Marsden Foods: Production Budget, Material Purchases and an Unconfirmed Forecast
Marsden Foods budgets quarterly for product X. Sales forecasts are Q1 12,000 units, Q2 15,000 and Q3 9,000. Finished goods inventory is held at 20% of the following quarter's sales; opening inventory at 1 January was 2,400 units. Each unit uses 3 kg of material. Material inventory policy is 10% of the next quarter's production requirement; opening material inventory was 3,600 kg. One shift gives capacity of 13,000 units per quarter; overtime is available but carries a 50% premium on a base wage of $12 per hour, with 2 hours allowed per unit. In late March the sales director revised the Q2 forecast up to 18,000 units, citing an export enquiry that has not yet been confirmed, and asked for the Q1 budget to be reissued on that basis.
1. Prepare the Q1 production budget and the Q1 material purchases budget on the original forecast.
Read the worked answer
Production budget - Q1 Sales required: 12,000 Add closing FG (20% × Q2 sales 15,000): 3,000 Less opening FG: (2,400) Production = 12,600 units
(Q2 production for the material calculation: 15,000 + 0.20 × 9,000 − 3,000 = 13,800 units.)
Material purchases budget - Q1 Material used in production: 12,600 × 3 kg = 37,800 kg Add closing material inventory (10% × 13,800 × 3 kg = 4,140 kg): 4,140 kg Less opening material inventory: (3,600 kg) Purchases = 38,340 kg
The inventory adjustments work in opposite directions to intuition: growth in Q2 pulls both finished goods and material stocks up in Q1, while the opening balances reduce the required build.
2. Recalculate Q1 production on the revised Q2 forecast, assess the capacity position for Q1 and Q2, and quantify the overtime premium needed to cover the shortfall.
Read the worked answer
Revised Q1 production 12,000 + (20% × 18,000) − 2,400 = 12,000 + 3,600 − 2,400 = 13,200 units
Capacity position
| Q1 | Q2 | |
|---|---|---|
| Production required | 13,200 | 16,200 |
| Capacity | 13,000 | 13,000 |
| Shortfall | (200) | (3,200) |
Q2 production = 18,000 + (20% × 9,000) − (20% × 18,000) = 18,000 + 1,800 − 3,600 = 16,200 units. Total shortfall = 3,400 units.
Overtime cost Hours needed = 3,400 × 2 = 6,800 hours Premium = 50% × $12 = $6 per hour Premium = 6,800 × $6 = $40,800
(Base wages of 3,400 × 2 × $12 = $81,600 would already be in the standard labour cost; only the $40,800 premium is an extra cost of the revision.)
Note the amplification: the 3,000-unit upgrade in Q2 sales becomes a 600-unit rise in Q1 production and a 2,400-unit rise in Q2 production, because the closing inventory target rises at the same time as the sales target.
3. Advise the finance director on how to respond to the sales director's request.
Read the worked answer
Do not simply reissue the budget. A budget is an authorised financial plan; an unconfirmed enquiry belongs in a forecast or a scenario, not in the approved budget.
Process points:
- Keep the budget on the most-likely forecast and prepare the 18,000-unit case as a separate sensitivity/scenario, so the capacity and overtime consequences are visible without destabilising the plan.
- Require confirmation (order, letter of credit, or minimum-volume commitment) before committing to the $40,800 overtime premium and the additional inventory.
- Compare the extra contribution with $40,800. The selling price has not been given; if the export price is near the normal price the premium is easily affordable, but if it is a discounted export price the deal may be marginal or loss-making. Ask for the export price and the incremental contribution per unit.
- Consider alternatives to overtime: a temporary second shift, subcontracting, or deferring Q1 stock build to smooth the peak.
Behavioural points: late, unilateral revisions damage budgetary control (variances against a plan nobody believes are meaningless) and invite slack-building by other managers. Sales forecasts are systematically over-optimistic where a manager is judged on revenue; a formal forecast-accuracy record and a review meeting, rather than ad hoc reissue, addresses this.