Budgets: Discussion question

RD Ltd. is in the process of preparing its budgets for 2020. Thecompany produces and sells a single product, Z, which currently hasa selling price of £100 for each unit.

The budgeted sales units for 2020 are expected to be asfollows:

Jan	Feb	Mar	Apr	May	Jun	July	Aug	Sep	Oct	Nov	Dec
5,000	5,500	6,000	6,000	6,250	6,500	6,250	7,000	7,500	7,750	8,000	7,500

The company expects to sell 7,000 units in January 2021.

The selling price for each unit will be increased by 15% witheffect from 1 March 2020.

1,000 units of finished goods are expected to be in stock at theend of 2019. It is company policy to hold a closing stock balanceof finished goods equal to 20% of the following month’s sales.

Each unit of Z produced requires 3 kgs of material X, whichcurrently costs £5 for each kg. The price for each kg is expectedto increase by 10% on 1 June 2020.

Stock of raw material at the end of 2019 is expected to be 3,750kgs. The company wishes to avoid any stock-outs and requires theclosing stock of raw materials to be set at 20% of the followingmonth’s production requirements.

A purchase of fixed asset will be made in March, £50,000 –payment will be made in four equal installments starting in June.Opening cash balance of £20, 000.

The production of each unit of Z requires 4 hours of skilledlabour and 2 hours of unskilled labour. Skilled labour is paid at arate of £10 for each hour and unskilled labour at £8 for each hour.Each worker is expected to work 40 hours each week, 48 weeks eachyear.

Taxation on 2019’s profit will be paid in March and thisam­­­­ounts to £15, 000. Fixed overhead including depreciation of£550 is £3,000 per month and this is expected to increase in May to£3,500.

Required:

Prepare the following budgets for the first six monthsof 2020.

(a) The sales budget (in value)                                  

(b) The production budget (in units)                       

(c) The material usage budget (in value)               

(d) The material purchase budget (in value)        

(e) The direct labour budget (in hours)                                                  

(f) Cashbudget