Problem:
Preparation of functional budgets
Data
Wilmslow Ltd makes two products, the Alpha and the Beta. Both products use the same material and labour but in different amounts. The company divides its year into four quarters, each of twelve weeks. Each week consists of five days and each day comprises 7 hours.
You are employed as the management accountant to Wilmslow Ltd.and you originally prepared a budget for quarter 3, the twelve weeks to 17 September. The basic data for that budget is reproduced below.
Original budgetary data: quarter 3
12 weeks to 17 September
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Product
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Alpha
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Beta
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Estimated demand
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1800 units
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2100 units
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Material per unit
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8 kilograms
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12 kilograms
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Labour per unit
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3 hours
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6 hours
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Since the budget was prepared, three developments have taken place.
1. The company has begun to use linear regression and seasonal variations to forecast sales demand. Because of this, the estimated demand for quarter 3 has been revised to 2000 Alphas and 2400 Betas.
2. As a result of the revised sales forecasting, you have developed more precise estimates of sales and closing stock levels.
- The sales volume of both the Alpha and Beta in quarter 4 (the twelve weeks ending 10 December) will be 20% more than in the revised budget for quarter 3 as a result of seasonal variations.
- The closing stock of finished Alphas at the end of quarter 3 should represent 5 days sales for quarter 4.
- The closing stock of finished Betas at the end of quarter 3 should represent 10 days sales for quarter 4,
- Production in quarter 4 of both Alpha and Beta is planned to be 20% more than in the revised budget for quarter 3. The closing stock of materials at the 'end of quarter 3 should be sufficient for 20 days production in quarter 4.
3. New equipment has been installed. The workforce is not familiar with the equipment. Because of this, for quarter 3, they will only be working at 80% of the efficiency assumed in the original budgetary data.
Other data from your original budget which has not changed is reproduced below:
- 50 production employees work a 35 hour week and are each paid £210 per week;
- overtime is paid for at £9 per hour;
- the cost of material is £10 per kilogram;
- opening stocks at the beginning of quarter
3 are as follows:
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500 units
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600 units
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12 000 kilograms
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- There will not be any work in progress at any time.
Task 1
The production director of Wilmslow Ltd wants to schedule production for quarter 3 (the twelve weeks ending 17 September) and asks you to use the revised information to prepare the following:
(a) The revised production budget for Alphas and Betas;
(b) The material purchases budget in kilograms;
(c) A statement showing the cost of the material purchases;
(d) The labour budget in hours;
(e) a statement showing the cost of labour.
Data
Margaret Brown is the financial director of Wilm-slow Ltd. She is not convinced that the use of linear regression, even when adjusted for seasonal variations, is the best way of forecasting sales volumes for Wilmslow Ltd.
The quality of sales forecasting is an agenda item for the next meeting of the Board of Directors and she asks for your advice.
Task 2
Write a brief memo to Margaret Brown. Your memo should:
(a) Identify two limitations of the use of linear regression as a forecasting technique;
(b) Suggest two other ways of sales forecasting.