Question

Question 6 (12 marks) Kohli Cricket Equipment Ltd manufactures cricket bats. Management is now preparing detailed budgets for the third quarter, July to September, and has assembled the following information to assist in preparing the budget: The Marketing Department has estimated sales in units as follows for the remainder of the year July August September 12,000 14,000 10,000 October November December 8,000 6,000 6,000 The company maintains finished goods inventories equal to 10% of the following month's sales. The inventory of finished goods on July 1 will be 2200 bats. • Each cricket bat requires 2 kilograms of Willow Wood. To prevent shortages, the company would like the inventory of Willow Wood on hand at the end of cach month to be equal to 20% of the following month's production needs. The inventory of Willow Wood on hand on 31 July will be 5,440 kilograms. Required: (i) Prepare a production budget in units for each of the months, July to September. (3 marks)

Answer 1

i)

Kohli Cricket Equipment Llimited
Production budget for the month
	July	August	September
	Units	Units	Units
Sales	12000	14000	10000
Add: Closing finished goods	1400	1000	800
	(14000*10%)	(10000*10%)	(8000*10%)
	13400	15000	10800
Less: Opening stock of finished goods	2200	1400	1000
Production (units)	11200	13600	9800

ii)

Kohli Cricket Equipment Llimited
Direct material (in Kgs) budget for the month of August
	August
Production (units)	13600
Willow wood required for production (kgs)	27200
	(13600*2)
Inventory required (20% of September production)	3920
	(9800*2*20%)
	31120
Less: Opening inventory of willow wood	5440
Willow wood required in August (kgs)	25680

iii) Budgetary slack is the deliberate under estimation of budgeted revenue or over estimation of budgeted expenses. This allows managers a much better chance of making their numbers which is particularly important for them if performance appraisals and bonuses are tied to the achievement of budgeted numbers.

An organisation can reduce the problems caused by budgetary slack by

1. Limiting the number of managers who contribute to the budget

2. A budget should not be the basis for evaluating the performance

iv) Budgeting plays an important role to achieve the objective of the organisation by utilizing available resources efficiently. With the help of a budget plan, it is easy to do the financial analysis that you have enough money to do things that you have planned to do. A strong budgeting plan improves and provides useful insights for decision making.

The budget sets a tone for the organisation. It helps in forecasting the approach to the management for the coming years. It helps in determining whether the management planning is going to be aggressive or cut down on costs ot it would maintain a steady pace.

So budgeting is very essential element in the success of the organisation.