WEEK6–OPERATINGBUDGETS(MANUFACTURINGORGANISATIONS)
CaseStudy
LittlePeopleInc.manufacturescardboardboxeswhichareusedfortransportingvery
specialtoystotoystoresallaroundAustralia.Youhavealreadybeengivenatourofthe
factorywheretheseboxesaremade,nowweneedyoutopreparethecompany’sbudgets
forthecomingyearending30June.
Thebudgetsthatyouneedtoprepareinclude:
1.Productionbudget
2a.Directmaterialsusagebudget
2b.Directmaterialspurchasesbudget
3.Directlabourbudget
4.Factoryoverheadbudget
5.Endinginventorybudget
6.COGSbudget
7.Salesbudget
8.Operatingexpensesbudgets
ThenyouneedtoprepareaBUDGETEDINCOMESTATEMENT.
NOTE;
1. TheprocessfollowedtoprepareaCASHBUDGETandtheBUDGETEDFINANCIAL
STATEMENTSforamanufacturingorganisationandamerchandising
organisationisthesamesowearenotgoingtolookatthesebudgetsagaininthis
lesson.
2. Inthislessonweareonlygoingtofocusonlearninghowtopreparethebudgets
whichareusedtopreparetheBUDGETEDINCOMESTATEMENTofa
manufacturingorganisation.
3. CASHBUDGETSwerecoveredinLESSON4andBUDGETEDFINANCIAL
STATEMENTSwerecoveredinLESSON5.
1
Youareprovidedwiththefollowinginformation:
Sales
LPIestimatesthatitwillsell900,000boxesat$0.80eachduringthecomingyear.
Directmaterials
Eachboxrequiresanaverageof0.4kilogramsofcardboardatacostof$0.60per
kilogram.
Directlabour
Ittakesonehourtoproduce300boxes.Factoryworkersarepaidanaverageof$15per
hour.
Factoryoverhead
Thefollowingfactoryoverheaditemsareanticipatedfortheyear:
$
Indirectmaterials
8,150
Indirectlabour
43,500
Lightandpower
29,000
Rates
14,500
Factoryinsurances
17,500
Depreciationoffactoryequipment
21,000
*Factoryoverheadisappliedonthebasisofdirectlabourhours.
*Forthepurposesofapplyingfactoryoverheadtoproduction,assumethatLPIwilluse
185directlabourhoursinMarchand250directlabourhoursinMaynextyear.
2
Inventories
Finishedgoods
Actualbeginninginventory
Desiredendinginventory30June
Directmaterials
Actualbeginninginventory
Desiredendinginventory30June
Operatingexpenses
Estimatesfortheyearareasfollows:
Marketing
Advertising
Salariespaidtosalesstaff
Administration
Clericalwagesandsalariespaidto
management
Stationery,telephone,postageetc.
Depreciationofofficeequipment
Financial
Baddebts
Bankcharges
29,000boxesvaluedat$15,950
20,000boxes
6,500kg
5,000kg
2%ofsales
$58,000
$110,000
$14,500
$9,500
1%ofsales
$5,000
3
CaseStudySOLUTIONS
1.Productionbudget
(referCHAPTER4–WEEK3–purchasesbudgetinUNITS)
LittlePeopleInc.
Productionbudgetfortheyearending30June
Boxes
(UNITS)
Sales
900,000
Add:Desiredendinginventory
20,000
Totalboxesneeded
920,000
Less:Actualbeginninginventory
29,000
Totalboxestobeproduced
891,000
4
2a.Directmaterialsusagebudget
Thepurposeofthisbudgetistoshowthevolumeofdirectmaterialsthatwillbeused
inbudgetedproduction.
Itcanalsobeusedtoshowthevalueofdirectmaterialsthatwillbeusedinbudgeted
production.
LittlePeopleInc.
Directmaterialsusagebudgetfortheyearending30June
Totalboxestobeproduced
891,000 (fromproductionbudget)
Kilosofcardboardrequiredtomakeeachbox
x0.4
Totalcardboardneededforproduction(kg)
356,400
Costperkiloofcardboard
x$0.60
Totalcostofcardboardtobeusedinproduction
$213,840
2b.Directmaterialspurchasesbudget
LittlePeopleInc.
Directmaterialspurchasesbudgetfortheyearending30June
Totalcardboardneededforproduction(kg)
356,400 (fromDMusage budget)
Add:Desiredendinginventory(kg)
5,000
Totalcardboardneeded(kg)
361,400
Less:Actualbeginninginventory(kg)
6,500
Totalcardboardtobepurchased(kg)
354,900
Priceperkiloofcardboard
x$0.60
Totalcostofcardboardtobepurchased
$212,940
5
3.Directlabourbudget
Topreparethisbudgetyouneed:
VOLUME(no.directlabourhoursrequiredtomanufacturebudgetedproductionoutput)
xCOST(hourlyrate)
LittlePeopleInc.
Directlabourbudgetfortheyearending30June
Totalboxestobeproduced(units)
891,000 (fromproduction budget)
No.boxesproducedperhour
/300
Totaldirectlabourhoursrequiredfor
production(hours)
2,970
Directlabourcostperhour
x$15.00
Totaldirectlabourcost
$44,550
6
4.Factoryoverheadbudget
STEP1:Estimatetotalfactoryoverheadexpectedtobeincurredduringtheperiod
$
Indirectmaterials
8,150
Indirectlabour
43,500
Lightandpower
29,000
Rates
14,500
Factoryinsurances
17,500
Depreciationoffactoryequipment
21,000
Total
133,650
STEP2:Establishanapplicationrate.
Wearetoldthatfactoryoverheadisappliedonthebasisofdirectlabourhours(cost
driver).
Therefore,LPI’sfactoryoverheadapplicationrateiscalculatedasfollows:
TOTALbudgetedfactoryoverhead
TOTALbudgeteddirectlabourhoursrequiredforproduction
$133,650
2,970(fromdirectlabourbudget)
=$45perdirectlabourhour
STEP3:Applythispredeterminedratetothetotalfactoryoverhead
AssumingthatLPIwilluse185directlabourhoursinMarchand250directlabourhours
inMaynextyear,howmuchfactoryoverheadwouldbeappliedtoproductionforthose
months?
Factoryoverheadtobeappliedtoproduction:
ForMarchis =
185DLhoursx$45perDLhour =
$8,325.
ForMayis =
250DLhoursx$45perDLhour =
$11,250.
7
5.Endinginventorybudget
Recall:Thereare3basictypesofinventories:
1.Finishedgoods(ourfocus)
2.Materials(ourfocus)
3.Workinprogress(beyondthescopeofthistext)
Tocalculatethefinishedgoodsinventory,wefirsthavetoworkouthowmuchitcoststo
produceonecompletedbox.
Weknowthat;
*Eachboxrequiresanaverageof0.4kilogramsofcardboardatacostof$0.60per
kilogram.
*Eachhourofdirectlabourproduces300boxesatacostof$15fordirectlabourand
$45forfactoryoverhead.
$
Directmaterials
0.4kgx$0.60
0.24
Directlabour
$15/300
0.05
Factoryoverhead
$45/300
0.15
Totalproductioncostperbox
0.44
Nowwecanpreparetheendinginventorybudget.
LittlePeopleInc.
Endinginventorybudgetasat30June
$
Finishedgoods
20,000boxes@$0.44perbox
8,800
Directmaterials
5,000kg@$0.60perkg
3,000
Totalendinginventories
11,800
8
6.COGSbudget
WealreadyhavealltheinformationthatweneedtopreparetheCOGSbudget.
STEP1:CalculatetheTOTALcostofproduction.
$
Directmaterials
213,840
Directlabour
44,550
Factoryoverhead
133,650
Totalcostofproduction
392,040
STEP2:PreparetheCOGSbudget.
LittlePeopleInc.
COGSbudgetfortheyearending30June
Beginningfinishedgoodsinventory
$15,950 (given)
(see‘step1’above)
Add:Costofproduction
$392,040 Goodsavailableforsale
$407,990 Less:Endingfinishedgoodsinventory
$8,800 (fromendinginventorybudget)
COGS
$399,190
7.Salesbudget
(referCHAPTER3–WEEK2)
LittlePeopleInc.
Salesbudgetfortheyearending30June
$
900,000boxes$0.80perbox
720,000
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8.Operatingexpensesbudgets
(referCHAPTER4–WEEK3)
LittlePeopleInc.
Marketingexpensesbudgetfortheyearending30June
$
14,400
58,000
72,400
$
$110,000
14,500
9,500
134,000
$
7,200
5,000
12,200
Advertising
($720,000x2%)
Salariespaidtosalesstaff
Totalmarketingexpenses
LittlePeopleInc.
Admin.expensesbudgetfortheyearending30June
Clericalwagesandsalariespaidtomanagement
Stationery,telephone,postageetc.
Depreciationofofficeequipment
Totaladmin.expenses
LittlePeopleInc.
Financialexpensesbudgetfortheyearending30June
Baddebts
Bankcharges
Totalfinancialexpenses
($720,000x1%)
9.BudgetedIncomeStatement
LittlePeopleInc.
BudgetedIncomeStatementfortheyearending30June
$720,000
Sales
Less:COGS
$399,190
Grossprofit
$320,810
Less:Operatingexpenses
Marketingexpenses
$72,400
Admin.expenses
$134,000
Financialexpenses
$12,200
$218,600
Totaloperatingexpenses
$102,210
Netprofit
10