- 15 Marks
PM – May 2022 – L2 – SA – Q7 – Budgeting and Budgetary Control
Preparation of operational budgets and calculation of Economic Order Quantity for Eko Limited.
Question
Eko Limited is a small manufacturing company producing two high-quality products called ‘Kay’ and ‘Lay’. Both products use a raw material Tee (costing ₦30 per kg) in their manufacture. The Directors are reviewing the company’s stock management policies for the forthcoming year as part of the annual budget preparation cycle.
Due to the product specification, quality is an important factor and a quality control inspection takes place immediately after the production cycle has ended. At this point, any inferior products are rejected and only good production becomes available for sale. In addition to these losses, a certain quantity of waste is unavoidable from material Tee due to the cutting process for both products.
The following forecast information has been extracted from departmental estimates for the year ending 31st December 2020 (the budget period).
| Product Kay | Product Lay | |
|---|---|---|
| Sales (quality approved units) | 23,000 | 10,000 |
| Finished goods stock increase by year-end | 275 | 185 |
| Post-production rejection rate (%) | 2 | 3 |
| Material Tee usage (per completed unit, net of wastage) | 2kg | 3kg |
| Material Tee wastage (%) | 5 | 10 |
Additional Information:
- Usage of raw material Tee is expected to be at a constant rate over the period.
- Annual cost of holding one unit of raw material in stock is 17% of the material cost.
- The cost of placing orders is ₦30 per order.
- Eko Limited maintains a constant 1,000 kg of safety/buffer stock of material Tee regardless of the quantity ordered each time.
Required:
a. Prepare operational budgets for the year ending 31st December 2020 under the following headings: (Show your workings clearly)
i. Production budget for Products Kay and Lay (in units). (5 Marks)
ii. Purchases budget for Material Tee (in kgs and value). (5 Marks)
b. Calculate the Economic Order Quantity for Material Tee (in kgs). (5 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Economic Order Quantity, Production Budget, Raw Material Purchase
- Level: Level 2
- Topic: Budgeting and Budgetary Control
- Series: MAY 2022