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Homework answers / question archive / 1)Smith Ltd manufactures and sells one product

1)Smith Ltd manufactures and sells one product

Accounting

1)Smith Ltd manufactures and sells one product. You are presented with the following information for the preparation of the annual operating budget for the period ending 31 December 2021:

  • Estimated sales in units are 50,000 units for Quarter 1, 53,000 units for Quarter 2, 62,000 units for Quarter 3, and 65,000 units for Quarter 4. The estimated per unit selling price is $9 for Quarters 1-3, and $10 for Quarter 4.

 

  • Smith Ltd has set the desired ending inventory of its product at 5% of the next quarter’s sales units. In quarter 4 of 2021 continuing into 2022, Smith Ltd aims to decrease this percentage to 2.5% of sales. It is expected that Smith Ltd will sell 60,000 units in Quarter 1 of 2022 and 65,000 units in Quarter 2 of 2022. The beginning inventory on 1 January 2021 is 3,000 units.

 

  • Smith Ltd uses 2.5 kg of direct material per unit to produce its product. Smith Ltd has set the desired ending inventory of its direct material at 15% of the next quarter’s manufacturing needs. The beginning inventory on 1 January 2021 is 17,750 kg of direct material. Smith Ltd has secured a contract price with a supplier, in which the supplier will provide direct materials at a cost of $0.55 per kg over the next 18 months.

Tasks

Prepare the following budgets for the period ending 31 December 2021 (use whole numbers when rounding):

  1. Sales budget.
  2. Production budget.
  3. Direct material purchases budget (use whole numbers when rounding).

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Preparation of Budget for the Year ended 31st December:-

(i).Sales Budget:-

Particulars I Quarter II Qaurter III Quarter IV Quarter Total
Sales Units(a) 50,000 53,000 62,000 65,000 230,000
Price Per Unit(b) $9 $9 $9 $10  
Total Sales 4,50,000 4,77,000 5,58,000 6,50,000 21,35,000

(ii).Production Budget:-

Production Budget for 1st Jan to 31st Dec 2021
Particulars Quarter 1 Quarter 2 Quarter 3 Quarter 4
Expected Sales for the Quarter 50,000 53,000 62,000 65,000

Add: Inventory at the End of Dec 2021(5 % of next Quarter Sales in first three Quarters

In Last 2.5% of Next Quarter Sales Units)

 2,650 3100 3250 1500
Less: Begining Inventory as on 1st jan 2021 3,000 2650 3100 3250
Production of the Quarter 49,650 53,450 62,150 63,250

(iii).    Direct Materials Budget

For the Year Ended December 31st, 2021

Particulars Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Units to be Produced(from

Production Budget)

 49,650 53,450 62,150 63,250  
Direct Material per unit 2.5 2.5 2.5 2.5  

Total Direct Material Needed for

production(lbs)

 1,24,125 1,33,625 1,55,375 1,58,125  

Add: Desired ending Direct Material(lbs)

(15% of Next Month Manufacturing Needs)

20,043

(15 % of 1,33,625)

23,306

23,719

 22,547(WN :1)  
Less: Beginning direct Materials(lbs) 17,750 20,043 23,306 23,719  
Direct Material Purchases(lbs) 1,26,418 1,36,888 155,788 1,56,953  
Cost Per Pound 0.55 0.55 0.55 0.55  
Cost of Direct Material Purchases 69,530 75,288 85,683 86,324  
           

(WN:1) Desired Ending Direct material of last Quarter:-

15 % of Next Quarter Manucturing Needs.(next quarter = jan to march 2022)

Next Quarter Sales(jan to march 2022) = 60,000 units

Add:Closing Inventory(2.5% of next quarter = 1625 units

units = 2.5% of 65,000 units)

Less:Opening Inventory(31dec 2021 = (1500)

inventory)

Production Units = 60,125

Material Required    = 2.5kg

Production Requirement of next

Quarter(Material)    = 60,125 *2.5

   = 1,50,313

15% of Above = 15% of 1,50,313

=22,547

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