Question
Pepito Ltd is a manufacturing firm which produces two types of products, Ariel and Blippy. Every month, the accountant draws up a forecast of the
Pepito Ltd is a manufacturing firm which produces two types of products, Ariel and Blippy. Every month, the accountant draws up a forecast of the expected profit or loss, in addition to, the forecast cash inflows and outflows.
As shown below, Materials X and Y are used as follows:
Ariel (Perunit)Blippy (Perunit)
Material X 1 kg. 2 kgs.
Material Y 2 kgs. 1 kgs
Also each unit of Ariel and Blippy requires 2 and 3 direct labour hours respectively.
The table below summarises the budgeted sales level (in units) for the month of October:
Product Unit Price per unit
Ariel 1,500 Rs. 30
Blippy 3,000Rs. 40
On 1st October, the opening inventory and expected closing inventory on 31st October were as follows :
Opening InventoryBudgeted closing inventory
Material X 2,000kgs. 2,500kgs.
Material Y1,250kgs. 2,000kgs.
The opening inventory for Ariel and Blippy amount to 100 and 125 units respectively. The closing inventories are expected to increase by 25%.
The following standard cost information for October is also available:
Material X Rs. 1 per kg.
Material Y Rs. 2 per kg.
Direct labour Rs. 2 per hour.
An overhead absorption rate of Rs 1 per direct labour hour was to be used for production overheads.
Other overheads amounted to Rs10,000 for Administration and Rs.20,000 for Selling and distribution.
As regards cash collection from sales, the firm adopts a policy whereby 50% are collectedinthesame monthofsales while the remainder is collected at the rate of25%ineachofthenexttwomonths. Payments for purchases of Material Y are due the following month, while Material X is paid immediately on the date of purchase.
The following figures are available for the three month ending 31st October:
August September October
Rs. Rs. Rs.
Sales 300,000400,000 165,000
Purchase: Material Y 50,000
Wages for the month 100,000
Other net cash expenses 100,000
Opening balance of cash (1st October)10,000
Moreover, during the month, 10% of the net profit in October was required to be paid as advance tax. The firm had also recently carried out some investment from which it is expecting commissions amounting to Rs 10,000 to be received in the month of November.
prepare the production, material and direct labour cost budgets, the forecast profit and loss statement and; the cash budget.
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