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Houghton Ltd is planning to set up a business on 01/07/2020 and has made the following forecast for the first six months of trading: **Sales price per unit is €50.** (i) Stocks of finished goods are maintained at 60% of the following month’s sales requirement - Leaving Cert Accounting - Question 9 - 2020
Question 9
Houghton Ltd is planning to set up a business on 01/07/2020 and has made the following forecast for the first six months of trading: **Sales price per unit is €50.*... show full transcript
Worked Solution & Example Answer:Houghton Ltd is planning to set up a business on 01/07/2020 and has made the following forecast for the first six months of trading: **Sales price per unit is €50.** (i) Stocks of finished goods are maintained at 60% of the following month’s sales requirement - Leaving Cert Accounting - Question 9 - 2020
Step 1
Prepare a production budget for Houghton Ltd for the four months July to October 2020.
Answer
To prepare the production budget, we first need to determine the sales forecast, determine the required closing stocks, and calculate the total production needed.
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Sales Forecast: July: 11,400 August: 11,600 September: 11,900 October: 12,200
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Closing Stock Calculation:
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For July:
Closing stock = 60% of next month's sales = 60% of 11,600 = 6,960
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For August: Closing stock = 60% of September sales = 60% of 11,900 = 7,140
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For September: Closing stock = 60% of October sales = 60% of 12,200 = 7,320
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For October, we assume 60% of November's forecast (12,400) = 7,440.
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Opening Stocks (assumed 0 for July): Opening for August = 60% of July's sales = 60% of 11,400 = 6,840.
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Production Calculation:
Required Production = Sales + Closing Stock - Opening Stock- July: 11,400 + 6,960 - 0 = 18,360
- August: 11,600 + 7,140 - 6,840 = 11,900
- September: 11,900 + 7,320 - 7,140 = 12,080
- October: 12,200 + 7,440 - 7,320 = 12,320
Therefore, the production budget will be:
| Month | Units Required |
|---|---|
| July | 18,360 |
| August | 11,900 |
| September | 12,080 |
| October | 12,320 |
Step 2
Prepare a raw materials purchases budget (in units and €) for Houghton Ltd for the four months July to October 2020.
Answer
To prepare the raw materials purchases budget, we will calculate the total raw materials needed for production, the required closing stocks, and then calculate the purchases required.
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Materials Requirement: Each product requires 4 kg of material X.
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Production in Units (from the production budget):
- July: 18,360
- August: 11,900
- September: 12,080
- October: 12,320
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Kgs Needed for Production:
- July: 18,360 units * 4 kg/unit = 73,440 kg
- August: 11,900 units * 4 kg/unit = 47,600 kg
- September: 12,080 units * 4 kg/unit = 48,320 kg
- October: 12,320 units * 4 kg/unit = 49,280 kg
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Closing Stock Requirement:
- For July: 20% of August production = 20% of 47,600 = 9,520 kg
- For August: 20% of September production = 20% of 48,320 = 9,664 kg
- For September: 20% of October production = 20% of 49,280 = 9,856 kg
- For October: Assume closing stock based on November's requirement (not given)
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Opening Stocks (assumed 0 for July): Opening for August = 20% of July = 20% of 73,440 = 14,688 kg
Using all this information:
Purchases Required = (Kg Needed for Production + Closing Stocks - Opening Stocks)
Putting it in a table:
| Month | Kg Required | Opening Stock | Closing Stock | Purchases Required |
|---|---|---|---|---|
| July | 73,440 | 0 | 9,520 | 73,440 + 9,520 |
| August | 47,600 | 14,688 | 9,664 | 47,600 + 9,664 - 14,688 |
| September | 48,320 | 9,664 | 9,856 | 48,320 + 9,856 - 9,664 |
| October | 49,280 | 9,856 | [calculated] | 49,280 + [closing] - 9,856 |
Step 3
Prepare a cash budget for Houghton Ltd for the four months ending 31/10/2020.
Answer
The cash budget calculation involves considering cash inflows from sales and cash outflows for various expenses, including wages, variable overheads, fixed overheads, and loan payments.
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Cash Sales for Each Month:
- Cash Customers: 40% of total sales
- ADD: Cash discount: 5% on cash sales
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Credit Sales Collections:
- Collections occur in the month after the sale.
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Total Payments:
- Wages (includes 10% of sales).
- Variable Overheads (based on production)
- Fixed Overheads
- Equipment payments and interests.
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Net Cash Flow Calculation: Calculate Net Cash Flow = Total Cash Inflows - Total Cash Outflows for each month.
The final cash budget in table form:
| Month | Cash Inflow | Cash Outflow | Net Cash Flow |
|---|---|---|---|
| July | [Cash inflow] | [Cash outflow] | [Net Cash Flow] |
| August | [Cash inflow] | [Cash outflow] | [Net Cash Flow] |
| September | [Cash inflow] | [Cash outflow] | [Net Cash Flow] |
| October | [Cash inflow] | [Cash outflow] | [Net Cash Flow] |
Step 4
Explain what information is available to Houghton Ltd from the cash budget.
Answer
The cash budget provides Houghton Ltd with several critical insights:
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Liquidity Management: It shows the expected cash inflows and outflows, helping to identify potential cash surpluses or deficits.
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Financial Planning: Enables the company to plan for necessary financing, including decisions on borrowing or using available funds.
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Cash Flow Timing: Understanding when cash is expected to flow in and out aids in effective cash flow management, ensuring the business meets financial obligations.
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Operational Efficiency: Recognizing the relationship between sales, production, and subsequent cash flows aids in adjusting operational strategies more proactively.