Manufacturing Budgets - TAFE NSW

Manufacturing Budgets - TAFE NSW

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 Slides prepared by Peter Miller 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. Exampl e 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 Solutio n Production Budget for the three months to 31 March Slides prepared by Peter Miller National Core Accounting Publications 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 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. Exampl e Slides prepared by Peter Miller National Core Accounting Publications 7 Soluti on Materials Purchases Budget for the three months to 31 March Required Production Required Materials ( @ 1.5 kg / unit ) + Closing Stock Material Available - Opening Stock Required Purchases Required Purchases ( @ $2 / kg ) (units)

Jan 880 Feb 840 Mar 1,040 Total 2,760 Apr 1,160 (kg) 1,320 1,260 1,560 4,140 1,740 (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 Slides prepared by Peter Miller National Core Accounting Publications 870 8 Combined Production & Purchases Budget

Example Slides prepared by Peter Miller National Core Accounting Publications 9 Soluti on 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 Slides prepared by Peter Miller National Core Accounting Publications 11 Direct Labour Budget Exampl e

Direct labour Budget for the Year Ending 30 June 2004 Budgeted Production (units) 50,000 Direct labour Hours per unit 2 (Hours) Total Budgeted Direct labour Hours 100,000 Budgeted Direct labour Cost (@$17 per hour) $1,700,000 Slides prepared by Peter Miller National Core Accounting Publications 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 Exampl e Factory Overhead Budget (Static Budget) Budgeted Production 20,000 units Variable Factory Overhead $1.50 per unit Fixed Factory Overhead

$25,000 Required: Prepare a Factory Overhead budget for the year. Slides prepared by Peter Miller National Core Accounting Publications 14 Solutio n Factory Overhead Budget for the year ending Budgeted Production ( Units ) 20,000 ($) Budgeted Variable Overheads @ $1.50 per unit 30,000 Budgeted Fixed Overhead Budgeted Total Factory Overhead Slides prepared by Peter Miller National Core Accounting Publications 25,000 $55,000

15 Exampl e 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 Department 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 Solutio n Factory Overhead Budget for the Year Slides prepared by Peter Miller National Core Accounting Publications 17 Exampl e Factory Overhead Budget

(Flexible Budget) Slides prepared by Peter Miller 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. Slides prepared by Peter Miller National Core Accounting Publications 19 Other Manufacturing Budgets Expenses Budget Cost of Goods Sold Budget Budgeted Income Statement Slides prepared by Peter Miller National Core Accounting Publications 20

Next Chapter Chapter 4 Cash Budgets Slides prepared by Peter Miller National Core Accounting Publications 21

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