Chipango Ltd, produces and sells special nuts. The company is preparing its budget for the year 2021. The budget will need to be approved by 30th November 2020. The forecasted bank overdraft as at 31st December 2020 is K360,000. The planned selling price of a nut is K318. Each of the months of March, June, September and November are expected to achieve 8.5% of the planned sales quantity. The remainder of the planned sales quantity is expected to be achieved equally in all of the other months. The sales receipts are 80% of the current sales and the balance is spread equally over the next two months. It is company policy to provide 2% of the sales for unrecoverable debts. Variable cost per nut: Raw material requirement was 10 kgs at the price of K12 per kg will be required. Direct labour hours are 18 at the hourly rate of K5 and the variable overheads recovered at the rate of K2 per labour hour. The company has planned a target profit of K1, 440,000 for 2020. The fixed costs for the year are evenly planned as follows:

Production overheads K2,160,000

Administration overheads K1,440,000

Selling overheads K720,000

Total  K4,320,000.

Chipango Ltd plans to settle K632,500 outstanding dividends in the third month of the new year. The materials are paid for in the month following the purchases. Labour costs, variable and fixed costs are settled as they are incurred. The production of each month’s sales is planned as, 40% of each month’s sales are produced in the month before sale and the balance is produced in the month of sale. The purchase of the direct materials required for each month’s production is planned as follows:

(i) 35% of each month’s direct materials requirements are purchased in the month before the materials are required.

(ii) 65% of each month’s direct materials requirements are purchased in the month the materials are required. The inventory of direct materials and finished goods at 1 January should be assumed to be consistent with the above policies.

A new Finance Director, who previously held a senior management position in a 'not for profit' health organisation, has recently been appointed. Whilst employed by the health service organisation, the new Finance Director had been the manager responsible for the implementation of a zero-based budgeting system which proved highly successful.

You are required to:

a) Calculate the total budgeted sales quantity (special nuts) for the year 2021. (5 marks)

b) Calculate the budgeted sales quantity for each of the months of May and November. (5 marks)

c) Calculate the Breakeven point in special nuts and revenue. (3 marks)

d) Calculate the margin of safety as a percentage of budgeted sales and comment on the results. (3 marks)

e) Prepare the production quantity (special nuts) budget for each of the first three of the year 2021. (3 marks)

f) Prepare the direct materials purchases budget (in Kilogram and value) for the first three months of the year 2021. (6 marks) g) Prepare the Cash budget for the first three months of the year 2021.

(14 marks)

h) Explain how the implementation of a zero-based budgeting system in CT Ltd may differ from the implementation of such a system in a 'not for profit' health organisation.

Answer rating: 100% (QA)

ANSWER a The total budgeted sales quantity for the year 2021 is 1000000 special nuts b The budgeted ... View the full answer