Page 140 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 7: Budgeting

The production manager consults the storekeeper and casts his figures as follows: Notes
Two kinds of raw materials A and B are required for manufacturing the product. Each unit
of the product requires 2 units of A and 3 units of B. The estimated opening balances at the
commencement of the next year are:

Finished product : 10,000 units
Raw Materials A : 12,000 units Raw Materials B : 15,000 units
The desirable closing balances at the end of the next year are:
Finished products : 14,000 units

Raw materials A : 13,000 units Raw materials B : 1,000 units
Prepare production budget and materials purchase budget for the next year.
Solution:

The first step is to prepare the production budget. To identify the volume of materials required
for production by considering the production budget and the closing stock of materials of A and
B respectively.
Why the closing stock of raw materials has to be added with estimated consumption? The
purpose of adding the closing stock of raw materials is to anticipate the future demand of them,
due to market influence; which warrants the firm to go for placement of order not only taking

into consideration of expected consumption of raw materials but also the closing stock of raw
materials to be maintained at the end of the season, in order to facilitate to have uninterrupted
flow of production.

Why the opening stock of raw materials has to be deducted?
The opening stock of raw materials, which is available in the firm, should be considered for the

placement of order of raw materials. The materials to be ordered should be other than that of the
materials available in the fi rm.

Production Budget (Units)
Estimated sales 50,000
Add: Desired Closing stock 14,000
64,000
Less: Opening Stock 10,000
Estimated Production 54,000

Materials Procurement or Purchase Budget (Units)

Material A Material B
Estimated Consumption
For A 2 units × 54, 000 1,08,000
For B 3 units × 54,000 1,62,000
Add: Closing Stock 13,000 16,000
1,21,000 1,78,000
Less: Opening Stock 12,000 15,000
Estimated Purchases 1,09,000 1,63,000

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