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 (Per Unit) Blippy (Per Unit)

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 1^st October, the opening inventory and expected closing inventory on 31^st 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 31^st 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 (1^st 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.

You are required to prepare the following for the month of October:

(a) the production, material and direct labour cost budgets(7 marks)

(c) the forecast profit and loss statement and; (4 marks)

(d) the cash budget. (4 marks)

(e) Explain the importance of budgetary control and processes for manufacturing organistions.(5 marks)