- 20 Marks
IMAC – MAY 2021 – L1 – Q2 – Budgeting | Cost and Cost Behaviour | Relevant Cost and Revenue
QR activity-based budgeting system for products Q and R, and working capital calculation for a company.
Question
a) QR uses an activity based budgeting (ABB) system to budget product cost. It manufactures two products, product Q and product R. The budget details for these two products for the forthcoming period are as follows:
| Product Q | Product R | |
|---|---|---|
| Budgeted production (units) | 80,000 | 120,000 |
| Number of machine setups per batch | 4 | 3 |
| Batch size (Units) | 5,000 | 4,000 |
The total budget cost of setting up the machine is GH¢74,400.
Required: i) State and explain THREE (3) objectives of budgeting. (6 marks)
ii) Calculate the budgeted machine setup cost per unit of product Q and R. (5 marks)
iii) State THREE (3) benefits and TWO (2) limitations of using an activity-based budgeting system. (5 marks)
b) A company has annual sales revenues of GH¢30 million and the following working capital periods:
| Period | Months |
|---|---|
| Inventory conversion period | 2.5 |
| Accounts receivable collection period | 2.0 |
| Accounts payable payment period | 1.5 |
Production costs represent 70% of sales revenue.
Required: Calculate the total amount held in working capital excluding cash and cash equivalents. (4 marks)
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