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

2. 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

3. 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

4. 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

5. Solution Production Budget for the three months to 31 March
Business Budgeting - Chapter 5

6. 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

7. 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

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

9. 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

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

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

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

13. 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

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

15. 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

16. Solution Factory Overhead Budget for the year ending…
Budgeted Production ( Units ) ,000
Budgeted Variable $1.50 per unit ,000
Budgeted Fixed Overhead ,000
Budgeted Total Factory Overhead $55,000
Business Budgeting - Chapter 5

17. 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

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

19. 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

20. 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

21. Other Manufacturing Budgets
Expenses Budget- shows all the operating expenses of a business for a period, not including production Comprehensive Manufacturing Budget
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22. 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

23. 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