Operating Budgets: Manufacturing Budgets Chapter 5 Operating Budgets: Manufacturing Budgets Business Budgeting - Chapter 5

Manufacturing Budgets The function of a manufacturing business is to produce finished goods. Process Costs Direct materials Direct Labour Factory Overhead Business Budgeting - Chapter 5

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 Business Budgeting - Chapter 5

Production Budget A production budget shows the estimated or expected production of a manufacturing business for a period expressed in units. Example Inventory 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. Business Budgeting - Chapter 5

Solution Production Budget for the three months to 31 March Business Budgeting - Chapter 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 – Raw Material budget for the three months to 31 March Business Budgeting - Chapter 5

Purchases Budget Example A purchases budget shows the estimated purchases of a business for a period which may be expressed in units and/or dollar values. Example Closing inventory 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. Business Budgeting - Chapter 5

Solution Materials Purchases Budget for the three months to 31 March Business Budgeting - Chapter 5

Combined Production and Purchases Budget Example 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. Business Budgeting - Chapter 5

Solution Materials Purchases Budget for the three months to 30 June Business Budgeting - Chapter 5

Direct Labour Budget Based on estimates of: Production Time allowed to produce one unit Labour Rate per Hour Business Budgeting - Chapter 5

Example Direct labour Budget for the Year Ending 30 June Budgeted Production (units) 50,000 Direct labour Hours per unit (Hours) 2 Total Budgeted Direct labour Hours 100,000 Budgeted Direct labour Cost (@$17 per hour) $1,700,000 Business Budgeting - Chapter 5

Factory Overhead Budget A factory overhead budget shows the estimated factory expenses, excluding 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. Business Budgeting - Chapter 5

Factory Overhead Budget Factory Expenses: Direct and Indirect Fixed Costs Variable Costs Two Approaches Static Budget Flexible Budget Business Budgeting - Chapter 5

Example Factory Overhead Budget (Static Budget) Required: Prepare a Factory Overhead budget for the year for 20, 000 units Budgeted Production 20,000 units Variable Factory Overhead $1.50 per unit Fixed Factory Overhead $25,000 Business Budgeting - Chapter 5

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 $55,000 Business Budgeting - Chapter 5

Example 2 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: Required: Prepare a Factory Overhead budget for the year. Business Budgeting - Chapter 5

Factory Overhead Budget for the Year Solution Factory Overhead Budget for the Year Business Budgeting - Chapter 5

Example 3 Factory Overhead Budget (Flexible Budget) Required: Prepare a Factory Overhead Budget showing cost at production levels of 10, 000, 12,000 and 16,000 units. Business Budgeting - Chapter 5

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. Business Budgeting - Chapter 5

Other Manufacturing Budgets Expenses Budget- shows all the operating expenses of a business for a period, not including production Comprehensive Manufacturing Budget Business Budgeting - Chapter 5

Other Manufacturing Budgets Cost of Goods Sold Budget- Calculated as follows: (Opening Inventory + Cost of production = Goods Available for sale) – Closing Inventory = Cost of Goods Sold Business Budgeting - Chapter 5

Other Manufacturing Budgets Budgeted Income Statement- shows the estimated net profit of a business for a period. It is prepared by incorporating the budgeted gross profit from the Budgeted Trading Statement and deducting the total budgeted expenses from the Expenses Budget. Business Budgeting - Chapter 5