Manufacturing Budgets
Operating Budgets
Slides prepared by Peter Miller
©National Core Accounting Publications
1
Production
The function of a manufacturing business is to produce
finished goods.
Components of production:
Process Costs
• Direct materials
• Direct Labour
• Factory Overhead
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©National Core Accounting Publications
2
Classification of Inventory
A manufacturing business will at any point in time have
inventory at varying stages of the production process.
Inventory on hand consists of:
• Direct materials
• Work in Process
• Finished Goods
Sales budgets are prepared in the same manner for
manufacturers and non - manufacturers
Slides prepared by Peter Miller
©National Core Accounting Publications
3
Production Budget
A production budget shows the estimated or expected
production of a manufacturing business for a period
expressed in units.
Example
Expected Sales
($)
January
9,000
February
8,000
March
10,000
April
12,000
Stock of finished goods at the beginning of any month
is expected to be 20% of the expected sales (in units)
for the month. Selling price is $10 per unit.
Required:
Prepare a Production Budget for the three months to 31 March.
Slides prepared by Peter Miller
©National Core Accounting Publications
4
Solution
Production Budget
for the three months to 31 March
Expected Sales
Expected Sales
+ Closing Stock
Available for Sale
- Opening Stock
Required Production
($)
( Units )
( Units )
( Units )
( Units )
( Units )
Jan
9,000
900
160
1,060
180
880
Feb
8,000
800
200
1,000
160
840
March
10,000
1,000
240
1,240
200
1,040
Slides prepared by Peter Miller
©National Core Accounting Publications
Total
27,000
2,700
240
2,940
180
2,760
April
12,000
1,200
240
5
Raw Material Cost Budget
A Raw Materials Cost Budget shows the estimated cost of
the raw materials required to satisfy the expected
production level.
Example
Production Budget for the three months to 31 March
Budgeted Production
Raw Material
Required
Jan
880
Feb
March
840
1,040
(kg)
1,320
1,260
1,560
4,140
($)
2,640
2,520
3,120
8,280
( units )
Total
2,760
( @ 1.5 k.g. per / unit )
Raw Material Cost
( @ $2 / unit )
Slides prepared by Peter Miller
©National Core Accounting Publications
6
Purchases Budget
A purchases budget shows the estimated purchases of a
business for a period which may be expressed in units and/or
dollar values.
Example
Required Production (units)
January
880
February
840
March
1,040
April
1,160
Closing stock of production material is required to be 50% of the following month’s
production material requirements. Each unit produced requires 1.5 kg of material at a
cost of $2 per kg.
Required:
Prepare a Materials Purchases Budget for the three
months to 31 March.
Slides prepared by Peter Miller
©National Core Accounting Publications
7
Solution
Materials Purchases Budget
for the three months to 31 March
(units)
Jan
880
Feb
840
Mar
1,040
Total
2,760
Apr
1,160
Required Materials ( @ 1.5 kg / unit )
(kg)
1,320
1,260
1,560
4,140
1,740
+ Closing Stock
(kg)
630
780
870
870
(kg)
1,950
2,040
2,430
5,010
(kg)
660
630
780
660
(kg)
1,290
1,410
1,650
4,350
($)
2,580
2,820
3,300
8,700
Required Production
Material Available
- Opening Stock
Required Purchases
Required Purchases ( @ $2 / kg )
Slides prepared by Peter Miller
©National Core Accounting Publications
870
8
Example
Combined Production
& Purchases Budget
April
May
June
July
August
Required Production ( $ )
12,000 14,000 18,000 15,200 16,000
Production is regulated so that each month's opening stock of finished goods
is sufficient for 25% of that month's sales requirements.
Each unit produced requires 3 kg of raw material at a cost of $2 per kg.
Each month's opening stock of raw material is sufficient to satisfy that
month's production.
Selling piece of each unit of product is $20.
Required:
Prepare a Materials Purchases Budget for the three months to 30
June.
Slides prepared by Peter Miller
©National Core Accounting Publications
9
Solution
Materials Purchases Budget
for the three months to 30 June
April
May
June
Total
July
12,000
14,000
18,000
44,000
15,200
16,000
800
Expected Sales
($)
Expected Sales
( Units )
600
700
900
2,200
760
( Units )
175
225
190
190
200
( Units )
775
925
1,090
2,390
960
( Units )
150
175
225
150
190
( Units )
625
750
865
2,240
770
+ Closing Stock
Available for Sale
- Opening Stock
Required Production
Material Required
( Units )
1,875
2,250
2,595
6,720
( Units )
2,250
2,595
2,310
2,310
( Units )
4,125
4,845
4,905
9,030
( Units )
1,875
2,250
2,595
1,875
Required Purchases
( Units )
2,250
2,595
2,310
7,155
Required Purchases
($)
4,500
5,190
4,620
14,310
+ Closing Stock
Material Available
- Opening Stock
Slides prepared by Peter Miller
©National Core Accounting Publications
August
200
2,310
10
Direct Labour Budget
Based on estimates of:
• Production
• Time allowed to produce one unit
• Labour Rate per Hour
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©National Core Accounting Publications
11
Direct Labour Budget
Example
Direct labour Budget
for the Year Ending 30 June 2004
Budgeted Production (units)
Direct labour Hours per unit
50,000
(Hours)
Total Budgeted Direct labour Hours
Budgeted Direct labour Cost (@$17 per hour)
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©National Core Accounting Publications
2
100,000
$1,700,000
12
Factory Overhead Budget
A factory overhead budget shows the estimated factory
expenses, not including direct/raw material and direct
labour costs, expected to be incurred in achieving the
forecast /required production level of a manufacturing
business for a period.
Factory Expenses:
Direct and Indirect
•
Fixed Costs
•
Variable Costs
Two approaches:
•
Static Budget
•
Flexible budget
Slides prepared by Peter Miller
©National Core Accounting Publications
13
Example
Factory Overhead Budget
(Static Budget)
Budgeted Production
20,000 units
Variable Factory Overhead
$1.50 per unit
Fixed Factory Overhead
$25,000
Required:
Prepare a Factory Overhead budget for the year.
Slides prepared by Peter Miller
©National Core Accounting Publications
14
Solution
Factory Overhead Budget
for the year ending…
Budgeted Production ( Units )
20,000
($)
Budgeted Variable Overheads @ $1.50 per unit
30,000
Budgeted Fixed Overhead
25,000
Budgeted Total Factory Overhead
Slides prepared by Peter Miller
©National Core Accounting Publications
$55,000
15
Example
Columnar Factory Overhead Budget
(Static Budget)
The following estimates are provided for a year in respect of a
manufacturing business which has two production departments:
Budgeted Production (units)
Department 1
20,000
Department 2
15,000
Direct Labour Hours per unit
1 hr
1.5 hrs
Variable Factory Overhead Rate
$2 per DLH
$3 per DLH
Fixed Factory Overhead
$25,000
$20,000
Required:
Prepare a Factory Overhead budget for the year.
Slides prepared by Peter Miller
©National Core Accounting Publications
16
Solution
Factory Overhead Budget for the Year
Factory Overhead Budget for the
Year
Budgeted Production (units)
Budgeted Direct Labour Hours
@ 1 hour per unit
@ 1.5 hours per unit
Variable Factory Overhead
@ $2 per direct labour hr
@ $3 per direct labour hr
Fixed Factory Overhead
Budgeted Total Factory Overhead
Department
1
20,000
20,000
Department
2
15,000
Total
22,500
42,500
67,500
20,000
$87,500
107,500
45,000
$152,500
40,000
25,000
$65,000
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©National Core Accounting Publications
17
Example
Factory Overhead Budget
(Flexible Budget)
Production
Production
ProductionLevel
Level
Level
(units)
(units)
(units)
10,000
10,000
10,000 12,000
12,000
12,000 16,000
16,000
16,000
(( $
$
) )) 20,000
Budgeted
Budgeted
BudgetedVariable
Variable
VariableOverheads
Overheads
Overheads@@
@$2
$2
$2per
per
perunit
unit
unit ( $
20,000
20,000 24,000
24,000
24,000 32,000
32,000
32,000
($
(( $
$
) )) 20,000
Budgeted
Budgeted
BudgetedFixed
Fixed
FixedOverhead
Overhead
Overhead
20,000
20,000 20,000
20,000
20,000 20,000
20,000
20,000
($
(( $
$
) )) 40,000
Budgeted
Budgeted
BudgetedTotal
Total
TotalFactory
Factory
FactoryOverhead
Overhead
Overhead
40,000
40,000 44,000
44,000
44,000 52,000
52,000
52,000
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©National Core Accounting Publications
18
Cost of Production Budget
( Manufacturing Budget )
The cost of production or manufacturing budget shows the estimated
cost of producing the budgeted output of a manufacturing business
for a period.
Budgeted
Budgeted
Budgeted
Budgeted
Budgeted
Budgeted
Budgeted
Budgeted
Budgeted
Budgeted
Raw Materials Cost
Raw Materials Cost
Direct Labour Cost
Direct Labour Cost
Prime
Cost
Prime Cost
Factory Overhead
Factory Overhead
Cost
Cost of
of Production
Production
Slides prepared by Peter Miller
©National Core Accounting Publications
$ 82,000
$ 82,000
170,000
170,000
252,000
252,000
55,000
55,000
$307,000
$307,000
19
Other Manufacturing Budgets
• Expenses Budget
• Cost of Goods Sold Budget
• Budgeted Income Statement
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©National Core Accounting Publications
20
Next Chapter
Chapter 4
Cash Budgets
Slides prepared by Peter Miller
©National Core Accounting Publications
21