requires 4 hours of skilled labour and 2 hours of unskilled labour. Skilled labour is paid at a rate of 10 for each hour and unskilled labour at 8 for each hour. Each worker is expected to work 40 hours each week, 48 weeks each year.

Taxation on 2019s profit will be paid in March and this amounts to 15, 000. Fixed overhead including depreciation of 550 is 3,000 per month and this is expected to increase in May to 3,500.

Required:

Prepare the following budgets for the first six months of 2020.

(a) The sales budget (in value)

(b) The production budget (in units)

(c) The material usage budget (in value)

(d) The material purchase budget (in value)

(e) The direct labour budget (in hours)

(f) Cash budget