Question

Fowell (Pty) Ltd plans to sell 120 000 units of a certain product line at a price of R60. There are 10 000 units of the product in the inventory at 1 January (costing R50 per unit) and the inventory is to be increased 20% during the year. Two types of materials are used to make the product. Four units of Material A each costing R3 are required for each unit of product, and two units of Material B each costing R4 are required for each unit of product. The purchase price has remained constant over the last 2 years. On 1 January there are 10 000 units of Material A in inventory and 5 000 units of Material B. Plans for the year indicate that 12 000 units of Material A and 6 000 units of Material B are to be in the inventory on 31 December. There were no work-in-progress on 1 January or 31 December.   Each unit of product can be produced in 15 minutes of direct labor time. Direct labor is paid at the rate of R80 an hour. The variable manufacturing overhead varies at the rate of R5 per direct labor hour and the fixed manufacturing overhead for the year is estimated at R1 400 000.

a. Prepare a production budget for the year.

b. Prepare a materials purchases budget for the year.

Answer 1

Answer:

a.) Production Budget

Production Budget

	Units
Expected Units to be sold	120000
Desired Inventory, December 31 (10,000 × 120%)	12000
Total	132000
Estimated Inventory, January 1	10000
Total Units to be produced	122000

b.) materials purchases budget

Materials Purchases Budget

.	Material A	Material B
Expected Units to be Produced (A)	122000	122000
Material requirement Per Unit (B)	4	2
Expected material requirement (A × B)	488000	244000
Add: Estimated Inventory, December 31	12000	6000
total Material requirement	500000	250000
Less: Estimated Inventory, January 1	10000	5000
Total materials to be purchased	490000	245000