ECON42815 TMc Lecture 1a

Budgetary planning

Case study: E plc

E plc manufactures and distributes components for the electronics industry. The firm's management and management accounting systems are built around budgetary planning and standard variable costing systems. The management team has agreed its operational budgets for the forthcoming budget year:

1.Sales will be:

Quarter 1 million

148

248

342

442

Note: In the previous year, sales were 48 million per quarter.

2.Selling prices will remain constant throughout the budget year.

3.Within each quarter, the sales mix will be :

Product A: 50% of sales value

Product B: 50% of sales value.

4.Selling prices will be:

Product A: 20 per unit

Product B: 50 per unit.

5.Variable production costs per unit will be:

Product AProduct B

Direct material1020

Direct labour25

Overhead25

6.Finished goods inventories of 2 million will be maintained throughout the budget year for each product; finished goods inventories are valued at variable production cost.

7.Products A and B are manufactured from the same direct material; total direct material inventories will be maintained at 1 million throughout the budget year.

8.Direct material prices, direct labour wage rates and variable production overhead input prices will remain constant over the budget year.

9.Budgeted annual fixed overhead costs (million) are as follows (last year's actual costs are shown in brackets),

Production, 10 (15); Administration, 10 (14); Selling and Marketing, 10 (15); Depreciation, 5 (8); Training, 1 (5); Research, 4 (8); Maintenance, 1 (5).

Fixed overhead costs will be incurred evenly over the budget year.

10.Budgeted management bonuses, not included in 9. above, are 10 million, payable on the last day of the budget year; last year management bonuses were 7 million.

11.E plc makes all of its sales on credit and customers pay their accounts at the end of the month following the month of sale.

12.E plc makes all of its purchases on credit and pays its suppliers at the end of the month following the month of purchase.

13.Direct labour, variable overhead and fixed overhead costs are paid in the month they are incurred.

14.In the first week of Quarter 3, production machinery costing 20 million will be acquired and paid for.

15.E plc works on a 48 week budget year. Each quarter contains 12 weeks and each month contains 4 weeks. Sales, purchases and production take place evenly, month by month,withineach quarter although, of course, there will be differences between quarters.

16.It is assumed that the following balances ( million) will be extracted from E plc's accounting system at thestartof the budget year,

Non-current assets at cost, 101; accumulated depreciation, 25; cash/bank, 10; debtors, 16; inventory of direct materials, 1; inventories of finished goods: Product A, 2 and Product B, 2; divisional capital and reserves, 99; creditors, 8.

Note: E plc and its divisions use the straight-line method of depreciation; it is company policy that fixed assets (non-current assets) are not depreciated in the year of purchase.

REQUIRED:

1.Prepare budgeted financial statements for E plc as follows:

Cash/bank budgets quarter by quarter (i.e. FOUR budgets in total)

ONE budgeted annual profit statement

ONE budgeted statement of financial position, as at the end of the budget year.

2.Comment upon E plc's operational budgets and the budgeted financial statements shown in answer to 1. above.