Intermediate: Calculation of sales to achieve target profit and preparation of functional budgets There is a continuing demand for three sub¬ assemblies - A, B, and C - made and sold by MW Limited. Sales are in the ratios ofA 1, B 2, C 4 and selling prices are A £215, B £250, C £300.

Each sub-assembly consists of a copper frame onto which are fixed the same components but in differing quantities as follows:

The skilled labour is paid £6 per hour and unskilled £4.50 per hour. The skilled labour is located in a machining department and the unskilled labour in an assembly department. A five-day week of 37^ hours is worked and each accounting period is for four weeks.
Variable overhead per sub-assembly is A £5, B £4 and C £3.50. At the end of the current year, stocks are expected to be as shown below but because interest rates have increased and the company utilises a bank overdraft for working capital purposes, it is planned to effect a 10% reduction in all finished sub-assemblies and

Work-in-progress stocks are to be ignored.
Overhead for the forthcoming year is budgeted to be Production £728 000, Selling and Distribu¬ tion £364000 and Administration £338 000. These costs, all fixed, are expected to be incurred evenly throughout the year and are treated as period costs.
Within Period 1 it is planned to sell one thir¬ teenth of the annual requirements which are to be the sales necessary to achieve the company profit target of £6.5 million before tax.
You are required:

(a) to prepare budgets in respect of Period 1 of the forthcoming year for (i) sales, in quantities and value;
(ii) production, in quantities only;
(iii) materials usage, in quantities;
(iv) materials purchases, in quantities and value;
(v) manpower budget, i.e. numbers of people needed in each of the machining department and the assembly depart¬ ment; (20 marks)

(b) to discuss the factors to be considered if the bought-in stocks were to be reduced to one week’s requirements - this has been proposed by the purchasing officer but resisted by the production director. (5 marks)
(Total 25 marks)
CIMA Stage 2 Cost Accounting

Sub-assembly Frame Component Component Component A B C Buying in costs, per unit D E F 1 5 I 4 1 1 7 5 3 5 1 20 8 5 3 Operation times by labour for each sub- assembly are: Sub-assembly Skilled hours Unskilled hours A B C 2 1 1272 1 2 223