1. Smart Pvt Ltd manufactures a product called Mega using three different raw materials.

The product
details are as follows.
Selling price per unit LKR.50,000
Material X 3kgs material price LKR.700per kg
Material Y 2kgs material price LKR.1000 per kg
Material Z 4kgs material price LKR.900 per kg
Direct labour 8hours labour rate LKR1600 per hour
The company is in the process of preparing its budgets for next year and made the following estimates.
Demand for product Mega from January to April
January February March April
400 units 300 units 600 units 450 units
The companys inventory policy is to hold stocks of finished goods at the end of each month equal to
50% of the following months sales demand, and it is expected that the finished goods stock at the start
of the budget period will meet this requirement.
Quality standards require that at the end of the production process the final output is tested against
standards and it is usual for 10% of those tested to be faulty. It is impossible to rectify these faulty units
due to the nature of final product.
Expected raw material inventory levels as of 1 January.
Material X 1000 kgs
Material Y 400 kgs
Material Z 600 kgs
Inventory levels are to be increased by 20% in January, and then remain at their new level for the
foreseeable future.
Labour is paid on an hourly rate based on attendance. In addition to the unit direct labour hours shown
above, 20% of attendance time is spent on tasks which support production activity.
Requirements: prepare the following budgets for the quarter from January to March inclusive.
1. Sales budget in quantity and value;
2. Production budget in unit;
3. Raw material usage budget in kgs;
4. Raw material purchases budget in kgs and value;
5. Labour requirements budget in hours and value.

2. Hash makes two products P1 and P2. Sales for next year are budgeted at 5,000 units of P1 and
1,000 units of P2. Planned selling prices are LKR 230 and LKR 300 respectively.
Hash expects to have the following opening inventory and required closing inventory levels of finished
products:
P1 Units P2 Units
Opening inventory 100 50
Required closing inventory 1,100 50
Each product goes through two production processes, whittling and fettling. Budgeted production data
for the products are as follows:
Finished products: P1 P2
Raw materials X: Kilos per unit 12 12
Raw materials Y: Kilos per unit 6 8
Direct labour Hours per unit 8 12
Machine hours per unit: Whittling 5 8
Machine hours per unit: fettling 3 4
Raw material inventories Raw material
X Y
Opening inventory (Kilos) 5,000 5,000
Planned closing inventory (Kilos) 6,000 1,000
Standard rates and prices:
Direct labour rate per hour LKR 7
Material X purchase price per kilo LKR 2
Material Y purchase price per kilo LKR 5
You should assume that the following production overhead absorption rates have already been
established:
Production overhead absorption rates
Variable LKR 1 per direct labour hour
Fixed LKR 8 per direct labour hour
Budgeted administration and marketing overheads are LKR 225,000.
The opening statement of financial position is expected to be as follows:

LKR LKR
Noncurrent assets

950,000
Inventory 66,000

Trade receivables 260,000

Cash 25,000


351,000

Trade payables 86,000

Other Short -term liabilities 24,000


110,000

Net current assets

241,000
Net assets

1,191,000
Non-current assets in the statement of financial position are expected to increase by LKR 40,000, but no
change is expected in trade receivable, trade payable and other short term liabilities.
There are no plans at this stage to raise extra capital by issuing new shares or obtaining new loans.
The company currently has an overdraft facility of LKR 300,000 with its bank.
Required:
For the budget period, prepare
a) A sales budget
b) A production budget in units
c) Material usage and purchase budget
d) A direct labour cost budget
e) A machine utilization budget
f) A production cost budget
g) A budgeted income statement
h) A budgeted statement of financial position (or balance sheet) as at the end of the period