Kibo Manufacturing Company has prepared a draft budget for sales of 10,000 units for the next year as
follows:-
Shs.
Shs.
Sales price per unit
300
Variable costs per unit
Direct material
80
Direct labour (2 hours x shs. 30)
60
Variable overheads (2 hours x shs. 5)
10
150
Contribution per unit
150
Budgeted contribution
1,500,000
Less: Budgeted Fixed Costs
1,400,000
Budgeted profit
100,000
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The Board of Directors of the company is dissatisfied with the proposed budget and therefore asks you in your capacity as the Management Accountant of the company, to come up with an alternative budget with a higher profit figure.
After critically studying the market environment in which the industry is operating in, and taking into consideration both the company’s past performance and its future performance projections, you came up with some suggestions which will lead to an improved budgeted profit of Tshs. 250,000. You further ascertain that in order for the company to be able to realize the improved budgeted profit, it will have to incur an additional Tshs. 285,000 on advertising and put the sales price up to Tshs. 320 per unit. Inspite of the price increase, it is expected that sales volume would rise to 12,000 units. In order to achieve the extra production capacity, however, the work force must be able to reduce the time taken to make each unit of the product. It is proposed to offer a pay and productivity deal in which the wage rate per hour is increased to Tshs. 40. The hourly rate for variable overheads will be unaffected.
REQUIRED:
Prepare a revised budget of Kibo Manufacturing Company giving effect to the above suggestions.
QUESTION 6
a) Explain what is a labour budget and also indicate the purposes of preparing this budget
b) Discuss the role of budget committee during the preparation phase of a new annual budget for a large manufacturing company
c) Comment upon the behavioral aspects which the budget committee should consider when approving individual departmental budget