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Spencer Ltd - Leaving Cert Accounting - Question 9 - 2005
Question 9
Spencer Ltd. has recently completed its annual sales forecast to December 2006. It expects to sell two products – Silver at €140 and Gold at €170. All stocks are to... show full transcript
Worked Solution & Example Answer:Spencer Ltd - Leaving Cert Accounting - Question 9 - 2005
Step 1
Production Budget (in units)
Answer
To prepare the production budget, we need to account for the expected sales and the opening stock, adjusting for the reduction in stocks by 20%.
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Expected Sales:
- Silver: 8,000 units
- Gold: 3,700 units
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Opening Stocks:
- Silver: 500 units at €120 each
- Gold: 400 units at €140 each
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Closing Stock Calculation:
- Silver: 500 units x 20% = 400 units will be justified at the end of the period.
- Gold: 400 units x 20% = 320 units will be justified at the end of the period.
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Required Production:
- Silver: 8,000 + 400 - 400 = 7,900 units
- Gold: 3,700 + 320 - 320 = 3,620 units
Thus, the production budget totals:
- Production for Silver: 7,900 units
- Production for Gold: 3,620 units.
Step 2
Raw Materials Purchases Budget (in units and €)
Answer
To create the Raw Materials Purchases Budget, we need to calculate the quantity of raw materials required for production and determine the purchase requirements.
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Requirements for Silver:
- Total Material 1: 7,900 units x 6 kgs = 47,400 kgs
- Total Material 2: 7,900 units x 4 kgs = 31,600 kgs
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Requirements for Gold:
- Total Material 1: 3,620 units x 4 kgs = 14,480 kgs
- Total Material 2: 3,620 units x 6 kgs = 21,720 kgs
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Total Requirements:
- Material 1: 61,880 kgs
- Material 2: 53,320 kgs
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Closing Stock of Raw Materials:
- Material 1 closing stock = 18,000 kgs (after production considerations)
- Material 2 closing stock = 16,000 kgs (after production considerations)
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Purchases Calculation:
- Total Material Purchases = Total Requirements - Opening Stocks = (61,880 + 53,320) - Closing stocks.
The purchase cost in euros can be calculated multiplying kg by the price per kg.
Step 3
Production Cost/Manufacturing Budget
Answer
This budget will include the costs for materials consumed, labor, and overheads.
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Raw Materials Consumed:
- Silver: 6 kgs x 4,000 units = 24,000 kgs
- Gold: 4 kgs x 3,700 units = 14,800 kgs
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Labor Costs:
- Skilled Labour for Silver: 7,900 units x 6 hours = 47,400 hours
- Skilled Labour for Gold: 3,620 units x 7 hours = 25,340 hours
- Total labour cost = Total hours x €12.
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Variable Overheads:
- Calculate using the total variable rate multiplied by total skilled labour hours.
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Fixed Overheads:
- Include fixed overhead costs of €145,480.
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Total Cost of Manufacture:
- Sum all costs above.
Step 4
Budgeted Trading Account
Answer
To create the budgeted trading account, we need to balance the income from sales against the costs of goods sold and the total manufacturing costs.
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Sales Income Calculation:
- Total sales budgeted is: (8,000 units x €134) + (3,700 units x €155).
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Cost of Goods Sold:
- Determine cost per unit multiplied by the units sold.
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Calculate Gross Profit:
- Gross Profit = Total Sales - Cost of Goods Sold.
Step 5
Market Research
Answer
For conducting market research, consider the following aspects:
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Trends:
- Review current market trends affecting product pricing and sales volumes.
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Comparison with Last Year’s Sales:
- Analyze last year’s sales data and how current forecasts compare.
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Sales Manager and Representatives’ Opinions:
- Gather insights from the sales team regarding customer preferences and buying behavior.
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Pricing Strategy:
- Analyze what price can be charged based on the above insights.
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Economic State:
- Consider the current economic conditions that may affect demand for luxury goods like Silver and Gold.
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Competition:
- Assess competitors' performance in the market and their pricing strategies.
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Luxury vs Necessities:
- Understand if the products fall under luxury or necessity and how that affects purchasing decisions.