Crowley Ltd has recently completed its annual sales forecast to December 2015 - Leaving Cert Accounting - Question 9 - 2014

To prepare the Raw Materials Purchases Budget, first, we need to calculate the required amount of raw materials based on production needs.

For Material X:

• Required for Micro (10,360 units × 6 kg) = 62,160 kg

• Required for Excel (6,060 units × 4 kg) = 24,240 kg

• Total required = 62,160 + 24,240 = 86,400 kg

• Less Closing stock (20% of opening): 7,000 kg × 20% = 1,400 kg

• Therefore, Required purchases = 86,400 - (7,000 - 1,400) = 80,800 kg.

Calculating in €,

• Price of Material X: €2 per kg = 80,800 kg × €2 = €161,600.

For Material Y:

• Required for Micro (10,360 units × 5 kg) = 51,800 kg

• Required for Excel (6,060 units × 7 kg) = 42,420 kg

• Total required = 51,800 + 42,420 = 94,220 kg

• Less Closing stock (20% of opening): 5,000 kg × 20% = 1,000 kg

• Therefore, Required purchases = 94,220 - (5,000 - 1,000) = 90,220 kg.

Calculating in €,

• Price of Material Y: €4 per kg = 90,220 kg × €4 = €360,880.

To prepare the Production Cost/Manufacturing Budget, we will include the costs of raw materials consumed, labour, and overheads.

• Opening stock of raw materials: Material X: 7,000 kg = €1.80/kg → €12,600 Material Y: 5,000 kg = €3.60/kg → €18,000

• Total cost of raw materials consumed: = €12,600 (X) + €18,000 (Y) + (€161,600 + €360,880) = €551,080.

• Cost of Labour: Total hours used: (10,360 units × 8 hours for Micro) + (6,060 units × 7 hours for Excel) = 82,880 hours. At €12/hour, total = 82,880 × €12 = €998,560.

• Variable overheads (total hours × €5) = 82,880 × 5 = €414,400.

• Fixed overheads = €180,400.

Total Cost of Manufacture = Cost of raw materials + Cost of Labour + Variable Overheads + Fixed Overheads.

To prepare the Budgeted Trading Account, we will calculate the expected sales, opening stock, cost of manufacture, and closing stock.

• Sales of finished goods: Micro = 11,000 units × €240 = €2,640,000 Excel = 6,500 units × €300 = €1,950,000 Total sales revenues = €4,590,000.

• Opening stock of finished goods: Micro: 800 units × €130 = €104,000 Excel: 550 units × €150 = €82,500 Total opening stock = €186,500.

• Less Closing stock of finished goods: Micro: 640 units × €130 = €83,200 Excel: 440 units × €150 = €66,000 Total closing stock = €149,200.

Thus, Gross Profit can be calculated as: Gross Profit = Total Sales - Cost of Manufacture - Closing Stock.

A Cash Budget is a detailed plan that estimates cash inflows and outflows over a specific period. It helps organizations manage their finances more effectively.

Advantages:

1. Forecasting Surpluses and Deficits: It allows organizations to anticipate cash surpluses and plan for investments or allocate funds accordingly.
2. Avoiding Cash Shortages: It aids in identifying potential cash deficits in advance, enabling timely actions to ensure sufficient funds to meet operational needs.

Other factors as Principal Budget factors:

• Availability of materials is critical for production planning.
• Capability of the plant also influences budgeting as it determines the volume of production possible.