Manzini Interior Decor Limited a company listed on the Eswatini Stock Exchange (ESE) manufactures a single product: kitchen blenders. The company is in the process of preparing a budget for the six months ending 30 June 2022. The statement of financial position at 31 December 2021 is as follows:

ASSETS Non-current assets Machinery at cost Less: Accumulated depreciation Office fixtures, fittings and computer Less: Accumulated depreciation Current Assets Inventories: Finished goods (200 units) Inventories: Raw Material Receivables (December 2021 sales, all on credit) Cash at bank EQUITY AND LIABILITIES Equity Share Capital Retained Earnings Current Liabilities Payables for raw materials (One month’s purchases)

Payables for production overheads (one month’s purchases) Payables for administrative expenses (one month’s purchases)

96 000 (34 400)

15 000 (13 000)

15 000 3 750 40 000 8 000 20 000 93 350 10 000 9 000 4000 57 600 12 000 66 750 136 350 113 350 23 000 136 350 EE Page 4 of 7 At the end of every month the figure for receivables equals the total sales for the month just ended (e.g. receivables at the end of December are December’s sales). At the end of every month 4

Page 5 of 7 payables equals the total purchases for the month just ended (e.g. payables at the end of December are December purchases).

Manzini Interior Décor’s selling price and cost structure for one kitchen blender is as follows:

E Selling Price 100 Raw materials 25 Direct Labour 20 Prime Cost 45 The business uses full absorption costing based upon the number of units planned for production. The company’s sales director produces a forecast for sales (in units) for the first six months of 2022 on the basis of discussions he has held with fellow directors and with his sales team. The production director then works out projected production in number of units. Projections for sales and production in units, together with opening and closing inventories of finished goods for each month are as follows:

Month Opening Inventories in Units Number of Units Sales Number of Units Production Closing Inventories in Units January 200 February 250 March 250 April 300 May 350 June 400 TOTAL 1710 1960 250 300 250 280 280 250 280 330 300 300 350 350 300 350 400 300 350 450 Production in July is estimated at 350 units.

Production is planned in such a way as to autumn, this is to ensure that the company has sufficient inventory to respond to a potential increase in demand following, a major advertising campaign that is planned for the latter half of the year. At the beginning of each month the production director plans to have half of the raw materials in inventory which will be required for the coming month’s production schedule. In order to simplify the budgeting exercise it is assumed that there is no work-in-progress at each month-end.

Production overheads forecast for the first six months of 2022 are:

Factory rental Supervisory Salaries Other direct labour Cleaning Insurance Power Depreciation of Machinery E

16 000 12 450 6 250 3 900 2 600 5 800 4 800 build up inventories of finished goods towards the 5

Maintenance Canteen Costs Business rates Other factory expenses Total 1 000 2 500 2 800 700 58 800 Page 6 of 7 Production overheads accumulate evenly over the six month period.

Monthly administrative costs total E4000, plus E250 of depreciation of office fixtures and fittings and computer. Each month’s expenses are paid in the next following month (remember that this does not include depreciation, which is a non-cash adjustment).

No capital expenditure is planned for the six months ending 30 June 2022 and there will be no disposals on non-current assets. The requirement is to prepare the following budgets for the first six months of 2022.

(a) Raw materials purchases budget. 

(b) Budget overhead absorption rate. 

(c) Budget statement of profit or loss for each of the six months ending 30 June 2022 and a summary statement of profit or loss thereof. (5 Marks)

(d) Budget statement of financial position at 30 June 2022. (15 Marks)

(e) Budget statement of cash flows for each of the six months ending 30 June 2022.