Discount Furniture Pty Ltd manufactures a variety of desks, chairs, tables and s

Question

Discount Furniture Pty Ltd manufactures a variety of desks, chairs, tables and shelf units which are sold to public school systems throughout Queensland. The accountant of the company’s School Desk Division is currently preparing a budget for the first quarter of 2018. The following sales forecast has been made by the division's sales manager.

         January    5,000 desk and chair sets

         February    6,000 desk and chair sets

         March    7,500 desk and chair sets

         April     7,500 desk and chair sets

Each desk and chair set requires 10 metres of pine planks and 1.5 hours of direct labour. Each set sells for $50. Pine planks cost $0.50 per metre and the division ends each month with enough wood to cover 10 per cent of the next month's production requirements. The division incurs a cost of $20.00 per hour for direct labour wages and fringe benefits. The division ends each month with enough finished goods inventory to cover 20 per cent of the next month's sales. Also, assume that April's production will total 8,000 units.

Required:

(a) Prepare the Production Budget for Discount Furniture Pty Ltd for January, February and March, using the information provided.

(b) Prepare the Direct Materials Purchases Budget for January February, and March, using the information provided.

(c) Outline three purposes of preparing budgets such as the Production and Direct Materials Purchases budgets considered here.

Explanation / Answer

Answer a. Production Budget Jan Feb Mar Total Sales in Set                  5,000                   6,000                   7,500                18,500 Add: Ending Inventory in Set                  1,200                   1,500                   1,500                   1,500 Total Needs                  6,200                   7,500                   9,000                20,000 Less: Beginning Inventory in set                (1,000)                (1,200)                 (1,500)                (1,000) Desired Production in Set                  5,200                   6,300                   7,500                19,000 Answer b. Material Purchase Budget Jan Feb Mar Total Desired Production in Set                  5,200                   6,300                   7,500                19,000 Material Required per Set (in mtrs)                        10                         10                         10                         10 Total Material required for Production in mtrs                52,000                63,000                 75,000              190,000 Desired Ending Materials Inventory -10%                  6,300                   7,500                   8,000                   8,000 Total Mtrs be available                58,300                70,500                 83,000              198,000 Beginning Materials Inventory (in mtrs)                (5,200)                (6,300)                 (7,500)                (5,200) Total Materials to be Purchased (in mtrs)                53,100                64,200                 75,500              192,800 Material price per mtr                     0.50                     0.50                     0.50                     0.50 Total Material Purchased (in $)                26,550                32,100                 37,750                96,400 Answer c. Benefits of Production Budget: 1. Helps Company to track costs 2. Product Demand 3. Cost Factors Benefits of Direct Material Purchase Budget: 1. Shows the quantity and cost o material to be purchased 2. Helps to maintain a safety stock 3. Gives a control over the material required and the time of purchase of raw material.

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