Question 11.E.2: C Ltd makes two products, Alpha and Beta. The following data...
C Ltd makes two products, Alpha and Beta. The following data is relevant for year 3:
Material prices: Material M £2 per unit
Material N £3 per unit
Direct labour is paid £10 per hour.
Production overhead cost is estimated to be £200,000, which includes £25,000 for depreciation of property and equipment. Production overhead cost is absorbed into product costs using a direct labour hour absorption rate.
Each unit of finished product requires
Alpha Beta
Material M 12 units 12 units
Material N 6 units 8 units
Direct labour 7 hours 10 hours
The sales director has forecast that sales of Alpha and Beta will be 5,000 and 1,000 units, respectively, during year 3. The selling prices will be
Alpha £182 per unit
Beta £161 per unit
She estimates that the inventory at 1 January, year 3, will be 100 units of Alpha and 200 units of Beta. At the end of year 3 she requires the inventory level to be 150 units of each product.
The production director estimates that the raw material inventories on 1 January, year 3, will be 3,000 units of material M and 4,000 units of material N. At the end of year 3 the inventories of these raw materials are to be:
M: 4,000 units
N: 2,000 units
The fi nance director advises that the rate of tax to be paid on profi ts during year 3 is likely to be 30 per cent. Selling and administration overhead is budgeted to be £75,000 in year 3, which includes £5,000 for depreciation of equipment.
A quarterly cash-flow forecast has already been completed and is set out below
| 1 | 2 | 3 | 4 | |
| Quarter, year 3 | £ | £ | £ | £ |
| Receipts | 196,000 | 224,000 | 238,000 | 336,000 |
| Payments: | ||||
| Materials | 22,000 | 37,000 | 40,000 | 60,000 |
| Direct wages | 100,000 | 110,500 | 121,000 | 117,000 |
| Overhead | 45,000 | 50,000 | 70,000 | 65,000 |
| Taxation | 5,000 | |||
| Machinery purchase | 120,000 |
The company’s balance sheet at 1 January, year 3, is expected to be as follows:
| £ | £ | £ | ||
| Cost | Depreciation | Net | ||
| Non current assets | ||||
| Land | 50,000 | __ | 50,000 | |
| Buildings and equipment | 400,000 | 75,000 | 325,000 | |
| 450,000 | 75,000 | 375,000 | ||
| Current assets | ||||
| Inventories | ||||
| – raw materials | 20,000 | |||
| – finished goods | 15,000 | |||
| 35,000 | ||||
| Receivables | 25,000 | |||
| Cash at bank | 10,000 | |||
| 70,000 | ||||
| Current liabilities | ||||
| Payables | 9,000 | |||
| Taxation | 5,000 | |||
| 14,000 | ||||
| 56,000 | ||||
| 431,000 | ||||
| Financed by | ||||
| Share capital | 350,000 | |||
| Retained earnings | 81,000 | |||
| 431,000 |
You are required to prepare the company’s budgets for year 3 including a budgeted income statement for the year and a balance sheet at 31 December, year 3.
