Production Budgeting

Production Budgeting
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Key Learning Outcomes

  • Understand how to lay out each budget and the trading account.
  • Understand how to calculate the closing stock figures.
  • Understand the theory of Production Budgeting and other Management Accounting theory.
  • Know the maximum time for this question ‒ 36 minutes.

Introduction: Production Budgeting

Production Budgeting is one of five Management Accounting topics asked as Question 8 and Question 9 in Section 3 of the Accounting examination over the years as follows:  1998, 2001, 2005, 2008, 2011, 2014.

The years stated above are listed solely to assist revision ‒ See Practical Matters 4.

Section 3 of the Accounting examination is worth 80 marks out of a total of 400 marks (20%).

The choice in Section 3 is to answer either Question 8 or Question 9 (80 marks each).

Practical Matters:

(1)   Always do the solution in the same way ‒ this will increase speed and confidence.

(2)   Use only one pen in the solution ‒ use of colour slows down the work.

(3)   Write the solution on the left and right hand side of a double page.

(4)   Do not try to predict the examination paper ‒ study all possible questions in this section.

Sample Exam Q&A

 Question

Tyrrell Ltd has recently completed its annual sales forecast to December 2017.  It expects to sell two products – Amber at €270 and Sapphire at €340.

All stocks are to be reduced by 10% from their opening levels by the end of 2017 and are valued using the FIFO method.

01

You are required to:

(a)     Prepare a Production Budget (in units).

(b)     Prepare a Raw Materials Purchases Budget (in units and €).

(c)     Prepare a Production Cost/Manufacturing Budget.

(d)     Prepare a Budgeted Trading Account (if the budgeted cost of a unit of Amber and Sapphire is €247 and €270 respectively).

(e)     State the factors taken into account by Tyrrell Ltd. in arriving at the expected sales in 2017  of 20,500 units.

(a)

 Prepare a Production Budget (in units).

Sample Answer (a)
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(b)

 Prepare a Raw Materials Purchases Budget (in units and €).

Sample Answer (b)
03

(c)

 Prepare a Production Cost/Manufacturing Budget.

Sample Answer (c)
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(d)

 Prepare a Budgeted Trading Account (if the budgeted cost of a unit of Amber and Sapphire is €247 and €270 respectively).

Sample Answer (d)
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(e)

 State the factors taken into account by Tyrrell Ltd. in arriving at the expected sales in 2017  of 20,500 units.

Sample Answer (e)
Factors taken into account by Tyrrell Ltd. in arriving at the expected sales in 2017 of 20,500 units.

  1. Last year’s sales.
  2. Market research.                
  3. Opinion of the sales manager and sales representatives.
  4. Trends.
  5. State of the economy.
  6. Selling price to be charged.
  7. Competition.
  8. Type of product ‒ luxury or necessity.

Student Activity

Q1 Show how the closing stock of finished goods figures of €247 for Amber and €270 for Sapphire in the question above were calculated.
Q2 State the layout of the following:
(a)   Production Budget.
(b)   Raw Materials Purchases Budget.
(c)   Production Cost/Manufacturing Budget.
(d)   Budgeted Trading Account.
Q3 Explain what is meant by a Capital Budget.
Q4 Explain the term ‘Master Budget’ and list the components of a Master Budget for a manufacturing firm.
Q5 State the items that could be considered to be the Principal Budget Factor.
Q6 Outline the differences in focus between Management Accounting and Financial Accounting.

Student Activity Answers

You can download/view answers to the above questions here