Page 194 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 9: Budgetary Control

procurement of raw materials through the multiplication of raw material required to produce Notes
for a single product with number of units expected to produce.
Why the stock of raw materials is deducted from the expected volume of materials procured for
production to the tune of production budget?
If there is any existing stock of raw materials i.e. opening stock of raw materials available from
the yester seasons or years should be deducted from the volume of materials required for
production to be ordered and placed. The remaining volume should be the volume to be ordered
for production.

Example: The sales manager of the MR Ltd. reports that next year he anticipates to sell 50,000
units of a particular product.

The production manager consults the storekeeper and casts his figures as follows:
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 firm.
Production Budget (Units)
Estimated sales 50,000
Add: Desired Closing stock 14,000
64,000
Less: Opening Stock 10,000

Estimated Production 54,000

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