Case study 3, Exercises of Applied Economics

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CASE 3 (10%)

Luhur Sdn. Bhd. manufactures a product called Smart. Below is the estimated information for

the month of April 2016:

Sales 91,000 units

Selling price RM

Beginning inventory of Smart 21,800 units

Ending inventory of Smart 7,500 units

Each unit of Smart requires four units of direct material AA at the price of RM3.50 per unit. The

beginning inventory of direct material AA is 21,800 units. The company has decided that ending

inventory for direct material AA should be maintained at the level of 11,000 units at the end of

each month. Each unit of completed Smart requires 15 minutes of direct labour (0.25 hour) and

paid at the rate of RM40 per hour.

Based on the above information, you are required to:

a) Prepare the following operating budget:

)i production budget for the month of April 2016;

Answer: Schedule 2 (in thousands)

Luhur Sdn. Bhd.

Direct Materials Purchases Budget

For the Month of April Ended 2016

Monthly

April

Sales

Desired Ending Inventory

Schedule 4 (in thousands)

Luhur Sdn. Bhd.

Direct Labor Budget

For The Month of April Ended 2016

Monthly

April

Units to be produced(Schedule 2)

Direct labor time per unit (hrs.)

x 0.

Total hours needed

Wage per hour

x RM

Total direct labor cost

RM 767

(6 marks)

b) What is a master budget and explain the differences between operational budget and

financial budgets.

(6 marks)

Answer:

A master budget is a comprehensive financial plan made up of various individual

departmental and activity budgets for the year. Components of master budget:

• Operating budgets are concerned with income generating activities
• Financial budgets are concerned with inflows and outflows of cash and with

financial position

Operational Budget

An operational budget covers a set period of time and lists an organization's planned revenue and expenses over that time frame. An operational budget includes three major sections: expenses, revenue and profits. The profit section combines expected revenue from all sources with budgeted expenses to determine whether the business will earn a profit or experience a loss over the budget period.

Financial Budget

A financial budget includes information about how a business will go about acquiring cash in the future and how it will spend that cash across the same time frame. One of the major sections of a financial budget is a cash budget, which outlines upcoming cash expenses and earmarks incoming cash to cover it. A capital expenditure budget is another section of a financial budget that deals with major upcoming expenses, such as new buildings for expansion.

Differences between operational budget and financial budgets:

Operating Budget Financial Budget Revenue Balance the revenue against upcoming expenses

Seeks ways to spend some or all of the revenue Balance Sheet Not included Includes, which notes the organisation's assets and liabilities at a given point in time, independent of its revenue or projected expenses. Differences Systematic Make money-savings cuts, can refer to the discretionary spending in its operating budget. Determine how much money to allocate to special projects

Help businesses work toward long- term goals

Financial Investors Not applicable Useful for financial investors, who need to gauge the business's health and understand its financial position relative to competitors

wise decisions based on a balanced view of the needs of all aspects of the business of

organisation.

Total : 30