- 20 Marks
IMAC – MAR 2023 – L1 – Q5 – Budgeting | Cost Segregation and Estimation
Explain cost estimation in budgeting, prepare sales and production budgets, and calculate variable and fixed overheads using the high-low method.
Question
a) Cost estimation techniques play an important role in budget preparation.
Required:
Explain the statement above. (3 marks)
b) Obsaw Ltd is in the process of preparing budgets for the year 2021. Based on past experience, the following trend equation has been developed in the year 2019 for the estimation of quarterly sales:
S = 21,900 + 900Q
Where, S = quarterly sales in units
Q = time period (Quarter I of year 2019 is time period 1)
The following set of seasonal variation index values has been derived using a multiplicative model, based on year 2019 actual sales:
| Quarter of the calendar year | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| Seasonality | -30% | -10% | +30% | +10% |
The management expects that the above trend and seasonal effect will continue until year 2023.
The company’s policy is to maintain a finished goods inventory of 20% of the demand for the following month. Monthly sales in each quarter are evenly distributed.
Required:
i) Prepare the quarterly sales budget (in units) for the calendar year 2021. (4 marks)
ii) Prepare the quarterly production budget (in units) for the calendar year 2021. (3 marks)
c) Obsaw Ltd recorded the highest and the lowest production overheads (POHs) during the year 2020 as follows:
| Production (units) | POHs (GH¢ million) |
|---|---|
| Highest | 37,000 |
| Lowest | 18,000 |
POHs are expected to increase by 10% per year and fixed production overheads are absorbed to products based on the budgeted production.
Required:
i) Using the high-low method, prepare the quarterly variable production overheads budget for the year 2021. (Use the production budget in b) ii) above.) (3 marks)
ii) Calculate the fixed production overheads absorption rate per unit for the year 2021. (2 marks)
d) Explain how standard costs for material and labour might be compiled. (5 marks)
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