4104LBSBW

The Report should be submitted via Canvas by Midnight on Sunday 19th

April 2020
Warrior Ltd

You are the recently appointed accountant at Warrior Ltd is a new company, which will be
incorporated on 1st April 2020. Initially the company will manufacture and sell a single
electronic product used in the production of drones. The following details relate to the
company’s first financial year:

Selling price £275 per unit.

Direct materials cost £75 per unit

Direct labour is 5 hours per unit for the first 2 months, reducing to 4 hours per
unit thereafter.

Direct labour cost £12 per hour

Sales targets for the forthcoming financial year are as follows:

Units

April 2020 1,200

May 1,400

June 1,500

July 1,900

August 2,000

September 2,000

October 2,100

November 2,200

December 2,000

January 2021 1,800

 February 1,800

March 1,900

90% of sales will be on credit terms, with customers paying two months later. The remaining
sales are paid for immediately. Closing inventory is planned to be 10% of the following
month’s sales target. Sales for April 2021 are expected to be 1,700 units.

Direct materials will be purchased during the month they are required for production and
paid for during the following month. An overhead absorption rate of £12 per direct labour
hour has been calculated for the variable production overheads. Variable distribution costs of
£8 per unit sold will also be incurred.

Total fixed production overheads of £115,000 and total fixed administration and distribution
overheads of £73,000 for the year will be incurred on an even basis throughout the year. All
overheads and the direct labour costs will be paid for in the month in which they are
incurred.

All production machinery will be leased; the costs of leasing the machinery are included in
the above figures. Warrior Ltd will also buy equipment that will be used mainly in the I.T.
department. They will purchase and pay for the equipment in June 2020. The equipment will
cost £22,000 and will be depreciated by 25% per annum. Depreciation is not included in the
overhead details given above.

Warrior Ltd will issue 140,000 ordinary shares of £1 at par for cash on 1st April 2020 and the
company is unwilling to issue any further shares at this stage.

The Board of Directors have little financial knowledge and currently does not
include a Finance Director. In order to assist you have been asked to produce
the following:

A report (created in Word) to the Board of Directors of Warrior Ltd which includes

1. An explanation as to why it is important to prepare budgets 10 marks

2. Comments on the budgeted cash position 10 marks

3. Suggestions of ways the monthly budgeted cash balances could be improved 10

marks
4. An explanation for the Directors as to the reasons why the forecast profit for the year
is not the same as the cash movement for the year (with reference to underlying
accounting assumptions and accounting concepts) 5 marks

5. The Directors are keen to compare their forecast results with their competitors.
Explain how ratios could be used to compare the company’s liquidity with its’
competitors results (Calculations are not required) 5 marks

6. An appendix (created as an Excel workbook) which shows :

 The following budgets (on a single worksheet) on a monthly basis for the 12
months ended 31st March 2021 in as much detail as the information given
allows (you should also include a total column for the year):

i. The Production Budget (in units)

ii. The Sales Budgets (in £)
iii. The Materials Purchases Budget (in £)
iv. The Direct Labour Budgets (in £)
v. The Overheads Budgets (in £) 20 marks

 Cash Budget for the company on a monthly basis for the 12 months ended
31st March 2020 in as much detail as the information given allows (you should
also include a total column for the year) 20 marks

 A single forecast Income Statement (Profit and Loss Account) for the whole of
the year 15 marks

Layout of report 5 marks