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

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©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

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©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.

Example

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
Solution
Production Budget
for the three months to 31 March

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©National Core Accounting Publications
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 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

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 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.

Example

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Solution
Materials Purchases Budget
for the three months to 31 March

Jan Feb Mar Total Apr

Required Production (units) 880 840 1,040 2,760 1,160
Required Materials ( @ 1.5 kg / unit ) (kg) 1,320 1,260 1,560 4,140 1,740
+ Closing Stock (kg) 630 780 870 870
Material Available (kg) 1,950 2,040 2,430 5,010
- Opening Stock (kg) 660 630 780 660 870
Required Purchases (kg) 1,290 1,410 1,650 4,350

Required Purchases ( @ $2 / kg ) ($) 2,580 2,820 3,300 8,700

Slides prepared by Peter Miller

©National Core Accounting Publications
8
 Combined Production
& Purchases Budget
Example

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Solution
Materials Purchases Budget
for the three months to 30 June
April May June Total July August
Expected Sales ($) 12,000 14,000 18,000 44,000 15,200 16,000

Expected Sales ( Units ) 600 700 900 2,200 760 800

+ Closing Stock ( Units ) 175 225 190 190 200

Available for Sale ( Units ) 775 925 1,090 2,390 960

- Opening Stock ( Units ) 150 175 225 150 190 200

Required Production ( Units ) 625 750 865 2,240 770

Material Required ( Units ) 1,875 2,250 2,595 6,720 2,310

+ Closing Stock ( Units ) 2,250 2,595 2,310 2,310

Material Available ( Units ) 4,125 4,845 4,905 9,030

- Opening Stock ( 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

Slides prepared by Peter Miller

©National Core Accounting Publications
10
 Direct Labour Budget

Based on estimates of:

• Production
• Time allowed to produce one unit
• Labour Rate per Hour

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©National Core Accounting Publications
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 Direct Labour Budget
Example
Direct labour Budget
for the Year Ending 30 June 2004

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

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
Example
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
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

Slides prepared by Peter Miller

©National Core Accounting Publications
15
Example
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:

Department 1 Department 2
Budgeted Production (units) 20,000 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.

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©National Core Accounting Publications
16
Solution
Factory Overhead Budget for the Year

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Example
Factory Overhead Budget
(Flexible Budget)

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 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.

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©National Core Accounting Publications
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Other Manufacturing Budgets

• Expenses Budget

• Cost of Goods Sold Budget

• Budgeted Income Statement

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Next Chapter
Chapter 4

Cash Budgets

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©National Core Accounting Publications
21