Purposes of Budgeting Systems

Budget
a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.
Planning Facilitating Communication and Coordination Allocating Resources Controlling Profit and Operations Evaluating Performance and Providing Incentives

Types of Budgets
Capital budgets with acquisitions that normally cover several years.

Long Range Budgets

Continuous or Rolling Budget 1999 2000

This budget is usually a twelve-month budget that rolls forward one month as the current month is completed.

2001

2002

Overview of the Master Budget for Stylistic Furniture

Revenues Budget

Ending Inventory Budget

Production Budget

Direct Materials Costs Budget

Direct Manufacturing Labor Costs Cost of Goods Sold Budget

Manufacturing Overhead Costs Budget

Operating Budget

R & D/Design Costs Budget Marketing Costs Budget Distribution Costs Budget Customer-Service Costs Budget Administrative Costs Budget

Budgeted Income Statement

Financial Budget Capital Expenditures Budget Cash Budget

Budgeted Balance Sheet

Budgeted Statement of Cash Flows

Stylistic Furniture Stylistic furniture manufactures prestige coffee tables. Its job costing system comprises direct manufacturing, direct labor & manufacturing overheads. Manufacturing overheads, both variable & fixed are allocated to each coffee table using direct manufacturing labor hours as the allocation base. The only source of revenue is sales of coffee tables. Units sold is the driver of revenues because prices are predicted to be unchanged throughout 2006. WIP inventory is negligible and is ignored. Unit costs of direct materials purchased & finished goods sold remain unchanged throughout each budget year but can change from year to year. There are two types of direct materials: Particle board (PB) and Red oak (RO) & two types of direct manufacturing labor: Laminating labor and Machining labor. Direct labor costs are variable with respect to manufacturing labor hours. Manufacturing labor rates remain unchanged throughout each budget year. Labor workers are hired on an hourly basis; no overtime is worked. Stylistic allocates all manufacturing overhead costs, variable and fixed, using direct labor hours. Non manufacturing costs variable component, consisting mostly of commissions to sales personnel, is variable with respect to the amount of revenue.

Stylistic Furniture
a. Each coffee table has the following product specifications:
Direct Materials Particle board (PB) Red oak (RO) 9.00 board feet (b.f.) per table 10.00 board feet (b.f.) per table 0.25 hours per table 3.75 hours per table

Direct manufacturing labor

Laminating labor Machining labor

b. Inventory information in physical units for 2006 is

Beginning Inventory Direct materials Particle board Red oak Finished goods Coffee tables 5,000 units 3,000 units 20,000 b.f. 25,000 b.f. 18,000 b.f. 22,000 b.f. Target Ending Inventory

c. Coffee table revenues expected for 2006 are

Selling price Units sold Rs.3,920 per table 52,000 coffee tables

Stylistic Furniture
d. Costs expected for 2006 include: 2005 Particle board (per b.f.) Red oak (per b.f.) Rs.39 Rs.58 2006 Rs.40 Rs.60

Laminating labor (per hour)

Machining labor (per hour)

Rs.240
Rs.290

Rs.250
Rs.300

e. Other budgeted cost rats and amounts for 2006 are Variable manufacturing overhead costsRs.95 per direct manufacturing labor-hour Variable nonmanufacturing costs13.5% of revenues Fixed manufacturing overhead costsRs.1,60,00,000 Fixed nonmanufacturing costsRs.1,40,00,000

f. The inventoriable (manufacturing) cost is Rs.2,750 per coffee table in 2005

Stylistic Furniture
Schedule 1: Revenue Budget
For the Year Ended December 31, 2006 Selling Price Coffee tables Rs.3,920 Schedule 2: Production Budget (in Units) For the Year Ended December 31, 2006 Units Sold 52,000 Total Revenues Rs.20,38,40,000

Coffee Tables
Budgeted unit sales (Schedule 1) Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced 52,000 3,000 55,000 5,000 50,000

Stylistic Furniture
Schedule 3A: Direct Materials Usage Budget For the Year Ended December 31,2006 Particle Board (PB) Physical Units Budget PB: 50,000 units x 9.00 b.f. per unit RO: 50,000 units x 10.00 b.f. per unit To be used in production, b.f. 4,50,000 4,50,000 5,00,000 5,00,000 Red Oak (RO) Total

Cost Budget
(Available from beginning inventory) PB: Rs.39 per b.f. x 20,000 b.f. Rs.7,80,000

RO: Rs.58 per b.f. x 25,000 b.f.

To be obtained from purchases of this period: PB:Rs.40 per b.f. x (4,50,000 B.F. 20,000 b.f.) RO: Rs.60 per b.f. x (5,00,000 b.f. 25,000 b.f.) 1,72,00,000

Rs.14,50,000

2,85,00,000

Direct materials to be used

Rs1,79,80,000

Rs.2,99,50,000

Rs.4,79,30,000

Stylistic Furniture
Schedule 3B: Direct Materials Purchases Budget For the Year Ended December 31,2006 Particle Board (PB) Red Oak (RO) b.f. b.f. b.f b.f. b.f. 5,00,000 22,000 5,22,000 25,000. 4,97,000 b.f. b.f. b.f. b.f b.f. Total

Physical Units Budget

Production usage (from Schedule 3A) Add target ending inventory Total requirements Deduct beginning inventory Purchases Cost Budget PB: 4,48,000 b.f. x Rs. 40 per b.f. RO: 4,97,000 b.f. x Rs.60 per b.f. Purchases Rs.1,79,20,000 1,79,20,000 2,98,20,000 Rs.2.98,20,000 Rs.4,77,40,000 4,50,000 18,000 4,68,000. 20,000 4,48,000

Stylistic Furniture
Schedule 4: Direct Manufacturing Labor Budget
For the Year Ended December 31,2006 Laminating Labor (LL) Labor-Hours Budget LL: 50,000 units x 0.25 hours/unit ML: 50,000 units x 3.75 hours/unit 12,500 Cost Budget LL: Rs.250 per hour x 12,500 hours ML: Rs.300 per hour x 1,87,500 hours Rs.31,25,000 Rs.31,25,000 Rs.5,62,50,000 Rs.5,62,50,000 Rs.5,93,75,000 hours 12,500 hours 1,87,500 1,87,500 hours hours 2,00,000 hours Machining Labor (ML) Total

Stylistic Furniture
Schedule 5: Direct Manufacturing Overhead Budget
For the Year Ended December 31, 2006 At Budgeted Level of 2,00,000 Direct Manufacturing Labour-Hours Variable manufacturing overhead costs

Supplies
Indirect manufacturing labor Power and energy Maintenance Miscellaneous Fixed manufacturing overhead costs Depreciation Property taxes Property insurance Plant supervision Miscellaneous Total manufacturing overhead costs

Rs.24,00,000
62,00,000 46,00,000 30,00,000 28,00,000 Rs.50,00,000 35,00,000 26,00,000 21,00,000 28,00,000 1,60,00,000 Rs.3,50,00,000 Rs.1,90,00,000

Stylistic Furniture
Schedule 6A: Computation of Unit Costs of Ending Inventory of Finished Goods December 31,2006 Cost per Unit of Input Input Total

Direct materials
Particle board Red oak Direct manufacturing labor Rs.40.0 per b.f. 60.0 per b.f. 9.00 b.f. 10.00 b.f. Rs.360 600 Rs.960

Laminating labor
Machining labor Manufacturing overhead Total

Rs.250 per hour

Rs.300 per hour Rs.175 per hour

0.25 hours
3.75 hours 4.00 hours

Rs.62.5
1,125 1,187.5 700 Rs.2,847.5

This Rs. 2,847.5 unit cost for 2006 compares to Rs.2,750 unit cost for 2005

Stylistic Furniture
Schedule 6B: Ending Inventories Budget December 31,2006 Cost per Unit Units Total

Direct materials
Particle board Red oak Finished goods Rs.40.0 per b.f. 60.0 per b.f. 18,000 b.f. 22,000 b.f. Rs.7,20,000 13,20,000 Rs.20,40,000

Coffee tables
Total ending inventory

Rs.2,847.5 per unit

3,000 units

Rs.85,42,500

85,42,500
Rs.1,05,82,500

Stylistic Furniture
Schedule 7: Cost of Goods Sold Budget For the Year Ended December 31, 2006 Beginning finished goods inventory, January 1,2006, Rs.2,750 x 5,000 Direct materials used Direct manufacturing labor Manufacturing overhead Cost of goods manufactured Cost of goods available for sale Deduct ending finished goods inventory, December 31, 2006 Cost of goods sold Schedule 6B Given Schedule 3A Schedule 4 Schedule Rs.4,79,30,000 5,93,75,000 3,50,00,000 14,23,05,000 15,60,55,000 85,42,500 Rs.14,75,12,500 Rs.1,37,50,000

Stylistic Furniture
Schedule 8: Non Manufacturing Costs Budget
For the Year Ended December 31,2006 Value-Chain Function R&D/Product design Marketing Distribution Customer service Administrative Variable Costs Rs.30,57,600 1,63,07,200 50,96,000 26,49,920 4,07,680 Fixed Costs Rs.25,00,000 29,00,000 22,00,000 24,00,000 40,00,000 Total Rs.55,47,600 1,92,07,200 72,96,000 50,49,920 44,07,680

Rs.2,75,18,400

Rs.1,40,00,000

Rs.4,15,18,400

Stylistic Furniture
Budgeted Income Statement for Stylistic Furniture for the Year Ended December 31,2004 Revenues Cost of good sold Schedule 1 Schedule 7 Rs.20,38,40,000 14,75,12,500

Gross margin
Operating costs R & D/ Product design Marketing costs Schedule 8 Schedule 8 Rs.55,57,600 1,92,07,200

5,63,27,500

Distribution costs
Customer-service costs Administrative costs Opening income

Schedule 8
Schedule 8 Schedule 8

72,96,000
50,49,920 44,07,680 4,15,18,400 Rs.1,48,09,100