Question

Bright Home Furniture is a well-known wooden display cabinet’s manufacturer in Seremban. Given below are the budgeted sales for the first four months of the year 2020:

Month	Unit to be produced
January	168
February	198
March	185
April	226

It requires 20 meters of wood to produce one unit of wooden display cabinet, at a cost of RM25 per meter. Assume that the company maintains an inventory of wood equal to 15 percent of the next month's needs. At the beginning of the year, 980 meters of wood are on hand.

Instructions

(a)        Prepare a Direct Materials Budget, in Ringgit Malaysia (RM), for the first quarter in year 2020. (Show all workings).

(b)        Identify the SIX (6) benefits of budgeting.

Answer 1

1)

Direct Materials Budget

	January	February	March	Total of the 1st quarter
Units to be produced ( from production budget)	168	198	185
Direct materials per unit (meters)	20	20	20
Total direct materials needed for production (meters)	3,360	3,960	3,700
Add: Desired ending direct materials. (meters)	594	555	678
Less : Beginning direct materials	(980)	(594)	(555)
Direct materials purchased (meters)	2,974	3,921	3,823
Cost Per meter (RM)	25	25	25
Cost of direct materials purchased (RM)	74,350	98,025	95,575	267,950

2) Six benefits of budgeting :

(a) It is a single use plan, which economically use financial resources .

(b) It defines the objectives of the organization as a whole and within this overall framework, it defines the results which each departments should achieve .

(c) On the basis of budgeting , effective and efficient allocation of resources can be done .

(d) It establishes a basis for internal audit by means of regular examination of departmental results.

(e) It facilitates Quick decision making from the end of the management, where controlling is centralized but activities and responsibilities are decentralized .

(f) It provides a basis for measuring productivity efficiency of the operation and workers by enabling the use of standard costs.

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