Part 1. Budget estimations

The Morpheus company has an industrial activity. It manufactures in its workshops two types of finished products (red pills and blue pills) from two raw materials (Zion powder and gelatin). The red pill frees those who consume it from the enslaving control of the Matrix, and the blue pill allows it to remain in the fabricated reality of the Matrix.

In September of year Y, Director Morpheus hires you as a management controller and asks you to build the budget for year Y + 1. It provides you with the following forecast information.

1. Sales

As, usually, consumers mostly choose blue pills, the sales goals (in quantities) for years Y, Y+1 and Y+2 are the following:

	Y	Y+1	Y+2
Red pills	125	150	160
Blue pills	600	700	720

Unit sales prices, identical to those of year Y, are estimated at:

Y+1
Red pills	350
Blue pills	210

Based on previous years, it can be assumed that at the end of year Y + 1, 10% of sales will not be collected given the payment period granted to customers. It should also be noted that in order to be able to deliver its customers quickly, the company always keeps a stock of finished products corresponding to 10% of the expected sales of the following year, for both red and blue pills of the period considered (here the year). The inventory valuation method used is the FIFO method.

2. Production

1. Direct production costs

The production department estimated that for Y + 1 the quantities of raw materials necessary to produce pills would be:

	Y+1
	Red pills	Blue pills
Zion powder	20 gram	0 gram
Gelatin	30 gram	20 gram

Since the blue pill has no effect, no Zion powder is required to make it. Forecasts for the unit purchase cost of raw materials are as follows:

	Y+1
Zion powder	3,000 per kg
Gelatin	1,500 per kg

For the Y + 1 budget, concerning the Zion Powder bought from the supplier Oracle, it is estimated that 3 months (on average) of purchase, that is 25% of the amount of raw material purchases, will not yet be paid to the suppliers at the end of December, due to the payment terms granted by this supplier. For Gelatin, however, the supplier The Merovingian does not grant us any payment term. In addition, there are no stocks of raw materials (neither for Zion powder nor for gelatin), the Oracle and the Merovingian are on site and immediately deliver the necessary raw materials to us.

Production labour is considered a direct variable cost of production. Indeed, the Morpheus company uses temporary workers (the inhabitants of Zion) to adjust the need for labour to fluctuations in production. According to the operating schedule, reviewed by the production manager, No, the manufacturing duration for each of the two products are as follows:

	Y+1
	Red pills	Blue pills
Direct labour	6 hours	1.5 hours

According to the director, the average hourly cost of production labour should be in year Y + 1 of 17 (including social charges). Salaries are paid within the month; therefore, there are no payment delays on salaries.

2. Manufacturing overhead costs

The cost of machines used in production is considered an overhead (indirect) charge as the machines are used to produce the two finished products. In addition, this cost is considered fixed and corresponds to the depreciation expenses of the machines. The machines started to be operated on January 1 of year Y and their value is reported in the balance sheet. The depreciation of these machines is done on a straight-line basis over 8 years, with no residual value at the end of the depreciation period. The annual salary cost of the production manager, Mr. No, is also considered as an overhead fixed production charge and is estimated at 42,000 for the year Y + 1. These overhead fixed charges are used 80% for the production of blue pills and 20% for the production of red pills. Disbursable charges are paid within the month.

There are also variable overhead production costs. They are generated by the use of machines. For Y + 1, the estimated time related to the use of machines per finished product are as follows:

	Y+1
	Red pills	Blue pills
Machine time / finished product units produced	30 minutes	15 minutes

These overhead variable production costs correspond to various maintenance products, lubrication and the energy required to operate the machines. In total, they are estimated at 10 per machine hour for year Y + 1. They are all paid during the month in which they are consumed.

3. Non-manufacturing overhead costs

A sales representative, Trinity, was hired by the company. His annual salary for Y + 1 is estimated at 70,000.

In addition, two new ships, the Logos and the Hammer, will be purchased to defend Sion against the Sentinels for a total estimated amount of 200,000 euros. The purchase will be made and paid for on year Y+1, July 1. The machines will be amortized on a straight-line basis over 10 years.

Your predecessor had already prepared an estimate of the balance sheet at year Y, December 31 (in Euros). There were also some elements on his way of building it.

Part 1: Estimating budgets (10 points)

Q1. What amount of sales will be collected?

Q2. What is the quantity to produce for the red pills and for the blue pills?

Q3. What is the total cost of raw materials consumed for red pills and blue pills?

Q4. What is the cost of finished product stocks for red pills?

Q5. What is the total amount of disbursement of non-manufacturing costs?