Assignment 41: You Are Required To Prepare A Direct Material

Assignment 41you Are Required To Prepare A Direct Material Budget For

1. You are required to prepare a Direct Material Budget for the second quarter (April to June) by considering a manufacturing company operating in Saudi Arabia as a sample study.

2. You are required to prepare the Sales price variance and Revenue sales quantity variance by taking any of your choice Saudi based company and suggest the suitable reasons for the variances.

3. You are required to allot the support department cost to operations department by taking any Saudi based operating company.

Paper For Above instruction

The assignment requires a comprehensive analysis involving the preparation of a direct material budget, analysis of sales variances, and cost allocation within a Saudi-based company. This essay systematically addresses each component, emphasizing practical application within the context of Saudi manufacturing and business environments, supported by financial management principles and relevant examples.

Introduction

Financial planning and control are vital components of effective management, particularly within manufacturing companies operating in dynamic markets such as Saudi Arabia. A direct material budget is a fundamental element of the overall budget, facilitating precise planning of raw material procurement based on projected production levels. Additionally, variance analysis in sales pricing and quantity provides insights into operational performance, market conditions, and pricing strategies. Cost allocation ensures proper distribution of overhead costs, fostering transparency and informed decision-making.

Preparing a Direct Material Budget

The first task involves developing a direct material budget for a manufacturing company in Saudi Arabia for the second quarter, encompassing April, May, and June. This process demands an understanding of the projected production volume, the bill of materials, and the cost per unit of raw materials. For instance, consider a Saudi-based furniture manufacturing company that produces 10,000 units in each of these months. If each unit requires 5 kg of wood at a cost of SAR 20 per kg, then the total raw material requirement and budget can be calculated.

For April: 10,000 units x 5 kg/unit = 50,000 kg; Cost: 50,000 kg x SAR 20/kg = SAR 1,000,000.

The same calculation applies to May and June, assuming production levels remain consistent. Adjustments would be made if production fluctuates. This budget helps ensure the procurement process aligns with production schedules, minimizes excess inventory, and controls costs.

Sales Price Variance and Revenue Sales Quantity Variance

The second component involves analyzing variances through a real-world Saudi company—say, a Saudi-based electronics retailer like Al-Falak. The sales price variance compares the actual selling price with the budgeted price, multiplied by the actual sales volume, revealing the impact of pricing strategies and market conditions. Conversely, the revenue sales quantity variance assesses the effect of selling a different quantity than planned.

Suppose the planned selling price per unit was SAR 1,200, with a projected sales volume of 5,000 units. If the actual average selling price was SAR 1,150, and actual sales volume was 4,800 units, then:

• Sales Price Variance = (Actual Price - Budgeted Price) x Actual Quantity = (SAR 1,150 - SAR 1,200) x 4,800 = -SAR 240,000 (favorable if lower price attracts more buyers, or unfavorable if due to pricing pressure).
• Sales Quantity Variance = (Actual Quantity - Budgeted Quantity) x Budgeted Price = (4,800 - 5,000) x SAR 1,200 = -SAR 240,000 (indicating lower sales volume).

Reasons behind price variance could include increased competition, promotional discounts, or changes in market demand. Variances in sales volume may be due to seasonal factors, marketing effectiveness, or economic shifts affecting customer purchasing power.

Allocating Support Department Costs

The third task involves cost-sharing where support departments, such as Human Resources, Maintenance, and Accounting, allocate costs to operational departments like Production or Sales. For example, consider a large Saudi industrial company involved in petrochemicals, which allocates overheads based on direct labor hours.

If the total support department cost is SAR 2,000,000 and the production department uses 10,000 direct labor hours out of a total of 50,000 hours across all departments, then the support cost allocated to production is:

SAR 2,000,000 x (10,000 / 50,000) = SAR 400,000.

This method ensures equitable distribution based on resource utilization, ultimately facilitating accurate product costing and profitability analysis.

Conclusion

In conclusion, the assignment demonstrates the importance of meticulous financial planning and analysis within Saudi manufacturing and business environments. Preparing a direct material budget enables efficient procurement, while variance analysis provides valuable insights into market and operational performance. Cost allocation practices further promote transparency and managerial control. Implementing such financial tools aligns with best practices in managerial accounting, helping Saudi firms optimize resources and enhance competitiveness globally.

References

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• Aljifri, K., & Moustahid, S. (2017). The Role of Variance Analysis in Management Control. Journal of Business Studies.
• Hussain, M., & Alnasser, A. (2019). Cost Allocation Methods in Saudi Manufacturing Companies. International Journal of Accounting and Finance.
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• Saudi Arabian Monetary Authority. (2022). Annual Report on Manufacturing Sector. SAMAH.
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• World Bank. (2023). Doing Business in Saudi Arabia: Policies and Reforms. The World Bank Publications.