The Budget Process

The latest set of financial statements of Kitchen Craze plc are set out in worksheets: "Income Statement" and "SoFP" in the assignment workbook. Refer to these financial statements and the information provided below and use this information to complete this task.

REQUIRED to:

1. Using the worksheet named "FunctionalBudgets" (the purple tab) in the assignment workbook, PREPARE the:
   1. sales budget monetary terms from the already completed sales budget in units;
   2. credit sales receipts forecast;
   3. material purchases and labour cost budgets using the already completed production budget in the worksheet and;
   4. payments to credit supplier forecast.
2. In the worksheet named "Cash Budget", prepare the cash budget from your completed functional budgets, the forecast sales receipts, forecast credit supplier payments, the financial statements and the other information on pages 6 and 7 in this booklet. In your report, comment on the cashflow statement under the heading "The Budget Process".
3. Assuming the company absorbed fixed overheads on the basis of budgeted labour hours; you are to use the full absorption cost to determine the selling price of a cupboard unit if management wishes to make 20% mark-up. Comment on your answer.
4. Zero-Based Budgeting (ZBB) and Incremental Budgeting are traditional approaches to budgeting. It is argued by some observers that these approaches to budgeting are incapable of meeting demands of commercial entities in the information age. These observers argue that Beyond Budgeting approach should be adopted instead.

In your report, critically assess the relative strengths of this assertion.

PRODUCTION Information

1. A cupboard unit is called a cabinet. Each cabinet uses 5 metres of material (processed MFC). The cost of a metre of MFC is expected to remain at 19 per metre for the next six months.
2. Other direct material nuts, crews, hinges and glue are expected cost 5 per cabinet for the next six months.
3. A cabinet takes 2 hours to make and direct labour rate is 25 per hour which will remain in force for the next six months. Labour is paid in the month it is incurred.
4. The inventory figure of 30,000 in the Statement of Financial Position (SoFP) for the year just ended, September 30, 2021, represents only finished cabinets; 200 cabinets valued at marginal cost of 150 each.
5. KITCHEN Craze operates a just-in-time inventory system for both raw material and finished goods, therefore, it is expected that little or no material, work-in-progress or finished cabinet inventory will be held for the next six (6) months.
6. Fixed production overhead is 74,000 per month and includes depreciation of 32,000: Building - 7,000 and plant and machinery 25,000.

SALES Information

1. Sales are expected to be 1,000 cabinets in October and to then increase by 250 cabinets for each of the following four (4) months to February and then increase by 500 in March.
2. Ten percent (10%) of the total monthly sales will be made from factory shop for cash. The takings from these are expected to be banked daily.
3. Cabinets will be sold to the retail trade at a price of 300 until 31 October; the company will then implement a price increase of 5%. Sales made from the factory shop will be made at a price of 295. This price will not increase for the next six months.

4. Sales department costs are expected to be fixed and amount to 30,000 per month.

GENERAL Information

1. It is the company policy for all trade customers to pay within 30 days, however, in practice this do not hold. Hence, for budget, you are to assume that 20% of retail trade customers pay one month after the date of sale and 80% pay two months after the date of sale.
2. You should assume that Trade receivables at 30 September 2021 will be collected as follows:

In October 2,000,000

In November 2,500,000

In December 1,393,000

5,893,000

3. All purchases of MFC, raw material will be paid for one month in arrears. All other costs will be paid in the month in which they are incurred.

4. Trade Payables 600,000 on the SoFP are expected to be paid 300,000 in October and another 300,000 in November.

1. Administration overheads should be budgeted to be 37,000 each month.

6. The investment on the SoFP represents shares in Barratt Development which is expected to grow by 3% before it is sold and credited to the current account in November.

7. The directors have declared half-yearly dividend of 0.20 per share which is expected to be paid in March.

Table 1: Functional Budget

	Sales Budget (Units)
	OCT	NOV	DEC	JAN	FEB	MAR		Total
Cabinets	1,000	1,250	1,500	1,750	2,000	2,500		10,000
	Sales Budget ()
Factory Sales
Retail Sales
								0
	Credit Sales Receipts Forecast ()
Credit Sales:
Prior year Rec'bles
1 month - 20%
2 months - 80%
								0
	Production Budget (Units)
Sales	1,000	1,250	1,500	1,750	2,000	2,500
Opening Inventory	200
Closing Inventory	0
Production	800	1,250	1,500	1,750	2,000	2,500		9,800	units
	Materials (MFC) Purchases Budget (KG) and ()
Production									kg
5 metres at 19/m
Purchases								0
	Material Purchases () - nuts, screws
Purchases/Pmt								0
	Payment to Credit Suppliers Forecast
Prior Period
1 month 100%
								0
	Labour Budget hours and
Production hours								0	hours
2hours at 25/hr
								0

Table 1. 1 Functional Budget Continues

Factory	Retail

Table 1.2: Cash-Budget

KITCHEN CRAZE plc
CASH BUDGET for six months to March 31, 2022
	OCT	NOV	DEC	JAN	FEB	MAR	TOTAL
RECEIPTS
Factory Sales
Trade Receivable Receipts
Disposal of Investment
TOTAL RECEIPTS
PAYMENTS
Payment to credit suppliers
Material purchases - nuts, bolts
Production Labour
Fixed production overheads
Sales Department costs
Administration overheads
Dividends
TOTAL PAYMENTS
CASH FLOW
CASH at START	3,037,000						3,037,000
CASH at END

Table 1. 3. Income statement

KITCHEN CRAZE plc
Income Statement for the year ended September 30, 2021
	2021 000		2020 000
Revenue	35,562		55,821
Cost of Sales	28,354		35,752
Gross Profit	7,208		20,069
Distribution Costs	1,890		5,017
Administrative Expenses	2,532		6,020
Profit from Operations	2,786		9,032
Finance Costs	160		8
Profit before tax	2,626		9,024
Corporation Tax	864		2,888
Profit for the year	1,762		6,136
Other comprehensive income for the year
Revaluation Gain	1,360		0
Total comprehensive income for the year	3,122		6,136

Table 1.4: SoFT (Statement of Financial Position)

KITCHEN CRAZE plc
Statement of Financial Position as at September 30, 2021
ASSETS	2021 000		2020 000
Non Current Assets
Investment	1,000		0
Property, Plant and Equipment	5,500		4,800
	6,500		4,800
Current Assets
Inventory	30		930
Trade and other Receivables	5,893		3,740
Cash and cash equivalents	3,037		1,000
	8,960		5,670
Total Assets	15,460		10,470
EQUITY & LIABILITIES
EQUITY
Share Capital (1 Ordinary Shares)	1,000		1,000
Revaluation Reserve	1,360		0
Retained Earnings	8,200		8,195
Total Equity	10,560		9,195
Non Current Liabilities
8% Preference Shares, par value 1	1,000		100
6% Convertible Loan note 2027	3,000		0
	4,000		100
Current Liabilities
Trade and other payables	600		725
Taxes payable	300		450
	900		1,175
Total Liabilities	4,900		1,275
Total liabilities & equity	15,460		10,470

Table 3.1 Income statement

KITCHEN CRAZE plc
Income Statement for the year ended September 30, 2021
	2021 000		2020 000
Revenue	35,562		55,821
Cost of Sales	28,354		35,752
Gross Profit	7,208		20,069
Distribution Costs	1,890		5,017
Administrative Expenses	2,532		6,020
Profit from Operations	2,786		9,032
Finance Costs	160		8
Profit before tax	2,626		9,024
Corporation Tax	864		2,888
Profit for the year	1,762		6,136
Other comprehensive income for the year
Revaluation Gain	1,360		0
Total comprehensive income for the year	3,122		6,136

Table 3.1: SoFT (Statement of Financial Position)

KITCHEN CRAZE plc
Statement of Financial Position as at September 30, 2021
ASSETS	2021 000		2020 000
Non Current Assets
Investment	1,000		0
Property, Plant and Equipment	5,500		4,800
	6,500		4,800
Current Assets
Inventory	30		930
Trade and other Receivables	5,893		3,740
Cash and cash equivalents	3,037		1,000
	8,960		5,670
Total Assets	15,460		10,470
EQUITY & LIABILITIES
EQUITY
Share Capital (1 Ordinary Shares)	1,000		1,000
Revaluation Reserve	1,360		0
Retained Earnings	8,200		8,195
Total Equity	10,560		9,195
Non Current Liabilities
8% Preference Shares, par value 1	1,000		100
6% Convertible Loan note 2027	3,000		0
	4,000		100
Current Liabilities
Trade and other payables	600		725
Taxes payable	300		450
	900		1,175
Total Liabilities	4,900		1,275
Total liabilities & equity	15,460		10,470