Description
You are the recently appointed accountant at City Ltd is a new company, which will be incorporated on 1st April 2020. Initially the company will manufacture and sell a single electronic product used in the production of drones. The following details relate to the company’s first financial year:
Selling price £275 per unit.
Direct materials cost £75 per unit
Direct labour is 5 hours per unit for the first 2 months, reducing to 4 hours per unit thereafter.
Direct labour cost £12 per hour
Sales targets for the forthcoming financial year are as follows:
Units
April 2020
1,200
May
1,400
June
1,500
July
1,900
August
2,000
September
2,000
October
2,100
November
2,200
December
2,000
January 2021
1,800
February
1,800
March
1,900
90% of sales will be on credit terms, with customers paying two months later. The remaining sales are paid for immediately. Closing inventory is planned to be 10% of the following month’s sales target. Sales for April 2021 are expected to be 1,700 units.
Direct materials will be purchased during the month they are required for production and paid for during the following month. An overhead absorption rate of £12 per direct labour hour has been calculated for the variable production overheads. Variable distribution costs of £8 per unit sold will also be incurred.
Total fixed production overheads of £115,000 and total fixed administration and distribution overheads of £73,000 for the year will be incurred on an even basis throughout the year. All overheads and the direct labour costs will be paid for in the month in which they are incurred.
All production machinery will be leased; the costs of leasing the machinery are included in the above figures. City Ltd will also buy equipment that will be used mainly in the I.T. department. They will purchase and pay for the equipment in June 2020. The equipment will cost £22,000 and will be depreciated by 25% per annum. Depreciation is not included in the overhead details given above.
City Ltd will issue 140,000 ordinary shares of £1 at par for cash on 1st April 2020 and the company is unwilling to issue any further shares at this stage.
The Board of Directors have little financial knowledge and currently does not include a Finance Director. In order to assist you have been asked to produce the following:
A report (created in Word) to the Board of Directors of City Ltd which includes;
1. An explanation as to why it is important to prepare budgets (10 marks)
2. Comments on the budgeted cash position (10 marks)
3. Suggestions of ways the monthly budgeted cash balances could be improved (10 marks)
4. An explanation for the Directors as to the reasons why the forecast profit for the year is not the same as the cash movement for the year (with reference to underlying accounting assumptions and accounting concepts) (5 marks)
5. The Directors are keen to compare their forecast results with their competitors. Explain how ratios could be used to compare the company’s liquidity with its’ competitors results ( 5 marks)
6. An appendix (created as an Excel workbook) which shows :
• The following budgets (on a single worksheet) on a monthly basis for the 12 months ended 31st March 2021 in as much detail as the information given allows (you should also include a total column for the year):
i. The Production Budget (in units)
ii. The Sales Budgets (in £)
iii. The Materials Purchases Budget (in £)
iv. The Direct Labour Budgets (in £)
v. The Overheads Budgets (in £) (20 marks)
• Cash Budget for the company on a monthly basis for the 12 months ended 31st March 2021 in as much detail as the information given allows (you should also include a total column for the year) ( 20 marks)
• A single forecast Income Statement (Profit and Loss Account) for the whole of the year (15 marks)
Layout of report ( 5 marks)
