1. F2:Management Accounting

2. Designed to give you knowledge and application of: Section E: Budgeting & Standard Costing E2. Functional budgets E4. Basic variance analysis under absorption and marginal costing E5. Reconciliation of budgeted profit and actual profit

3. Learning outcomes Study Guide E2: Functional budgets  Explain the term ‘principal budget factor’. [1]  Prepare budgets for sales, production, materials (usage and purchases),labour and overheads. [1]

4. Limiting factor or the principal budget factor Principal budget factor or limiting factor Restricts the volume of production or sales Influences all the functional budgets Not a permanent factor & can be eliminated by taking suitable measures The budget relating to the principal budget factor is prepared first & all the other budgets are prepared accordingly Explain the term ‘principal budget factor’ Example If labour (a factor of production ) is a limiting factor, then the company will prepare the production budget first and then all the other functional budgets will be based on this budget.

5. Functional budgets Sales budget Direct material budget Direct material usage budget Direct material purchase budget Direct labour budget Overhead budget Production overhead budget Administration overhead budget Selling and distribution overhead budget Production budget The budgets for the functional activities are called functional budgets (FBs)

6. Sales Budget The sales budget is the sales target for a budget period prepared by the marketing / sales department showing the projected volume of sales & estimated selling price of each product prepared with the help of the budgeted sales volume & the budgeted selling price. Normally the foundation of all the other functional budgets since, in most cases, potential demand for the products is the principal budget factor Budgets for sales, production, materials (usage & purchases), labour & overheads Refer to page E2.4

7. Sales budget for month of January, 20X7 Denton Ltd The following is the information provided by the sales manager of Denton Ltd for January 20X7: $25$35Budgeted selling price 20,000 Budgeted sales (in units) Product Bath Fittings Product Mirors The sales budget of the company may be presented as follows: Example Total 1,450,000 Product: Bath fittings 30,000 25 750,000 Product: Mirrors 20,000 35 700,000 Units per unit $ $ Products Budgeted Budgeted Total sales sales sales revenue

8. Should be in line with:  Sales budget  Inventory levels of raw material & finished goods Is a basis for:  Direct material usage budget  Direct labour budget  Production overhead budget Production budget A forecast of the production volume for the budget period prepared by the production manager & expressed in quantitative terms generally prepared based on the sales budget Production budget Refer to Summary on page E2.6

9. Product Mirrors Product Bath Fittings Budgeted sales (refer to the sales budget)20,000 (units) 30,000 (units) Inventory as at 31 January 20X74003,500 Inventory as at 1 January 20X71503,000 30,50020,250 Budgeted production 3,000150 Less: opening inventory 33,50020,400 Total requirement 3,500400 Add: budgeted closing inventory 30,00020,000 Budgeted sales Units Bath FittingsMirrors Production budget for month of January 20X7 Denton Ltd Prepare the production budget for the month of January A production budget based on the information provided by the sales manager and the stores manager of Denton Ltd (in the example above):

10. Production Budget is a base for:  Direct materials usage budget  Direct materials purchase budget  Direct labour budget  Production overhead budget Functional budgets based on Production budget Question A company is preparing a production budget for the next year. The following information is relevant: Budgeted sales 15,000 units Opening inventory 450 units Closing inventory is 5% of budgeted sales The production process is such that 15% of the units produced are rejected. What is the number of units required to be produced to meet demand? A. 15,250 units B. 14,750 units C. 18,000 units D. 15,000 units Continued…

11. Answer The correct option is C. Calculation of the number of units required to meet demand All the other options are a result of incorrect values and wrong interpretation of the given information. UUnits Sales 15,000 Less: Opening inventory450 Add: Closing inventory (5% of 15,000)750 Net production (good units) excluding rejected units15,300 Net production (good units) = 85% of total production, therefore Total production = 15,300 85% 18,000 units Continued…

12. RECAP  Explain the term ‘principal budget factor’?  Prepare budgets for sales, production, materials (usage and purchases), labour and overheads?