Irwin Ltd is planning to set up a business on 01/07/2016 and has made the following forecast for the first six months of trading: Sales Budget | | July | August | September | October | November | December | |----------------|--------|--------|-----------|---------|----------|----------| | Sales units | 9,000 | 9,750 | 11,000 | 12,000 | 12,500 | 12,800 | | Sales revenue | €270,000 | €292,500 | €330,000 | €360,000 | €375,000 | €384,000 | (i) Each product unit requires 3kg of material X, which costs €4 per kg - Leaving Cert Accounting - Question 9 - 2016

To prepare the raw materials purchases budget, we will determine the required quantity of raw materials based on production needs and required stock levels.

Raw Material Requirement Calculation:

1. Units Required for Production:

   • Required for production: Each unit requires 3kg of material X.
   • For each month, the formula is: $\text{Materials Required} = \text{Production} \times 3$

2. Stocks Calculation:

   • Opening Stock and Closing Stock for raw materials:
   • Opening stock for July is 0. Desired closing stock for each month is 20% of next month's requirements.

Month	Required for Production	Closing Stock	Opening Stock	Required for Purchases
July	44,550 kg	6,300 kg	0 kg	50,850 kg
August	31,500 kg	6,600 kg	6,300 kg	55,200 kg
September	34,800 kg	7,680 kg	6,600 kg	65,920 kg
October	36,900 kg	7,560 kg	7,680 kg	66,120 kg

Cost Calculation:

Cost per kg = €4. The monetary value for purchases can be calculated as follows:

Month	Required for Purchases	Cost (€)
July	50,850 kg	€203,400
August	55,200 kg	€128,640
September	65,920 kg	€140,840
October	66,120 kg	€148,520

Raw Materials Purchases Budget:

Month	Units for Production	Cost (€)
July	44,550 kg	€203,400
August	31,500 kg	€128,640
September	34,800 kg	€140,840
October	36,900 kg	€148,520

To create the cash budget, we will track cash inflows (receipts) and outflows (payments) for each month. The main components include:

Cash Receipts:

• Cash Sales: 30% of sales revenue will be received as cash
• Credit Sales: 70% distributed across 2 months.

Month	Cash Sales	Credit Sales (Previous Month)	Credit Sales (Two Months Ago)	Total Receipts
July	€81,000	-	-	€81,000
August	€87,750	€81,000	-	€168,750
September	€99,000	€87,750	€81,000	€267,750
October	€108,000	€99,000	€87,750	€294,750

Cash Payments:

• Wages: €10,000 plus 5% of sales revenue
• Variable Overheads: €4 per unit produced
• Fixed Overheads: €28,000 per month
• Equipment Purchase: Included in October
• Loan Repayments: Includes interest and capital repayment from August

Month	Wages	Variable Overheads	Fixed Overheads	Equipment	Loan Repayment	Total Payments
July	€10,000	€68,000	€28,000	-	-	€106,000
August	€10,000	€39,000	€28,000	-	€1,600	€78,600
September	€10,000	€46,000	€28,000	-	€1,600	€85,600
October	€10,000	€49,000	€28,000	€60,000	€1,600	€148,600

Net Monthly Cash Flow:

Month	Total Receipts	Total Payments	Net Cash Flow	Opening Cash Balance	Closing Cash Balance
July	€81,000	€106,000	-€25,000	€40,000	€15,000
August	€168,750	€78,600	€90,150	€15,000	€105,150
September	€267,750	€85,600	€182,150	€105,150	€287,300
October	€294,750	€148,600	€146,150	€287,300	€433,450

The budgeted trading and profit and loss account summarizes income and expenses for the business for the specified period. The components include:

Sales Revenue:

• Total sales for the period: €1,252,500

Less Cost of Sales:

• Opening Stock: Closing stock from previous month
• Purchases: Total purchases calculated previously
• Closing Stock: Estimated closing stock of finished goods

Trading Account:

Description	Amount (€)
Sales	1,252,500
Less Cost of Sales	-621,432
Gross Profit	€631,068

Less Expenses:

• Wages, variable overheads, fixed overheads, and depreciation:

Description	Amount (€)
Wages	€102,625
Variable Overheads	€197,000
Fixed Overheads	€28,000
Depreciation	€4,000
Total Expenses	€331,625

Operating Profit:

• Calculate: | Description | Amount (€) | |------------------------------|--------------| | Gross Profit | €631,068 | | Less Total Expenses | -€331,625 | | Operating Profit | €299,443 | | Less Interest | €1,200 | | Net Profit | €298,243 |

Recommendations:

1. Review Finished Goods Stock Levels: Consider reducing the closing stock requirement of finished goods, particularly in the early months to optimize cash flow and minimize carrying costs.

2. Negotiate Material Costs: Explore options to negotiate better prices for raw materials with suppliers to decrease overall cost of production.

3. Financing and Loan Strategy: Assess the need for the initial €48,000 and evaluate alternate financing to maintain lower monthly repayments. This will relieve cash flow pressures during the start-up phase.

4. Establish a Cash Reserve: It is prudent to establish a contingency fund or cash reserve to cover any unexpected expenses or downturns in sales.

Factors to consider when estimating future sales figures include:

1. Market Trends: Analyze current market trends and consumer behavior to anticipate demand and sales growth. This could involve researching industry reports and competitor performance.

2. Pricing Strategy: Investigate whether the pricing for products is competitive compared to similar offerings in the market.

3. Economic Outlook: Research the overall economic outlook to predict consumer spending patterns and their impact on sales.

4. Customer Feedback: Regularly gather feedback from customers and sales representatives to gauge customer satisfaction and areas for improvement.