MAPM5029 Management Accounting and Performance-Water Ltd Financial Sta
Water Ltd. is a new company, which will be incorporated on 1 January 2016. The company will manufacture one product.
The following details relate to the company’s first financial year:
Direct materials cost £40 per unit
Selling price £300 per unit
Direct labour 3 hours per unit
Direct labour cost £7.00 per hour
An overhead absorption rate of £5 per direct labour hour has been calculated for the variable production overheads. Variable distribution costs of £2.50 per unit sold will also be incurred.
Direct materials will be purchased during the month they are required for production and paid for during the following month. Monthly production is planned to meet expected sales demand for the following month. All sales will be on credit terms, with customers paying two months later. Water Ltd. will issue 20,000 ordinary shares of £1 at par for cash on 1 January 2016.
Water Ltd. will buy and pay for office equipment costing £2,400 in February 2016. The equipment will be depreciated by 25% per annum. Depreciation is not included in the overhead details given above.Production targets for the forthcoming financial year are as follows:
|
Month 2016 |
Units |
|
January |
120 |
|
February |
140 |
|
March |
160 |
|
April |
180 |
|
May |
200 |
|
June |
220 |
|
July |
240 |
|
August |
260 |
|
September |
240 |
|
October |
240 |
|
November |
160 |
|
December |
180 |
|
Total for year 2016 |
2,340 |
Total fixed production overheads of £9,900 and total fixed administration and distribution overheads of £3,900 for the year will be incurred on an even basis throughout the year. All overheads and the direct labour costs will be paid for in the month in which they are incurred. All production machinery will be leased - the costs of leasing the machinery are included in the above figures.
You are required to produce the following
- Based on the information provided, prepare the following budgets on a monthly basis for the 12 months ended 31 December 2016 in as much detail as the information given allows (you should also include a total column for the year ended 31 December 2016):
- Production Budgets
- Sales Budgets
- Materials Purchases Budgets
- Direct Labour Budgets
- Overheads Budgets
- Based on the information provided, prepare a Cash Budget for the company on a monthly basis for the 12 months ended 31 December 2016 in as much detail as the information given allows (you should also include a total column for the year ended 31 December 2016)
- Based on the information provided, prepare one budgeted Income Statement and one budgeted Balance Sheet for the whole of the year (12 months) ended 31 December 2016.
- Write a memorandum (maximum 1,500 words) to the shareholders to accompany the budgets that:
- Critically evaluates the use of budgets in the modern business world.
- Critically analyses the figures shown in the cash budget.
- Suggests ways in which the cash budget could be improved.
Answer:
| OPERATIONAL BUDGETS OF WATER LTD | ||||||||||||
| Particulars | February | March | April | May | June | July | August | September | October | November | December | Total |
| Opening inventory (Units) | 120 | 260 | 300 | 340 | 380 | 420 | 460 | 500 | 500 | 480 | 400 | |
| Production (Units) | 140 | 160 | 180 | 200 | 220 | 240 | 260 | 240 | 240 | 160 | 180 | 2340 |
| Sales (Units) | 120 | 140 | 160 | 180 | 200 | 220 | 240 | 260 | 240 | 240 | 160 | 0 |
| Closing Inventaory (Units) | 140 | 280 | 320 | 360 | 400 | 440 | 480 | 480 | 500 | 400 | 420 | 340 |
| Particulars | February | March | April | May | June | July | August | September | October | November | December | Total |
| Sales volume (units) | 120 | 140 | 160 | 180 | 200 | 220 | 240 | 260 | 240 | 240 | 160 | 2160 |
| Selling Price per unit | £300 | £300 | £300 | £300 | £300 | £300 | £300 | £300 | £300 | £300 | £300 | £300 |
| Sales (£) | £36,000 | £42,000 | £48,000 | £54,000 | £60,000 | £66,000 | £72,000 | £78,000 | £72,000 | £72,000 | £48,000 | £6,48,000 |
| Particulars | February | March | April | May | June | July | August | September | October | November | December | Total |
| Units | 140 | 160 | 180 | 200 | 220 | 240 | 260 | 240 | 240 | 160 | 180 | 2340 |
| Price per unit £ | £40 | £40 | £40 | £40 | £40 | £40 | £40 | £40 | £40 | £40 | £40 | £40 |
| Material purchases (£) | £5,600 | £6,400 | £7,200 | £8,000 | £8,800 | £9,600 | £10,400 | £9,600 | £9,600 | £6,400 | £7,200 | £93,600 |
| Particulars | February | March | April | May | June | July | August | September | October | November | December | Total |
| Units | 140 | 160 | 180 | 200 | 220 | 240 | 260 | 240 | 240 | 160 | 180 | 2340 |
| Hour per unit | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 |
| Total Hours | 420 | 480 | 540 | 600 | 660 | 720 | 780 | 720 | 720 | 480 | 540 | 7020 |
| Rate per Hour £ | £7 | £7 | £7 | £7 | £7 | £7 | £7 | £7 | £7 | £7 | £7 | £7 |
| Direct Labour cost (£) | £2,940 | £3,360 | £3,780 | £4,200 | £4,620 | £5,040 | £5,460 | £5,040 | £5,040 | £3,360 | £3,780 | £49,140 |
| Particulars | February | March | April | May | June | July | August | September | October | November | December | Total |
| Number of hours of production | 420 | 480 | 540 | 600 | 660 | 720 | 780 | 720 | 720 | 480 | 540 | 7020 |
| Number of units produced | 140 | 160 | 180 | 200 | 220 | 240 | 260 | 240 | 240 | 160 | 180 | 2340 |
| Absorption rate (5 per hour) | £2,100 | £2,400 | £2,700 | £3,000 | £3,300 | £3,600 | £3,900 | £3,600 | £3,600 | £2,400 | £2,700 | £35,100 |
| Distribution cost (2.50 per unit sold) | £300 | £350 | £400 | £450 | £500 | £550 | £600 | £650 | £600 | £600 | £400 | £5,400 |
| FIXED PRODUCTION OVERHEADS BUDGET (£) | £825 | £825 | £825 | £825 | £825 | £825 | £825 | £825 | £825 | £825 | £825 | £9,900 |
| PRODUCTION FIXED ASSETS DEPRECIATION BUDGET (£) | £50 | £50 | £50 | £50 | £50 | £50 | £50 | £50 | £50 | £50 | £50 | £600 |
| FIXED ADMINISTRATION OVERHEADS BUDGET (£) | £325 | £325 | £325 | £325 | £325 | £325 | £325 | £325 | £325 | £325 | £325 | £3,900 |
| Total overhead | £3,550 | £3,900 | £4,250 | £4,600 | £4,950 | £5,300 | £5,650 | £5,400 | £5,350 | £4,150 | £4,250 | £54,300 |
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