R Limited manufactures three products: A, B and C. You are required:

using the information given below, to prepare budgets for the month of January for:

sales in quantity and value, including total value production quantities material usage in quantities materials purchases in quantity and value, including total value

Data for Preparation of January Budgets

Data for Preparation of January Budgets

Product Quantity Price each

A 1000 100

B 2000 120

C 1500 140

  Materials Used in the Company's Products Material M1 M2 M3 Unit Cost 4 6 9   Quantities used Product units units units A 4 2 - B 3 3 2 C 2 1 1   Finished stocks Quantities A B C 1st January 1000 1500 500 31st January 1100 1650 550   Material stocks M1 M2 M3

units units units 1st January 26000 20000 12000 31st January 31200 24000 14400

(CIMA Cost Accounting 1: modified)

Solution to Worked Example: R Limited

Although both real and academic budgeting questions can sometimes prove difficult to solve, they are basically exercises in following through relationships and carrying out arithmetical calculations.

Please bear in mind the interrelationships of budgets that we discussed in the first page in this series. We will see an example of such interrelationships when we get to the Materials Usage Budget.

The budgets presented below should be found to be clearly and logically laid out, although there are alternative forms of layout that we could use for just about any budget we are working on.

  Product (i) Sales Budget A B C Total Sales Units 1000 2000 1500 Sales Values 100000 240000 210000 550000

The workings here are very straightforward: the sales values are found by multiplying the number of units sold (given in the question) by the selling price per unit (also given in the question).

(ii) Production Budget Product

Units A B C

Opening Stock 1000 1500 500 Production 1100 2150 1550 Total   2100 3650 2050 Closing Stock 1100 1650 550 550000 Sales 1000 2000 1500

The production budget follows this layout:

Opening stockPlus What we have produced this periodGives How many units are available to sell or use somewhere elseLess Closing stock, that we have not sold or usedGives What we must have sold or used

Remember, in the case of a production budget, we are dealing with finished goods, not raw materials or work in progress: hence, check where the opening and closing stock figures in this schedule have come from.

Also remember that there are alternative and acceptable layouts of the Production budget.

  Product(iii) Materials Usage Budget A B C Total

Units Produced 1100 2150 1550 Material Usage M1 4400 6450 3100 13950 Material Usage M2 2200 6450 1550 10200 Material Usage M3 - 4300 1550 5850

Here we see an example of the inter relationships between budgets that we discussed above. Having prepared the production budget, we use the outputs of that budget as the primary input of the materials usage budget: that is, the units produced.

The material usages are found by multiplying together the number of units produced by the number of units of each raw material required for each product. For example,

(iv) Materials Purchases Budget Material Units M1 M2 M3 Opening Stock 26000 20000 12000 Purchases 19150 14200 8250   45150 34200 20250 Closing Stock 31200 24000 14400 Used in Production 13950 10200 5850 Values M1 M2 M3 Total Purchases (units) 19150 14200 8250

Cost per unit 4 6 9 Total Cost 76600 85200 74250 236050

Conclusions

Functional budget preparation is not a difficult affair: work through the above example a couple of times and you should agree. The key principles of functional budget preparation are

· Understand the function, process or system you are budgeting

· Find all of the data you need

· Separate the values from the volumes

· Check for interrelationships, understand and use them

· Check your arithmetic once you have prepared each budget