Seaborne Ltd manufactures and sells a single product X. The standard selling price of X is £50, with
sixty percent (60%) of sales on a cash basis. Thirty percent (30%) of sales revenue are collected the
month following the sale and the remainder, two months’ following the sale. Seaborne Ltd offers a
1% discount on all its cash sales and no bad debts are anticipated in the foreseeable future.
The sales budget in units of X for the six months ending 31st of December 2020 has been produced
by the management accountant and is provided below:
Month July August September October November December
Budgeted sales units 140,000 150,000 155,000 180,000 170,000 160,000
Each unit of X requires 2 kilograms (kgs) of material Z; 45 minutes of skilled labour; and half an hour
of unskilled labour to be completed. Material Z costs £6 per kg, and the hourly rate for skilled and
unskilled labour is £12 and £8 respectively.
Seaborne Ltd takes two months to pay for its purchases of material Z while wages for labour (skilled
and unskilled) are paid in the month incurred.
Variable production overheads are £4 per unit of product X while fixed production overheads are
£1,000,000 per month, including depreciation charges of £200,000. Variable selling cost is £1 per
unit of X and fixed non-production overheads are £600,000 per month.
Half of the variable production overheads are paid in the month incurred and the other half is paid
the following month. The variable selling costs are paid in the month the cost is incurred. All fixed
overheads (production and non-production) are paid in the month incurred.
The company has a policy for closing inventory of product X to be equal to 15% of next month’s sales
and for the closing inventory of material Z to be equal to 20% of next month’s usage (production
At 30th of June 2020, Seaborne Ltd has 21,000 units of product X and 56,600 kgs of material Z on
(a) Prepare Seaborne Ltd.’s Cash Budget for the month of September 2020 only. [Assume that
the company will have a cash balance of £145,000 on 1st of September.] [15 marks]
(b) Using relevant examples to illustrate, critically discuss the use of budgeting as a performance
management system in an organisation such as Seaborne Ltd. (Maximum 600 words)
Hanos Ltd. makes two products, handbag and leather jacket. There are four departments in Hanos,
cutting and sewing departments are production departments and maintenance and handling
departments are service departments.
Hanos uses an absorption costing system to recover overheads on the basis of labour hours.
Budgeted monthly labour hours are 2,000 for cutting department and 1,500 for sewing department.
Details of next month’s budgeted fixed production overheads are shown below:
Budgeted Overheads Total
Rent and rates £80,000
Heat and lights £50,000
Machinery depreciation for cutting department £10,000
Machinery depreciation for sewing department £20,000
Salary of supervisors for the four departments £15,000
Insurance for all employees of the four
The costs of an on-site clinic £10,000
The following additional information is available:
Cutting Sewing Maintenance Handling Total
Floor occupied (m2
) 2,000 1,500 500 1,000 5,000
Machinery book value £100,000 £400,000 – – £500,000
Supervision hours 100 100 50 50 300
Number of employees 100 70 20 10 200
Services are used as follows:
Cutting Sewing Maintenance Handling Total
Maintenance hours worked 800 1,300 – 400 2,500
Handling hours 100 100 – – 200
(a) Allocate and apportion each of the production overheads to the four departments showing
clearly the basis used and calculate departmental overheads absorption rate (OAR) for the
production departments after re-apportionment of service departments costs. (Show your
answers to 2 decimal places). [15 marks]
(b) Using suitable examples to illustrate, critically discuss whether organisations such as Hanos
Ltd should use absorption or marginal costing systems for decision-making. (maximum of
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