Chapter 6 Master budget for manufacturing organisations Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting 3e by Alan Banks

Cost classifications Product costs are the costs of converting raw materials into a finished product. 1. Raw materials 2. Direct labour 3. Factory overhead Period costs are all other costs associated with the business. 1. Marketing expenses 2. General and administration expenses 3. Financial expenses Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting 3e by Alan Banks

Product costs Direct costs: major items of cost that can be relatively easily traced to the product, such as raw materials and direct labour. Raw materials and direct labour Prime cost Indirect costs: cannot not be easily traced directly to the product. All factory overhead. Factory overhead: all indirect costs of running a factory. Examples: indirect materials, indirect labour, factory insurance. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting 3e by Alan Banks

Manufacturing process Direct materials input Direct labour & factory overhead process output Finished goods Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting 3e by Alan Banks

Cost of production requires the preparation of the following budgets Sales Production Direct materials usage Direct labour Factory overhead Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting 3e by Alan Banks

Production budget Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting 3e by Alan Banks

Factory overhead budget Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting 3e by Alan Banks

Direct materials and labour budget Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting 3e by Alan Banks

Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting 3e by Alan Banks

Factory overhead application rate This allows the business to charge the product with an estimated amount. Application rate can be calculated on different bases: per unit direct labour cost direct labour hours machine hours. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting 3e by Alan Banks

Cost of goods sold budget Merchandising business stock @ beginning add net purchases cost of goods available for sale less stock @ end cost of goods sold Manufacturing business stock @ beginning add cost of production cost of goods available for sale less stock @ end cost of goods sold Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting 3e by Alan Banks