Question 1.1 C Ltd makes two products, Alpha and Beta. The following data is relevant for year 3: Material M 2 per unit Material N 3 per unit Direct labour is paid 10 per hour. Production overhead cost is estimated to be 200,000, which includes 25,000 for depreciation of property and equipment. Production overhead cost is absorbed into product costs using a direct labour hour absorption rate. Each finished unit requires: Alpha Beta

Material M 12 units 12 units Material N 6 units 8 units Direct labour 7 hours 10 hours The sales director has forecast that sales of Alpha and Beta will be 5,000 and 1,000 units, respectively, during year 3. The selling prices will be: Alpha 182 per unit

Beta 161 per unit She estimates that the inventory at 1 January, year 3, will be 100 units of Alpha and 200 units of Beta. At the end of year 3 she requires the inventory level to be 150 units of each product. The production director estimates that the raw material inventories on 1 January, year 3, will be 3,000 units of material M and 4,000 units of material N. At the end of year 3 the inventories of these raw materials are to be: M: 4,000 units N: 2,000 units The finance director advises that the rate of tax to be paid on profits during year 3 is likely to be 30%. Selling and administration overhead is budgeted to be 75,000 in year 3, which includes 5,000 for depreciation of equipment.

A quarterly cash-flow forecast has already been completed:

Year 3 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Receipts: 196,000 224,000 238,000 336,000 Payments: Materials 22,000 37,000 40,000 60,000 Direct wages 100,000 110,500 121,000 117,000 Overhead 45,000 50,000 70,000 65,000 Taxation 5,000 Machinery purchase

The company's balance sheet at 1st January year 3 is expected to be as follows: Non-current assets: Cost Depreciation NBV Land 50,000 50,000 Building and Equipment 400,000 75,000 325,000 450,000 75,000 375,000 Current assets: Inventories Raw materials 20,000 Finished goods 15,000 35,000 Receivables (Debtors) 25,000 Cash at bank 10,000 70,000 less Current liabilities: Payables 9,000 Taxation 5,000 14,000 Working Capital 56,000 431,000 Financed by: Share capital 350,000 Retained earnings 81,000 431,000 Required: You are required to prepare the company's budgets for year 3 including a budgeted Income Statement for the year and a Balance Sheet at 31 December, year 3. Page | 2 Question 1.2 The budgeted balance sheet data of Umbago Ltd is as follows: Balance sheet as at 1st March Non-Current assets: Cost Depreciation NBV Land and Building 500,000 500,000 Machinery and Equipment 124,000 84,500 39,500 Motor vehicles 42,000 16,400 25,600 666,000 100,900 565,100 Current Assets Stock of raw materials (100 units) 4,320 Stock of finished goods (110 units)a 10,450 Debtors (January 7,680, February 10,400) 18,080 Cash and Bank 6,790 39,640 Less current liabilities Creditors (raw materials) 3,900 Working Capital 35,740 600,840 Financed by: Ordinary share capital (fully paid 1 per share) 500,000 Share premium 60,000 Profit and loss account 40,840 600,840 a The stock of finished goods was valued at marginal cost The estimates for the next four-month period are as follows: March April May June Sales (units) 80 84 96 94 Production (units) 70 75 90 90 Purchase of raw materials (units) 80 80 85 85 Wages and variable overheads @ 65 per unit 4,550 4,875 5,850 5,850 Fixed overheads 1,200 1,200 1,200 1,200 The company intends to sell each unit for 219 and has estimated that it will have to pay 45 per unit for raw materials. One unit of raw material is needed for each unit of finished product. All sales and purchases of raw materials are on credit. Debtors are allowed two months' credit and suppliers of raw materials are paid after one month's credit. The wages, variable overheads and fixed overheads are paid in the month in which they are incurred. Page | 3 Cash from a loan secured on the land and building of 120,000 (at 7.5% interest rate) is due to be received on 1st May. Machinery costing 112,000 will be received in May and paid for in June. The loan interest is payable half yearly from September onwards. An interim dividend to 31 March of 12,500 will be paid in June. Depreciation for the four months, including that on the new machinery, is: Vehicle and equipment 15,733 Motor vehicle 3,500 The company uses the FIFO method of stock valuation. Ignore taxation. Required: a) Calculate and present the raw materials budget and finished goods budget in terms of units, for each month from March to June inclusive. (5 marks) b) Calculate the corresponding sales budget, the production cost budgets and the budgeted closing debtors, creditors and stocks in terms of value. (5 marks) c) Prepare and present a cash budget for each of the four months. (6 marks) d) Prepare a master budget, i.e. Budgeted trading profit and loss account, for the four months to 30 June, and budgeted balance sheet as at 30 June (10 marks) e) Advise the company about possible ways in which it can improve its cash management. (9 marks) Total 35 Marks (questions from ACCA Managerial Finance exam) Page | 4