Question

Question 2 20 marks A sales budget is given below for one of the products manufactured by the Real Estate Company: January February March April May June 21,000 units 36,000 units 61,000 units 41,000 units 31,000 units 25,000 units The inventory of finished goods at the end of each month should equal 20% of the next month's sales. However, on December 31 the finished goods inventory totalled only 4,000 units. Each unit of product requires three specialized electrical switches. Since the production of these specialized switches by the suppliers is sometimes irregular, the company has a policy of maintaining an ending inventory at the end of each month equal to 30% of the next month's production needs. This requirement had been met on January 1 of the current year. Required (show your calculations): a. Prepare a budget showing the required production each month for January, February, March, and April (8 marks) b. Prepare a budget showing the quantity of switches to be purchased each month for January, February, and March (8 marks) C. From a parent company's viewpoint, there is no significant difference between the budgeting of a local subsidiary and a foreign subsidiary. Do you agree with this statement? Explain your answers. (4 marks)

Answer 1

a.

Production Budget
	January	February	March	April
Sales units	21000	36000	61000	41000
Add : Desired Ending Inventory	7200	12200	8200	6200
Total Needs	28200	48200	69200	47200
Less : Beginning Inventory	4000	7200	12200	8200
Production Required	24200	41000	57000	39000

Desired Ending Inventory
January = 36000 x 20%, February = 61000 x 20%, March = 41000 x 20% and April = 31000 x 20%

b.

Purchases Budget
	January	February	March	April
Production Required	24200	41000	57000	39000
Switches Per unit	3	3	3	3
Switches for Production	72600	123000	171000	117000
Add : Desired Ending Inventory	36900	51300	35100
Total Required	109500	174300	206100
Less : Beginning Inventory	21780	36900	51300
Switches to be purchased	87720	137400	154800

Desired Ending Inventory
January = 123000 x 30%, February = 171000 x 30%, March = 117000 x 30%

c.
No i dont agree with the statement. Budgeting is done on the basis of prevalent market conditions, as to competition in the market, availability of raw material etc. There may not be same conditions existing for local and foreign subsidiaries, so budgets have to be prepared accordingly. For instance, as per local prevalent conditions it is estimated that 30% of raw material is required so that new order can be arrived before stock out, accordingly for foreign subsidiary, ending inventory should be decided on basis on time taken to restock.

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