Budgeting

Budgeting

Silky Shag Ltd manufactures three sizes of silk rugs for the Australian market: Small, Medium and
Large. Silky Shag Ltd uses silk and polyester to
manufacture the rugs. They import the silk in
kilograms from Nepal and buy the polyester in
square metres from an Australian supplier. The
following data are available for the January 2013 to December 2013 budget:
The direct-cost inputs for each rug are:
Direct-cost inputs Small rug Medium rug Large rug
Silk 1 kg 2kg 4kg
Polyester 1.2 kg
2.5 kg 5 kg
Direct manufacturing labour 30 minutes 1 hour 1 hour 30 minutes
The Marketing Manager of Silky Shag Ltd projects the following monthly sales and estimated selling
prices of the three sizes of rugs for 2013:
Months Small rugs Medium rugs Large rugs
Projected
sales per
month
Selling
price
(S/P)
Projected
sales per
month
Selling
price (S/P)
Projected
sales per
month
Selling
price
(S/P)
January to March 2 000 $30 each 2 500 $55 each 1 900 $90 each
April to May 2 300 $33 each 2 700 $58 each 2 200 $95 each
June to December 2 600 $34 each 3 000 $60 each 2 400 $100 each
The actual inventory of finished goods as at 31 December 2012 is as follows:
Inventory at 31/12/2012 Small rugs Medium rugs Large rugs
Units 3 000 3 750 2 850
The actual inventory of raw material as at 31 December 2012 is as follows:
Inventory at 31/12/2012 Silk (kilograms) Polyester (kilograms)
Small rugs 2 000 2 400
Medium rugs 3 200 4 000
Large rugs 7 600 9 500
Total cost $102 400 $31 800
2
The firm has a policy to keep the following level
of finished goods inventory at the end of any
particular month: 100% of the following month’s sales plus 50% of the second following month’s
sales. It is also company policy to keep raw materi
al inventory at the end of a particular month at
levels sufficient to manufacture the required number of rugs for the following month. For example,
the level of raw material inventory at the end
of January will be the raw material required to
manufacture the number of rugs for February.
Unit costs of direct materials purchased remain
unchanged for each quarter. The actual and estimated
unit costs for the silk and the polyester are as follows:
Actual for the quarter
ending 31/12/2012
Estimated for the quarter
ending 31/03/2013
Estimated for the quarter
ending 30/06/2013
Silk $8 per kilogram $8.50 per kilogram $9 per kilogram
Polyester $2 per kilogram $2.15 per kilogram $2.20 per kilogram
Silky Shag Ltd has a labour contract that calls fo
r a wage increase of 3.5% per hour on 1 June every
year. The current wage rate is $12 per hour. In a
ddition to wages, direct manufacturing labour-related
costs include superannuation contributions of $0.80
per hour and worker’s compensation insurance of
$0.25 per hour. These costs also increase by 3.5% per hour on 1 June every year. The cost of
employee benefits paid by Silky Shag Ltd for its employees is treated as a direct manufacturing labour
cost.
Manufacturing overhead (both variable and fixed)
is allocated to each rug on the basis of budgeted
direct manufacturing labour hours (DMLH) per r
ug. The budgeted variable manufacturing overhead
rate will be $2 per DMLH hour up to 31 May 2013 a
nd is estimated to be $2.10 per DMLH from 1
June 2013. The fixed manufacturing overhead will
be $12 000 per month up to 30 April 2013 and is
budgeted to be $13 000 per month from 1 May 2013. Bo
th variable and fixed manufacturing overhead
costs are allocated to each unit of finished goods.
Silky Shag Ltd aims to stay ahead of its competitors and does ongoing research and development of
its rugs. They employ a designer on a three month fi
xed contract (starting 1 June 2013) to do research
and development. The total cost for the cont
ract is $9 000. The fixed component of budgeted
marketing costs is $90 000 for the year ending 31 December 2013. In addition to the fixed cost for the
marketing department, the company pays sales people a commission of 5% of revenues earned in a
particular month. The distribution costs consis
t of a fixed component of $1 500 per month and a
variable component of $0.40 per rug sold for a partic
ular month. All fixed costs are allocated equally
per month for budgeting purposes.
Assume the following in your answer:
?
Direct materials inventory and finished goods inventory are costed using the FIFO method.
?
There is no work-in-progress inventory at any given point in time.
Use 3 (three) decimal places in your formulae
to calculate your figures and round the dollar
amounts shown in your output sheets to the nearest dollar.
Required:
All raw data must be entered on the input sheet only. The input sheet must be linked to the
appropriate output sheets so that you do not h
ave to enter data on the output sheets. Ensure
output sheets are linked where appropriate to en
sure figures are carried forward appropriately
3
to subsequent output sheets. Use only formulae in the output sheets and do not enter any
numerical values in the output sheets.
(i)
Design an input sheet that is the
only source of data entry,
and
link the input sheet with the
relevant output sheets (budgets). Please do not incl
ude your formulae and calculations in your
input sheet. Design and use formulae for calculating the figures
in your output spreadsheets and
link your output sheets when carrying figures forw
ard. Please refer to the marking criteria sheet
regarding the allocation of the 15 marks for the
design and use of the spreadsheets and formulae.
Please keep in mind that the marker does not have
time to recalculate your figures. Therefore,
show your calculations in the description column
of your spreadsheets where deemed necessary.
You will only receive maximum marks if the marker can follow your logic in the design of your
formulae and calculations and hence if it is
not too difficult and time-consuming to mark.
(ii)
Prepare the following seven (7) budgets
by month
for April, May and June of 2013
and the
totals
for these three months:
1.
Revenue budget
2.
Production budget in units
3.
Direct material usage budget in quantity and dollars. Calculate the cost budget for the direct
materials to be used for the
quarter
, showing the cost available for the direct materials
inventory at the beginning of the quarter and the cost of direct materials to be purchased for
the quarter. You do not have to
show the cost budget per month.
4.
Direct material purchases budget in physical units and the cost thereof (in dollars).
5.
Direct manufacturing labour costs (show DMLH
per product per month and the dollars for the
quarter).
6.
Manufacturing overhead budget (show the total
DMLH for the three products per month)
7.
Non-manufacturing costs budget
(iii)
Prepare the following four (4) budgets
for the quarter ending 30 June 2013 only.
(Show the
total
of the three months in these budgets only. Do not show the monthly figures. Round
dollar values for these budgets up to zero decimal places):
8.
Opening and ending inventories budget for direct mate
rials for the three months ending 30
June 2013.
9.
Opening and ending inventories budget for finished
goods for the three months ending 30
June 2013.
10.
Cost of good sold budget for the three months ending 30 June 2013.
11.
Income Statement budget for the three months ending 30 June 2013. Show the gross margin
and the operating profit in this budget.
Hint: To help you with calculating some figures, it
may be useful to design the spreadsheets of some
budgets in such a way as to include a few months befo
re and/or after the three months required in this
assignment.
4
Part B – Decision making and relevant information 20 marks
Part B is a continuation from Part A
On 4 February 2013, Silky Shag Ltd was contacted
by a competitor in China (Shaggy Rags). Shaggy
Rags proposes that Silky Shag Ltd moves the manuf
acturing business from Australia to China. This
way, Silky Shag Ltd will be able to retain th
eir own customers and expand their business. Shaggy
Rags asks Silky Shag Ltd to manufacture silk rugs
that will be sold to Shaggy Rags’ customers.
Consequently, Silky Shag will increase their current
estimated number of units sales by 50% from 1
April 2013. However, the sales price per unit of
the increased number of sales will decrease by 40%
per unit. Silky Shag Ltd will continue to manufactur
e and sell the current estimated number of rugs to
the Australian market at the current estimated se
lling price per unit. If Silky Shag Ltd moves its
manufacturing business to China, they will buy the s
ilk and polyester from a supplier in China. This
will result in the purchase price of silk to decrease
by 20% and that of polyester to decrease by 45%.
The labour costs and rent of property in China are about
half of what they currently are in Australia.
Silky Shag Ltd bought its own building to manufacture the rugs 10 years ago. The remaining useful
life of the building is 20 years. The company al
so signed a lease agreement on 1 July 2010, leasing
the plant and machinery for five years. The CEO is
in two minds about whether to accept or reject
Shaggy Rags’ proposal.
Required:
Write an essay advising the CEO of Silky Shag Lt
d whether to accept or reject the proposal. Discuss
the following issues that Silky Shag Ltd
will have to consider in making the decision:
1.
Relevant costs.
(5 marks)
2.
Other financial issues and costs.
(6 marks)
3.
Other non-financial issues.
(6 marks)
Part B assesses your
application
of theoretical concepts and issues to a practical situation. You will
only receive full marks if you apply the three i
ssues above in the context of Silky Shag Ltd.
Please note
that
3 marks
are allocated for demonstrating appr
opriate communication skills in your
essay. To receive these marks your essay must be well written, be free of grammatical and spelling
mistakes, and use of the correct formatting and re
ference styles. Ensure logical flow in your
arguments and that your answer is a coherent discussion,
You will only receive full marks if you justify your
answers and support your decisions with figures.
Provide calculations to show how you derived at y
our figures. It is recommended that you base your
calculations and discussions in Part B on the figures you calculated in Part A,
but you are not
expected to redo any budgets in answering Part B
.
You are expected to make reasonable and sensible assumptions.
Word limit for Part B:
between 1 000 – 1 500 words.

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