Question

ABC Pty Ltd produces turbines used in the production of hydro-electric generating

equipment. The turbines are sold to various engineering companies that produce hydropowered generators in Australia.

Details of the operations for the coming four months are provided in the attached excel

spread sheet.

Other information:

• The company plans to purchase land for future expansion

• Sales are on credit. Amounts not received in the month following the sale are

written off as bad debt immediately.

• The payment for labour and purchases of materials and other costs are for cash

and paid for in the month of acquisition.

• If the firm develops a cash shortage by the end of the month, sufficient cash is

borrowed to cover the shortage (including any interest payments due ). Any cash

borrowed is repaid one month later, as is the interest due.

During the process of preparing the organisation’s budget, the Sales Manager is

discussing the possible outcome of the forthcoming election with the Production

Manager. She noted that if one of the major political parties wins the election and forms

the government, there is a strong possibility that alternative sources of energy such as

hydro-powered electricity may no longer be as actively supported by the new

government as is the case under the current government.

The sales manager’s primary concern is that market for alternative power generation is

already volatile and subject to significant uncertainty. The production manager is also

concerned about his plans to build the new automated manufacturing facility on the

land to be purchased in May. This new manufacturing facility will enable him to

manufacture, in-house, the major two parts he is now purchasing and to significantly

automate the assembly process that is currently somewhat labour intensive. His

projection for the new facility indicates a reduction in direct material & direct labour

costs of 33% but that his fixed manufacturing overheads are likely to increase by 65%

due to the increased investment in production capacity.

Required:

Part A: Prepare Operating Budgets as follows: (75% of the marks)

1) Monthly Sales Budget for the quarter ending June

2) Monthly Production Budget for the quarter ending June

3) Monthly Direct Materials Budget for the quarter ending June

4) Monthly Direct Labour Budget for the quarter ending June

ABC Ply itd Sales April May 67,500 $6,200 Jure July 54,000 60,750 81,000 Actual Sales Volume 3 moths to June 162,200 Units Unit selling price

Answer 1

Solution:

Requirement 1 Sales Budget For the Quarter Ended June April May 67,500 54,000 $6,200 $6,200 $41,85,00,000 $33,48,00,000 Budgeted Units Sold (x) Selling Price Budgeted Sales June Quarter 60,750 1,82,250 $6,200 $37,66,50,000 $1,12,99,50,000

June Budgeted Units Sold (+) Desired ending inventory of FG Total Needed (-) Beginning inventory of FG Budgeted Production Requirement 2 Production Budget For the Quarter Ended June April May 67,500 54,000 32,400 36,450 99,900 90,450 43,200 32,400 56,700 58,050 60,750 48,600 1,09,350 36,450 72,900 Quarter 1,82,250 48,600 2,30,850 43,200 1,87,650

Requirement 3 Direct Materials Budget For the Quarter Ended June April May June Quarter 1,87,650 Rotor: Production (Units) (x)Rotor required per FG Total Consumption of Rotor Add: End. Inventory of Rotor 56,700 4 58,050 4 72,900 4 2,26,800 43,200 2,70,000 54,000 2,16,000 $81 $1,74,96,000 Less: Beg. Inventory of Rotor Rotor Purchased (in units) (x) Cost per unit Rotor Purchased (in Dollars) 2,32,200 48,600 2,80,800 43,200 2,37,600 $81 $1,92,45,600 2,91,600 64,800 3,56,400 48,600 3,07,800 $81 $2,49,31,800 7,50,600 64,800 8,15,400 54,000 7,61,400 [A] $6,16,73,400 56,700 1,87,650 Blades: Production (Units) (x)Rotor required per FG Total Consumption of Blades Add: End. Inventory of Blades 5 58,050 5 2,90,250 60,750 3,51,000 54,000 2,97,000 $108 $3,20,76,000 2,83,500 54,000 3,37,500 67,500 2,70,000 $108 $2,91,60,000 72,900 5 3,64,500 81,000 4,45,500 60,750 3,84,750 $108 $4,15,53,000 Less: Beg. Inventory of Blades Blades Purchased (in units) (x) Cost per unit Blades Purchased (in Dollars) [B] $10,27,89,000 Total Direct Material Purchased [A+B] $4,66,56,000 $5,13,21,600 $6,64,84,800 $16,44,62,400

Requirement 4 Direct Labor Budget For the Quarter Ended June April May 56,700 58,050 8 8 4,53,600 4,64,400 $50 $50 $2,26,80,000 $2,32,20,000 June 72,900 8 Quarter 1,87,650 Production (Units) (x)Lobor hrs required per unit Total Direct lobor hrs worked (x)Lobor rate per hour Total Direct Labor Cost 15,01,200 5,83,200 $50 $2,91,60,000 $7,50,60,000

Calculation of Beginning Inventory of Raw Materials April May June July Rotor: Budgeted Sales (x)Rotor required per FG 67,500 4 2,70,000 54,000 54,000 4 2,16,000 43,200 60,750 4 2,43,000 48,600 81,000 4 3,24,000 64,800 Beg. Inventory of Rotor (20%) Blades: Budgeted Sales (x)Blades required per FG 67,500 5 54,000 5 2,70,000 54,000 60,750 5 3,03,750 60,750 81,000 5 4,05,000 81,000 3,37,500 67,500 Beg. Inventory of Blades (20%)