The Omega Document Case Company

Omega is a long-established firm which used to make many different kinds of leather goods. However,
in 2012 it made a loss for the first time in over 20 years. This was due to fierce competition, mainly
from the Far East. In response to this, it has slashed its product range to its best-selling and most
profitable items. It is hoping to benefit from economies of scale and now plans to make only two
types of document case: the Delta and the Alpha.
Task:
From the following information, using the pro formas provided, you are required to create a budget for
the year ending 31 December 2013. (30 marks)
Sales forecast

Delta Alpha
Number of cases sold 4,000 2,500
Selling price per case £60 £55
Standard production data
Omega has only two production departments: Cutting and Stitching.
Unit costs:
Direct labour rates Raw materials
Cutting Stitching Leather Zip fasteners
£6.00/h £7.00/h £3.00/unit £1.00/unit
Product content

Delta Alpha
Leather 2 units 4 units
Zips 1 unit 2 units
Cutting dept labour 2 hours 1.5 hours
Stitching dept labour 1 hour 0.5 hour
Production overheads

Cutting Department Stitching Department
Fixed Variable Fixed Variable
£ £ £ £
Indirect labour 7,000 – 3,000 –
Indirect materials – 3,000 – 9,000
Maintenance 2,000 1,000 500 500
Business rates 6,000 – 1,000 –
Depreciation 8,000 – 2,000 –
Electricity 1,000 2,000 500 1,000
24,000 6,000 7,000 10,500

Marketing overheads
£

Salaries 28,000
Advertising 24,000
Other 2,000
54,000
Administration overheads
£
Salaries 32,000
Telephone 5,000
Other 4,150
41,150

Stocks forecast

Raw materials Completed cases
Leather Zips Delta Alpha
(units) (units) (units) (units)
Opening stock 6,000 1,000 100 1,000
Closing stock 8,000 2,000 1,100 500
Debtors and creditors
Raw materials, labour, all overheads and debenture interest will be paid in full through the bank and
cash accounts. Debtors and creditors at 31 December 2012 will pay and be paid during 2013. Debtors
and creditors at 31 December 2013 are expected to be £25,000 and £10,000 respectively. One year’s
interest on the debenture is paid during the year.
Fixed assets
There are no disposals expected during 2013 but some new equipment will be acquired, on cash terms,
for £20,000 just before the end of 2013.
Expected balance sheet as at 31 December 2012

Cost Depreciation provision NBV
Fixed assets £ £ £
Buildings 40,000 40,000 –
Machinery 200,000 50,000 150,000
240,000 90,000 150,000

Current assets
Raw material stock 19,000
Finished goods stock 40,000
Total stock 59,000
Debtors 15,000
Bank and cash 10,000
84,000

Less: Current liabilities
Creditors 8,000
Net current assets 76,000
226,000

Less: Long-term liabilities
10% debenture 2021/22 120,000

106,000

Financed by:
Shareholders’ capital £
Ordinary shares 82,000
Retained profit 24,000
106,000

Pro formas

1. Sales budget for y/e 31 December 2013

Units Selling price Revenue
£ £
Delta 4000…….. …60….. …240000……….
Alpha 2500……… .55……. ..137000………..
Budget revenue ..377000………..

2. Production budget y/e 31 December 2013

Delta Alpha
(units) (units)
Planned sales ..4000…… .2500…….
Desired closing stock finished goods .1100…….. 500 ……
Total required .5100…….. ..3000…….
Less opening stock finished goods 100 …… .1000……..
Budgeted production .5000…….. 2000………

3. Direct materials usage budget y/e 31 December 2013

Alpha

Material Production Usage Material Production Usage
content (units) content (units)
(units/case) (units/case)

Leather 2…… ..5000……. 10000 .4.…. 2000 8000
Zips …1… ..5000……. 5000 2…… 2000 4000
Cost/unit Total production Cost of materials used
£ £
Leather 3 18000 54000
Zips 1 9000 9000
Budgeted material cost . 63000

4. Direct materials purchases budget y/e 31 December 2013
   Leather Zips
   Desired closing stock .8000 units 2000. units
   Units needed for production .18000 units .9000 units
   Total required 26000 units .11000. units

Less opening stock .6000 units .1000 units
Purchases needed .20000units 10000. units
Cost per unit £3….. £..…..…1
Budgeted purchases cost £….60000…….….. £….10000…….…..

5. Direct labour budget y/e 31 December 2013

Labour content Cases Total Rate Total
in product produced labour per labour
(hours) (hours) hour cost
(£) (£)
Cutting Dept.
    Delta 2. .5000…….. 10000. 6  …60000.
    Alpha 1.5 2000.   .3000 6  …18000
Stitching Dept.
    Delta 1 5000   .5000 7  ..35000
    Alpha 0.5 2000   1000 .7..    7000
Budgeted labour hours and cost .19000 .120000.

6. Production overheads budget y/e 31 December 2013

Cutting Dept Stitching Dept
(expected 13,000
direct labour hours)

(expected 6,000
direct labour hours)

Fixed Variable Fixed Variable
costs costs costs costs
£ £ £ £
Indirect labour   …7000 …..…..     .3000. …..
Indirect materials …..…..     .3000 …….     9000.
Maintenance   .2000     1000       500      500.
Business rates   6000 …..…..     1000 …….
Depreciation   8000 …..…..    2000. …..
Electricity   1000.     2000       .500    1000.
Budgeted overhead costs 45500     ………     .9000   ………..
Overhead absorption rate
per direct labour hour 69500 £5000 £16000 £10500

7. Budgeted unit cost of manufacturing y/e 31 December 2013
   Delta Alpha

Unit cost Units in Cost Units in Cost

product product

£ £ £
Leather 3….. 10000 .3 .8000. 54000
Zips 1……. 5000 .1 4000 9000.
Direct labour:
Cutting .6 10000. ..6. 3000 78000

Stitching .7 5000. .7. 1000 .42000
Production overheads:
Cutting: fixed ……….. .. ….. ……….. ….. ….. .24000
variable ……….. .. ….. ……….. ….. ….. .6000
Stitching: fixed ……….. .. ….. ……….. ….. ….. 7000
variable ……….. .. ….. ……….. ….. ….. ..10500
Standard cost of product …………. .230500

8. Closing stock budget at 31 December 2013

Units Unit cost Total cost

£ £ £

Direct materials:
Leather 8000. 3. 24000
Zips 2000 1.. 2000 .26000.
Finished products:
Delta .1100 .
Alpha 500 ….. 40000

Budgeted closing stock ..66000……..

9. Cost of sales budget y/e 31 December 2013
   £ £
   Direct materials usage (3) 63000.
   Direct labour (5) .120000
   Production overheads (6) 101000.
   Add: Opening stock finished products .5500.
   Less: Closing stock finished products 66000.
   Budgeted cost of sales .40500
10. Marketing and administration expenses budget y/e 31 December 2013
    £ £

Marketing expenses:
Salaries .28000
Advertising ..24000
Other .2000 ….54000
Administrative expenses:
Salaries ..32000
Telephone 5000
Other 4150 …41150
Budgeted selling and administrative expenses 95150

11. Budgeted profit statement y/e 31 December 2013
    £
    Sales (1) 377000
    Less: Cost of sales (9) …40500
    Gross profit .336500
    Less: Marketing and admin. expenses (10) 95150
    Budgeted net profit 241350
    Less: Debenture interest 12000.
    Profit after interest 229350
12. Cash budget y/e 31 December 2013 (Summary form)
    £ £
    Opening cash balance 10000
    Add receipts 377000.
    Total cash available 387000.
    Less payments:
    Purchases .63000
    Direct labour (5) 120000
    Factory overheads 54500
    Less depreciation (6) 90000
    Marketing and admin. expenses (10) 95150
    Debenture interest 12000
    Fixed asset purchases 20000

…364650
Budgeted closing cash balance 22350

13. Budgeted balance sheet of Omega Manufacturing as at 31 December 2013
    £ £ £

Fixed assets

Cost Depreciation
Provision

NBV
Buildings – – . –
-Machinery 170000. .42500 127500
.170000………… .42500. .127500

Current assets
Stocks:
Finished goods 66000
Raw materials 26000 .92000
Debtors 25000
Bank & cash .22350
139250.

Less current liabilities
Creditors 10000.
Net current assets ..129350
256850

Less long-term liabilities
10..% debenture 2021./22. ..120000.
£.136850

Financed by:
Shareholders’ capital
Ordinary shares .106000
Retained profits .22350
£128350

Reference
Garrison, Ray H; Eric W. Noreen, Peter C. Brewer. (2009) Managerial Accounting . McGraw-
Hill Irwin.