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Hi, So I hope you are well.
I was solving cash budget questions of the textbook after taking your lecture. And I encountered a confusing statement regarding cash budget.
Statement of profit and loss.
Jan. Feb. March.Cost of production 50. 55. 32.
I am only included the cost of production aspect of The statement of P & L.
Now, below the statement was –
• 40% of production cost relate to direct materiel. Materials are bought in the month prior to the month in which they are used. Purchases are paid for one month after purchase.
• 30% of production cost relates to direct labour which paid for when it is used.
I was a bit confused by the word “using month”. I mean the statement of p & l only include the month in when they are incurred. And there is no where mentioned in question when materials are used. So, is there any other mean of the first statement other than, 40% of Cost of Production is direct materials.
And same for statement 2.
You are reading too much into it 🙂
The production cost in January is the cost of what is actually produced. 40% of this (so 20) is the cost of the materials used in production in January. The materials will have been purchased in December and then paid for in the following month, i.e. January.
The SOPL in January will show the cost of the materials actually used (i.e. the purchases as adjusted for the opening and closing inventories of material)Similarly 30% (i.e. 15) is the cost of the labour used in January. This is paid for in January.
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