- 20 Marks
IMAC – MAY 2020 – L1 – Q2 – Budgeting
Explain objectives of budgeting, prepare production and material budgets, and describe principal budget factor.
Question
a) Budgeting has several objectives:
i) Planning;
ii) Control;
iii) Performance evaluation;
iv) Motivation.
Required:
Explain TWO (2) of the above objectives of budgeting and how the TWO (2) objectives explained could conflict with each other. (4 marks)
b) A company produces two products, A1 and A2, that are sold to retailers. The budgeted sales volumes for the products are as follows:
| Product | Units |
|---|---|
| A1 | 32,000 |
| A2 | 56,000 |
The inventory of finished goods is budgeted to increase by 1,000 units of A1 and decrease by 2,000 units of A2 by the end of the quarter.
Materials B3 and B4 are used in the production of both products.
The quantities required of each material to produce one unit of the finished product and the purchase prices are shown in the table below:
| Material | B3 | B4 |
|---|---|---|
| A1 | 8kg | 4kg |
| A2 | 4kg | 3kg |
| Purchase price per kg | GH¢1.25 | GH¢1.80 |
| Budgeted opening inventory | 30,000kg | 20,000kg |
The company plans to hold inventory of raw materials, at the end of the quarter, of 5% of the quarter’s material usage budget.
Required:
Prepare the following budgets for the quarter:
i) The production budget (in units) (2 marks)
ii) The material usage budget (in kg) (4 marks)
iii) The material purchases budget (in kg and GH¢) (6 marks)
c) Explain the term “Principal Budget Factor” as used in budgeting control and give TWO (2) examples from a financial institution. (4 marks)
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