Question 2 [16 marks) Sun Pty Ltd manufactures a special ceramic tile that is used as a component in residential solar energy systems. Sales are seasonal in the home-building industry. The expected pattern of sales {in units) for each quarter of the next year (2018) is as follows: 15'Quarter 3,000 3rd Quarter 8,000 2"\"Quarter 0,000 4'\" Quarter 4.000 Each tile sells for $25. All sales are on account with 60% of each quarter's sales collected in the quarter of sale, and the remaining 40% collected in the quarter following the sale. Sun Pty Ltd experiences negligible bad debts. so this is ignored in the budget process. Sales in the 4'h quarter (October-December) of 2017 are expected to be $100,000 (4,000 units). Management's Finished Goods inventory policy is to have 10% of the following quarter's sales requirements in nished goods at the end of each quarter. On December 31, 2017 Sun Pty Ltd expects to have 300 units in inventory. Each tile requires 2kg of raw material. The inventory policy for raw materials is to have 10% of next quarter's raw materials requirements on hand at the end of each quarter. Sun Pty Ltd expects to have 480kg of the raw material in inventory at the end of December 201?. The raw material price is expected to be $4 per kg. The company buys its raw material on account and pays 70% during the quarter of purchase and the remaining 30% during the next quarter. The Accounts Payable balance {for raw materials) at the end of December 201? is expected to be $33,440. Each tile uses .5 hours of direct labour. Labour is expected to be paid at $10 per hour. Wages and salaries are paid each month as incurred. Fixed manufacturing overheads for this product line total $12,000 each quarter. Of this, $2,500 is for depreciation. All other xed expenses are paid for in the quarter incurred. Variable manufacturing overhead is budgeted at $1 per direct labour hour. All variable overhead expenses are paid for in the quarter incurred. Required: (3) (b) (C) (d) For the first two quarters of 2018 prepare the following budgets: (i) the Production budget (ii) the Direct Materials Purchases Budget (T marks) Prepare the cash receipts and cash disbursements section of the cash budget for the rst quarter of 2018. (4 marks) What does the cash budget in (b) reveal to management? What actiontis) do they need to take? (2 marks) What is budgetary slack? Provide one reason why lower level managers may build slack into the budget and then provide one disadvantage of lower level managers building slack into the budget from the viewpoint of executive management
