i) Prepare a production budget (in units) for OC I and OC II for 2018. ii) Prepa
ID: 2569130 • Letter: I
Question
i) Prepare a production budget (in units) for OC I and OC II for 2018.
ii) Prepare a direct materials budget showing the cost of material A and B required to be purchased for 2018.
(iii) What is budgetary slack? Identify two (2) reasons for employees may create budgetary slack
(b) OriginCare Ltd manufactures two products: OC I and OC II. The company is now planning the raw material requirements of the two products for 2018. To produce the two products the following raw material is required Direct material Cost per kg Amount used per unit OC I OCII $3.50 per kilogram4 kilograms $5.60 per kilogram2 kilograms 1 kilograms To keep production smooth, the company has the following inventory requirements: » The finished goods inventories (in units Finished good OCI OC II Expected 1st Januar 1000 units 2000 units Desired 31st December 500 units 800 units A sales budget for the two products for the vear 2018 follows Product OCI OC II Sales volume 7000 units 9000 unitsExplanation / Answer
i. Budget Production Report for 2018
Particulars
Product OC 1
Product OC 2
Budget Sales(A)
7,000
9,000
Opening Inventory of Finished Goods(B)
1,000
2,000
Closing Inventory of finished goods(C)
500
800
Budgeted Production(A – B + C)
6,500
7,800
ii. Calculation of Direct Material Budget
Particulars
Material A
Material B
Amount required for producing OC 1 per unit
4 Kg
2 Kg
Total material required for producing OC 1
6,500 x 4 = 26,000 Kg
7,800 x 2 =15,600 Kg
Amount required for producing OC 2 per unit
-
1 Kg
Total material required for producing OC 1
-
7,800 x 1 = 7,800 Kg
Total amount of RM required to be purchased
26,000 Kg
23,400 Kg
Amount per Kg of RM
$3.50
$5.60
Total Cost of Raw material to be purchased
26,000 x $3.50 = $91,000
23,400 x $5.60 = $131.040
iii. Budgetary slack occurs in a company when one or more persons with budgetary responsibility create a budget that over-estimates expenses and/or underestimates projected income or revenues. It is a delibrate action taken on the part of the employees. An employee may create budgetary slack for increasing their bonus and appraisals specially when they are tied to the budgets of the company. By showing the over estimation of expenses or under estimation of income, employees will show that the company have generated more revenue in actual than the budgeted.
Particulars
Product OC 1
Product OC 2
Budget Sales(A)
7,000
9,000
Opening Inventory of Finished Goods(B)
1,000
2,000
Closing Inventory of finished goods(C)
500
800
Budgeted Production(A – B + C)
6,500
7,800
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