Tremor manufactures two products, Winnex and Amora, which use raw materials, BX and DG. One unit of Winnex uses 3 litres of BX and 4 kilograms of DG. One unit of Amora uses 5 litres of BX and 2 kilograms of DG. A litre of BX is expected to cost $3 and a kilogram of DG $7.

Sales and finished goods inventory budget for the year 2002 are as follows:

Winnex Amora

Budgeted Sales 8000 units 6000 units

Opening Inventory 1500 units 300 units

Closing Inventory 600 units 600 units

Selling Price $200 $300

Inventories of raw material are 6,000 litres of BX and 2,800 kilograms of DG at 1 January, 2002 and the company plans to hold 5,000 litres and 3,500 kilograms, respectively, at

31, December 2002.

The warehouse and stores managers have suggested that a provision should be made for damages and deterioration of items held in store, as follows:

Product

Winnex Loss of 50 units

Amora Loss of 100 units

Raw Materials

BG Loss of 500 litres

DG Loss of 200 kilograms

The standard direct labour content of product Winnex is three hours and two hours for Amora. The budgeted productivity ratio of direct labour is only 80% for both products (which means that labour is only working at 80% efficiency).

The company employs 18 direct operatives to work on both products at a rate of $20 per hour and are expected to average 2,000 working hours each for the year.

Required:

a. Prepare the following budgets for the year 2002:

i.Sales

ii.Production budget

iii. Raw material usage budget

iv. Raw Materials purchases

v. Direct labour budget.

b. i. Comment on the problem that your direct labour budget reveals.

ii. Suggest two ways this problem might be overcome.