QUESTION 5 Nii Limited manufac

QUESTION 5Nii Limited manufactures three products called SI, MI, and LAR. Theinformation given belowrelates to the month of October, 2011.ProductQuantityPrice/Unit(Units)(GH₵)Sales:SI120080MI240096LAR1800112Materials used in the company’sProducts:MaterialMAMBMCUnit costGH₵ 3GH₵ 5GH₵ 8Quantity used in:MAMBMC(Units)(Units)(Units)Product SI531Product MI443Product LAR322Finished stocks:Product (SI)Product (MI)Product (LAR)(Units)(Units)(Units)Quantities:1st October1200180060031st October13201980660Page 7 of 8Material stocks:MAMBMC(Units)(Units)(Units)1st October31,20024,00014,40031st October37,44028,80017,280

Required:(a) Prepare the following functional budgets for the month ofOctober 2012 for(i)Sales in quantity and value, including total value(ii)Production quantities(iii)Material usage in quantities(iv)Material purchases in quantities and value, including totalvalue.(b) Explain the term ‘Principal budget factor’ as used in budgetingcontrol and give three (3) examples from a financialinstitution.


i) Sales in quantity and value, includingtotal value
Product SI MI LAR Total
Sales (Units)         1,200            2,400            1,800            5,400
Rate              80                 96               112
Sale Value       96,000       2,30,400       2,01,600       5,28,000
ii) ProductionQuantity
Product SI MI LAR Total(Units)
Opening Stock (Units) 1200 1800 600 3600
Closing stock (Units) 1320 1980 660 3960
Sales (Units)         1,200            2,400            1,800 5400
Production(Units)         1,320            2,580            1,860 5760
iii) Material usage inquantities
Material MA MB MC
Unit Cost (GH₵) 3 5 8
Qty Used In (Units) Units Units Units
Product SI 5 3 1
Product MI 4 4 3
Product LAR 3 2 2
Material Usages(Unit)       22,500          18,000          12,780          53,280
iv) Material purchases in quantities andvalue, including total value.
Product MA MB MC Total(Units)
Opening Stock (Units) 31200 24000 14400          69,600
Closing stock (Units)       37,440          28,800          17,280          83,520
Consumed (Units)       22,500          18,000          12,780          53,280
Purchase(Units)       28,740          22,800          15,660          67,200
Cost per Unit 3 5 8
Total Cost (Amount)       86,220       1,14,000       1,25,280       3,25,500

b) The principal budget factor is the factorthat limits the activities of functional budgets of theorganisation.The early identification of this factor is important in thebudgetary planning process because it indicates which budget shouldbe prepared first.

In general sales volume is the principal budget factor. So salesbudget must be prepared first, based on the available salesforecasts. All other budgets should then be linked to this.

Alternatively, machine capacity may be limited for theforthcoming period and therefore machine capacity is the principalbudget factor. In this case the production budget must be preparedfirst and all other budgets follows it.

Failure to identify the principal budget factor at an earlystage could lead to delays later on when managers realize that thetargets they have been working with are not feasible.

In case of one limiting factor, we shall need to apply theconcept of Marginal costing. In this we initially allot thelimiting resource on the basis of highest contribution per limitingfactor.

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