David is the Managing Director of MJ Ltd, a UK company that manufactures components for the healthcare 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, David has approached you to prepare the functional budgets for the forthcoming financial quarter.

Each of the departmental managers has provided David 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: 105

August 5,030

September 6,525

October 6,000

November 5,830

December 5,540

Production information

Opening stock of finished goods at 1^st August are 5,300 units.

In order to always meet customer demand, the sales manager demands that the closing stocks at the end of each month should equal 1.5 times the following months expected sales level.

Raw materials information

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

Opening stocks of raw materials at 1^st August are 4,200kgs. The company also has a long-standing policy of increasing closing stock levels by 5% each month in order to ensure they have enough raw materials.

Labour information

Each unit produced requires 4 labour hours which costs 10 per hour.

Production overheads information

Absorbed on the basis of 2 per direct labour hour.

Administration overheads information

Administration overheads are forecast at 10,000 for August, but expected to rise by 3% each month.

Selling overheads information

Selling overheads have historically run at 10% of sales revenue for each month.

The sales manager believes that the current average selling price per unit of 105 per unit is as high as the firms customers can bear at this time.

Required:

Prepare a report for David in which you:

Part 1:

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

1. Critically review the current budget preparation process
2. Critically analyse the potential advantages and disadvantages of adopting a beyond budgeting approach instead
3. Provide David with a recommendation(s) for the future based on your findings