Solved: Limitation plc commenced the manufacture and

sale of a new
Limitation plc commenced the manufacture and sale of a new

Limitation plc commenced the manufacture and sale of a new product in the fourth quarter of
2012. In order to facilitate the budgeting process for quarters 1 and 2 of 2013, the following
information has been collected:

(i) Forecast production/sales (batches of product):

(ii) It is estimated that direct labour is subject to a learning curve effect of 90 per cent. The
labour cost of batch 1 of quarter 4, 2012 was £1 440 (at £12 per hour). The labour output rates
from the commencement of production of the product, after adjusting for learning effects, are as
follows:

Labour hours worked and paid for will be adjusted to eliminate spare capacity during each
quarter. All time will be paid for at £12 per hour.

(iii) Direct material is used at the rate of 200 units per batch of product for the first 20 batches of
quarter 4, 2012. Units of material used per batch will fall by 2 per cent of the original level for
each 20 batches thereafter as the learning curve effect improves the efficiency with which the
material is used. All material will be bought at £1.80 per unit during 2013. Delivery of the total
material requirement for a quarter will be made on day one of the quarter. Stock will be held in
storage capacity hired at a cost of £0.30 per quarter per unit held in stock. Material will be used
at an even rate throughout each quarter.

(iv) Variable overhead is estimated at 50 per cent of direct labour cost during 2013.

(v) All units produced will be sold in the quarter of production at £1 600 per batch.

(a) Calculate the labour hours requirement for the second batch and the sum of the labour
hours for the third and fourth batches produced in quarter 4, 2012.

(b) Prepare a budget for each of quarters 1 and 2, 2013 showing the contribution earned from
the product. Show all relevant workings.

Reach out to freelance2040@yahoo.com for enquiry.

 Limitation plc commenced the manufacture and sale of a new

ANSWER
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