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Murray Ltd is preparing to set up business on 1/1/2014 to manufacture a single product - Leaving Cert Accounting - Question 9 - 2013
Question 9
Murray Ltd is preparing to set up business on 1/1/2014 to manufacture a single product. Below is the sales budget for the company for the first 6 months of 2014. Sa... show full transcript
Worked Solution & Example Answer:Murray Ltd is preparing to set up business on 1/1/2014 to manufacture a single product - Leaving Cert Accounting - Question 9 - 2013
Step 1
Prepare a Production Budget for the four months January to April, 2014.
Answer
To prepare the Production Budget, we need to calculate the required sales units and include the beginning and ending inventory:
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Monthly Sales Units:
- January: 7,000
- February: 8,000
- March: 10,000
- April: 9,000
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Calculate Closing Stock for each month: Closing Stock = 70% of next month’s sales:
- February: 70% of 10,000 = 7,000
- March: 70% of 9,000 = 6,300
- April: 70% of 10,500 = 7,350
- May: 0 (Not included)
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Calculate Opening Stock:
- January: 12,600 (given)
- February: 7,000 (from January closing stock)
- March: 9,000 (from February closing stock)
- April: 6,300 (from March closing stock)
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Required for Production: Required units = Sales + Closing Stock - Opening Stock.
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Budget Table:
Month Sales + Closing Stock - Opening Stock Required for Production January 7,000 7,000 12,600 1,400 February 8,000 6,300 7,000 7,300 March 10,000 7,350 9,000 8,350 April 9,000 0 6,300 2,700
Step 2
Prepare a Raw Materials Purchases Budget (in units and €) for the four months January to April, 2014.
Answer
When preparing the Raw Materials Purchases Budget, consider the following:
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Materials Required per Unit: Each product requires 5 kgs of material X.
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Calculate Required Production (from the Production Budget).
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Calculate Total Raw Material Requirements:
- Required for Production = Units Required * 5 kgs.
- Add Closing Stock required for the next month (20% of next month’s production).
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Calculate Opening Stock (20% of current month’s requirements) to find out the net purchase needed.
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Unit Cost: €2.00 per kg.
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Budget Table:
Month Units of Production Materials per Unit Required for Production Closing Stock Opening Stock Price per kg Cost of Raw Materials January 1,400 5 kg 7,000 0 0 €2.00 €14,800 February 7,300 5 kg 36,500 3,000 1,400 €2.00 €144,800 March 8,350 5 kg 41,750 5,400 7,300 €2.00 €167,200 April 2,700 5 kg 13,500 0 1,400 €2.00 €25,400
Step 3
Prepare a Cash Budget for the 4 months January to April, 2014.
Answer
The Cash Budget consists of:
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Receipts:
- Cash Sales: 40% of Monthly Sales Revenue.
- Credit Sales: 60% of Monthly Sales Revenue (revenue collected over 2 months).
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Payments:
- Expected Costs (Wages, Overheads, etc.) as detailed above.
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Net Monthly Cash Flow: Receipts - Payments.
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Balance: Start with an opening balance and calculate cash balance for each month.
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Budget Table:
Month Receipts Payments Net Cash Flow Opening Balance Closing Balance January 84,000 162,500 -78,500 30,000 -48,500 February 96,000 246,100 -150,100 -48,500 -198,600 March 108,000 194,200 -86,200 -198,600 -284,800 April ... ... ... ... ...
Step 4
Prepare a Budgeted Trading and Profit Loss Account for the 4 months ending 30/4/2014.
Answer
The Budgeted Trading and Profit and Loss Account summarizes:
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Sales: €1,020,000 (from expected sales units).
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Cost of Sales: Include opening stock, purchases of raw materials, and closing stock.
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Gross Profit: Sales - Cost of Sales.
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Expenses: Include wages, overheads, depreciation.
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Operating Profit: Gross Profit - Total Expenses.
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Net Profit: Operating Profit - Interest paid.
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Budget Table:
Item Amount (€) Sales 1,020,000 Cost of Sales (calculated) Gross Profit (calculated) Total Expenses (calculated) Operating Profit (calculated) Net Profit (calculated)
Step 5
Explain what is meant by a Capital budget.
Answer
A Capital Budget is a financial plan that outlines the expected capital expenditures and revenues for a specific period. It typically involves:
- Long-term Investments: Planning for significant investments in fixed assets such as equipment and property.
- Expected Returns: Estimating the financial returns on these investments.
- Funding Sources: Identifying sources of capital, such as loans or equity financing.
- Strategic Planning: Aligning capital expenditures with the organization's long-term goals.
In summary, the Capital Budget is critical for making informed decisions about expenditures that will affect the company’s future operational capabilities and financial performance.