Sorry another Budgeting question

cazalino

Really sorry to fill the page up with budgeting questions but i am studying from home so theres nobody else to ask and your all very helpful.

How do you calculate the answer to this: Raw materials budget for this year was set at £216300 this assumed a 3% increase in raw material prices compared with the previous year. However production volume is 10% higher than teh previous year and there has been no price increase. Calculate the material forecast...

steve2008

I'll explain this in maths terms, as if you can understand it this way you will have no problem with any type of these questions.
There are other ways of explaining it, but I expect other people will do a better job than me that way.

The way I go about it is to first calculate the value before the original forcast, which I label x.

in this case

x * 1.03 = 216300 This is basically what the question says, just written in a formula.

(1.03 = 1 + 3/100, i.e. 103%, so the 3% increase)


then rearrange the formula by dividing both sides by 1.03 to get

x = 216300/1.03 = 210000

Now, we look at what is actually happening.
There is no price increase, and production has increased by 10%, so our new forcast will be

x * 1.10 = 231000

(1.10 = 1 + 10/100)



Later on you will see more types of these and sometimes several changes. Again I reduce the forcast back to x and then build up the new one.

e.g. Raw materials budget for this year was set at £216300 this assumed a 3% increase in raw material prices compared with the previous year and production is expected to increase 2%. However production volume is 10% higher than the previous year and there has been a 5% price increase.

x * 1.03 * 1.02 = 216300

divide both sides by 1.02 and 1.03 to find x = 205882

Now build up the new forcast

x * 1.10 * 1.05 = 237794

steve2008

Note on working with decreases:

If it said for example "Raw materials budget for this year was set at £216300 this assumed a 3% DEcrease in raw material prices" then

x * 0.97 = 216300

(0.97 = 1 - 3/100)

cazalino

Hi Steve, thank you for that. It took a couple of read throughs but i think i understand. I checked and the answer is 220,000. So am i correct in saying you start with 216300 then strip it back to was it was. (216300/1.03/1.05 = 200,000) then add the 10% makes it 220,000. Hope thats right!

steve2008

Yes that looks right IF there was a 5% increase in production usage originally forecast. In your opening post I am assuming you missed that bit when you copied the question over.

cazalino

Oops sorry yes i missed that bit - thanks for you help