2QUESTION 1 Hamududu Limited (HL) produces cooking pots which it sells locally and abroad. It has two production centres in Lusaka and Kitwe. The pots are produced in three different sizes with all of...

Hamududu Limited (HL) produces cooking pots which it sells locally and abroad. It has two production centres in Lusaka and Kitwe. The pots are produced in three different sizes with all of them being popular in both markets. HL intends to increase exports and plans to increase production and sales of the pots during the first half of next year 2018. The actual figures for November and December 2017 were:

Month Production (units) Sales (units)

November 35,000 35,000 December 40,000 40,000

The following are the plans for the next six months of next year:

(i) To produce 40,000 units in January with a growth of 25% for each subsequent month.

(ii)To sell 40,000 units in January with a growth of 20% for each subsequent month up to April. Sales forecast is 90,000 and 100,000 units for May and June respectively.

(iii) To sell the pots at an average price of K105 per unit, with an anticipated price increase to K115.50 per unit from 1 June 2018.

Additional Information:

Receipts from sales:

- 40% for cash

- 60% on credit

- 5% discount is given to customer for payment within current month and on average 25% of customer will take up this option with the remainder paying the following month.

(ii) Raw material costs K40 per unit produced. Material purchases are paid one month after delivery and are held in inventory for one month before entering production.

(i) Wages and other variable costs are K40 per unit produced. Wages, variable and fixed costs are paid in the month of production.

(iv)Other fixed costs are K9,000 per month rising to K11,000 from 1 May 2018 onwards.

(v) A new machine costing K2.25 million is to be purchased in February to cope with the planned expansion of demand. K1.075 million will be paid on 1 February and the remainder retained until the machine is operational (expected 1 May 2018).

(vi)An advertising campaign is also to be launched, involving payments of K500,000 in each month of February and May.

(vii) Corporation tax of K280, 000 is due on 30 June 2018.

(viii)The company is financed by share capital of 1 million shares of K1 per share, a debenture of K0.5 million paying semi-annual interest of 17.5% on 31 March and 31 June each year. The debenture will be redeemed on 30 June 2019. The directors plan to pay a dividend of K0.1 per share in May 2018.

(ix) An overdraft of K0.5 million has been agreed with Hamududu Ltd’s bankers. The current overdraft interest rate is 21% per annum on the prior month closing balance.

(x) Interest is received on cash balances at 8% per annum on the prior month closing balance.

(xi) At the start of 1 January the firm’s bank account would be overdrawn by K580,000.

Required:

(a) Prepare a six months cash budget

The management of HL uses a standard absorption costing system with budgets and variance analysis to evaluate its performance. Below are production and sales volumes details for two of its products.

Budget details

The budgeted details for last year were:

Actual details

The actual costs of Maintenance services department incurred during the period were K425,250.

The Finance Director has asked you to prepare the necessary operating variances for one of the production centres to access performance of the two types of pots, small and medium.

Required:

(b)Calculate the sales price variances and the sales mix profit and sales quantity profit variances for both the small and medium pots.

(c) Prepare a statement that reconciles the budgeted and actual profits and shows appropriate variances in as much detail as possible.

(d)Discuss the circumstances under which each of the following budgets might be used.

(i) Rolling budget

(ii) Zero based budget