Cameron is the Managing Director of PL Ltd, a UK company that manufactures components for the car manufacturing industry. The company accountant has historically used a traditional incremental approach to creating their budgets. However, the company accountant has suddenly resigned at a time of significant political and economic uncertainty. As a result, Cameron has approached you to prepare the functional budgets for the forthcoming financial quarter.

Each of the departmental managers has provided Cameron with the following information in respect to the forthcoming 3-month period:

Sales information

Sales in units are forecast as follows:

Average selling price per unit: 120

August 6,100

September 7,425

October 6,900

November 6,030

December 5,250

Production information

Opening stock of finished goods at 1^st August are 4,000 units.

In order to always meet customer demand, the sales manager demands that the closing stocks at the end of each month should equal 1.2 times the following months expected sales level.

Raw materials information

Each unit produced requires 3 kgs of material which they estimate will be 5 per kg, they have been purchasing all their raw materials from the same French supplier for the past 6 years.

Opening stocks of raw materials at 1^st August are 12,200kgs. The company also has a long-standing policy of increasing closing stock levels by 10% each month in order to ensure they have enough raw materials.

Labour information

Each unit produced requires 3 skilled labour hours and 2 unskilled labour hours. Each skilled labour hour costs 15 per hour, and each unskilled labour hour costs 5 per hour.

Production overheads information

Absorbed on the basis of 3 per direct labour hour.

Administration overheads information

Administration overheads are forecast at 25,000 for August, but expected to rise by 7% each month.

Selling overheads information

Selling overheads have historically run at 15% of sales revenue for each month.

The sales manager believes that the current average selling price per unit of 120 per unit is as high as the firms customers can bear at this time.

Required:

Prepare a report for Cameron in which you:

Part 1:

Prepare the functional budgets for the financial quarter August to October from the information provided above.

Comment on your findings.

Part 2:

As previously mentioned, the company has always used a traditional incremental approach towards building its budgets to plan for the future. Cameron is now concerned that this may not be appropriate in the current turbulent political and economic environment which he believes may last for a number of years. As a result, he has also asked you for advice about how he might adopt a more flexible planning approach without losing financial control.

Critically review the current budget preparation process

Critically analyse the potential advantages and disadvantages of adopting a beyond budgeting approach instead

Provide Cameron with a recommendation(s) for the future based on your findings