Tremor manufactures two products,Winnexand Amora, which use raw materials, BX and DG. One unit ofWinnexuses 3litresof BX and 4 kilograms of DG. One unit of Amora uses 5litresof BX and 2 kilograms of DG. Alitreof 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 6,000litresof BX and 2,800 kilograms of DG at 1January,2002 and the company plans to hold 5,000litresand 3,500 kilograms, respectively, at31, 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 directlabourcontent of productWinnexis three hours and two hours for Amora. The budgeted productivity ratio of directlabouris only 80% for both products (which means thatlabouris 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.

How would I show the following budgets for the year 2002:

1. Sales
2. Production budget
3. Raw material usage budget
4. Raw Materials purchases
5. Direct labour budget.

i. What problem would be revealed in the direct labour budget

ii. How might this problem be overcome.