Periwinkle plc manufactures Product X using three different raw materials. The product details are as follows:

i. Selling price per unit 250. Seventy-five percent of sales are collected in the first month and these customers receive a 0.5% discount. The remainder is collected in the following month.

ii. Direct labour per unit 8 hrs

iii. Labour rate 7.50 per hour

iv. Materials requirement per unit

Material Required Price

A 3 kg $3.50 per kg

B 2 kg $5.00 per kg

C 4 kg $4.50 per kg

v. The company is considering its budgets for next year and has made the following estimates of sales demand for Product X for July to October: June 350 units, July 400 units, August 300 units, September 600 units, October 450 units, November 300 units.

vi. It is company policy to hold stocks (inventories) of finished goods at the end of each month equal to 50 per cent of the following month's sales demand.

vii. Raw material stocks (inventories) are expected to be 40% of the following month's requirements. Material is paid for on a cash basis.

viii. Labour is paid on an hourly rate based on attendance. In addition to the unit direct labour hours shown above.

ix. Overheads for the period are expected to be:

Variable Overheads

Production $40 per unit

Selling and Administration $35 per unit

Fixed Overheads (monthly)

Production $10 000 (including $3 000 depreciation)

Selling and Administration $4 000 (including $300 depreciation)

x. In September, Periwinkle plans to dispose of machinery. This is expected to realize $15 000. This machinery will be replaced in August with a new piece of equipment at a cost of $45 000, to be paid in two equal instalments in August and September.

xi. The company will receive a tax refund of $6 000 Equipment.

xii. Periwinkle's policy is to maintain a minimum cash balance of $10 000. The company can draw down (In multiples of $1 000) on a line of credit at a rate of $15% per annum. This is repaid when there is surplus cash. Borrowing occurs on the first day of the month, repayments are made on the last day of the month. Requirements:

a) Prepare the following budgets for the quarter from July to September inclusive:

i. Sales budget

ii. Schedule of cash collections

iii. Production budget in units

iv. Raw material purchases budget in kgs and value

v. Labour requirements budget in hours and value.

vi. Production overhead budget

vii. Selling and Administration Budget

viii. Cash budget

2. Gloria Hammond is the owner of GLOCO, which manufactures plastic water tanks. Gloria and her managers do no budgeting are planning for GLOCO. The company's management does not anticipate problems that arise and, as a result, the company has slow production, missed shipment deadlines and lost sales.

a) Discuss the reasons the reasons why Gloria should wish to engage in budgeting and planning.

b) Advise the company of the implications associated with a budgetary approach in which budgetary data are imposed on managers from above. Contrast such an approach with one in which budgetary data are self-imposed in a participatory manner