Professional Documents
Culture Documents
Outline
Preparing the Operating Sub-Budgets
Sales Budget & Production Budget (recap.)
Direct Material (DM) Budget
Direct Manufacturing Labor (DL) Budget
Manufacturing Overhead (MOH) Budget
Ending Inventory Budget
Cost of Goods Sold Budget
Basic Operating
Budget Steps
1.
2.
3.
4.
5.
Basic Operating
Budget Steps
6.
7.
8.
9.
x
=
10000
May
20000
June
30000
Quarter
60000
10
10
10
10
100000
200000
300000
600000
Production Budget
A detailed plan which shows the number of units a company
must produce to meet budgeted sales and budgeted
inventory levels
Expressed in terms of units
Production managers use this information to plan for the
materials and human resources that production activities will
requires
To prepare a production budget, managers must know:
Budgeted number of sales units (from the sales budget)
Desired level of ending inventory for each period in the
budget year
Production Budget
In inventory accounts, there are two items on
the debit side, and two items on the credit side
Beginning
Inventory
Additions to
Inventory
(To be produced)
Additions
to
Inventory
Withdrawals
(To be sold)
Withdrawals
Ending
Inventory
(EI)
(Desired)
Ending
Inventory
Beginning
Inventory
(BI)
Production Budget
+
=
=
10000
4000
May
20000
6000
June
30000
Quarter
60000
7000
7000
Total Needs
14000
26000
37000
=
67000
-
2,000
4000
6000
2000
Required Production
12000
22000
31000
65000
x
=
x
=
+
=
=
x
=
May
June
July
August
10000
20000
30000
35000
40000
4000
6000
7000
8000
Total Needs
14000
26000
37000
43000
2000
4000
6000
7000
Required Production
12000
22000
31000
36000
REMINDER:
Additions to Inv. = Withdrawals EI + BI
To be Purchase = To be Sold + Desired EI BI
= 35000 + 8000 7000 = 36000
8000
May
June
Quarter
12000
22000
31000
65000
60000
110000
155000
325000
0.50
0.50
0.50
0.50
DM Usage Cost ( )
30000
55000
77500
162500
11000
15500
18000
18000
71000
x
125500
173000
343000
11000
15500
10000
61000
114500
157500
333000
30500
57250
78750
166500
=
x
=
10000
=
=
Example 3
Marina company makes and sells dresses. Three meters
of silk are needed to make one dress. Budgeted
productions for the next four months are as follow:
Production in units
April
May
June
July
14000
14500
15500
12600
Example 3 (cont.)
(a) What is the desired ending inv. of material for May?
We have to calculate Junes needs for materials.
15500
3 meters
46500 meters
9300 meters
Example 3 (cont.)
(b) What is the total cost of material to be purchased in
April?
April
May
14000
14500
Production Needs
42000
43500
8700
50700
2500
48200
0.60
Production (units)
Materials (per unit) (meters)
Material Cost
28920
Example 3 (cont.)
(b) What is the total cost of material to be purchased in
April?
SECOND APPROACH (without using the table):
We can directly use the formula to solve for the material needed
and then multiply it by the cost per unit of use the statement
method.
Additions to Inv. = Withdrawals EI + BI
Purchases of materials = Needed for production + Desired EI BI
= (14000 units * 3 meters) + 8700 2500
= 42000 8700 + 2500 = 28920
x
=
x
=
Required production
Direct labor hours per unit of production
Total direct labor hours needed
Cost of direct labor per hour
Total direct labor (DL) costs
May
June
Quarter
12000
22000
31000
65000
0.05
0.05
0.05
0.05
600
1100
1550
3250
10
10
10
10
11000
15500
32500
=
x
6000
Example 4
Lubriderm corporation (specialized in daily skin care
products) goes through two department in the production
process. Each bottle requires two direct labor hours in
dept. A and one hour in dept. B. Labor cost is 20 per
hour in dept. A and 15 per hour in dept. B. (a) Assuming
the amount budgeted to be produced in January is 30000
units, what is the budgeted direct labor cost for January?
(b) The labor capacity for a normal 8-hour shift for a
month is 50000 direct labor hours for each of the depts.
Overtime is paid at time and a half. What would be the
budgeted direct labor cost for January, assuming a
budgeted production of 30000 units?
Example 4 (cont.)
(a) Production units: 30000
Dept. A
Dept. B
30000
30000
60000
30000
20
15
1200000
450000
Production in units
Direct Labor Hours per unit
Total Hours Required
Total
1650000
Example 4 (cont.)
(b) Labor Capacity : 50000
Production in units
Direct Labor Hours per unit
Total Hours Required
Dept. A
Dept. B
Total
30000
30000
60000
30000
20
15
1000000
450000
1450000
300000
300000
1300000
450000
1750000
May
June
Quarter
600
1100
1550
3250
20
20
20
20
12000
22000
31000
65000
30000
30000
30000
90000
42000
52000
61000
155000
x
=
Quantity of
Input (per unit)
Cost of Input
(per unit)
Total
5 Kg
2.50
0.05 hrs
10 (per hour)
0.50
0.05 hrs
2.385
Direct Materials
Direct Labor
Input
5.385
7000
37695
from production budget
(EI at the quarter)
Beginning FG inventory
Cost per unit of Beginning FG Inv.
Quantity of Units produced
Product cost per unit
Quantity of units in Ending inv. (its per unit cost is equal
to the FG cost)
x
=
+
=
=
Rate (/unit)
Total ()
2000
5.00
10000
65000
2.50
162500
Direct Labor
65000
0.50
32500
65000
2.385
155000
Beginning Inv.
ADD: Cost of Goods Manufactured
360000
7000
5.385
37.695
322.305
Operating Expenses
Includes all non-manufacturing costs (for example,
R&D costs, design costs, marketing costs, distribution
costs, customer service costs, labor costs of sales floor
personnel, distribution costs: costs of shipping products
to customers)
For service companies, this includes all costs that are
not directly related to the service offered
Similar to MOH, this cost can also have fixed and
variable parts (we will see an example!)
May
June
Quarter
10000
20000
30000
60000
10000
15000
30000
4000
8000
12000
24000
1000
2000
3000
6000
10000
20000
30000
60000
Office Rent
10000
10000
10000
30000
Advertising
5000
5000
5000
15000
35000
35000
35000
105000
50000
50000
50000
150000
60000
70000
80000
210000
Income Statement
=
=
=
=
Sales Revenue
Cost of Goods Sold (CGS)
Gross Profit
Operating Expenses
Operating Profit
Depreciation & Amortization
Trading Profit
Interest & Tax expenses
Net Profit
600000
322305
277695
210000
67695