Page 149 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes 3. Due to meet the future demand.

4. The excessive production due to the cheaper availability of raw materials, which leads to
greater amount of closing stock. If the storage cost is more than the hike takes place on the
cost of raw materials leads to abnormal storage of the stock.

The above diagram clearly illustrates that the emergence of the opening stock and closing stock
during the year out of sales and production volume of the enterprise.

Example: Prepare a production budget for three months ending March 31, 2006 for a
factory manufacturing four different articles on the basis of the following information:

Type of the Product Estimated Stock on Estimated sales during Desired Closing Stock on
Jan 1, 2006 Units Jan-Mar, 2006 Units Mar 31, 2006 Units
AA 2000 10,000 5,000
BB 3000 15,000 4,000
CC 4000 13,000 3,000
DD 5000 12,000 2,000
Solution:
Production Budget for three months ending March 31, 2006

Particulars AA BB CC DD
Units Units Units Units
Estimated Sales 10,000 15,000 13,000 12,000
Add: Desired closing stock 5,000 4,000 3,000 2,000
15,000 19,000 16,000 14,000
Less: Opening Stock 2,000 3,000 4,000 5,000
Estimated Production 13,000 16,000 12,000 9,000

Task Mr. X Co. Ltd. manufactures two different products X and Y. X forecast of the
number of units to be sold in first seven months of the year is given below:

Months Product X Product Y
Jan. 1,000 2,800
Feb. 1,200 2,800
Mar. 1,600 2,400
Apr 2,000 2,000
May 2,400 1,600
June 2,400 1,600
July 2,000 1,800
It is expected that (a) there will be no work in progress at the end of every month,
(b) finished units equal to half the sales for the next month will be in stock at the end of each

month (including the previous December).
Contd...

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