Operating Budgets Manufacturing Budgets Slides prepared by Peter Miller ©National Core Accounting Publications

Production Direct materials Direct Labour Factory Overhead 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

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

Production Budget Example 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

Production Budget for the three months to 31 March Solution Production Budget for the three months to 31 March Slides prepared by Peter Miller ©National Core Accounting Publications

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

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 Slides prepared by Peter Miller ©National Core Accounting Publications

Materials Purchases Budget for the three months to 31 March Solution Materials Purchases Budget for the three months to 31 March Slides prepared by Peter Miller ©National Core Accounting Publications

Combined Production & Purchases Budget Example Slides prepared by Peter Miller ©National Core Accounting Publications

Materials Purchases Budget for the three months to 30 June Solution Materials Purchases Budget for the three months to 30 June Slides prepared by Peter Miller ©National Core Accounting Publications

Direct Labour Budget Production Time allowed to produce one unit Based on estimates of: Production Time allowed to produce one unit Labour Rate per Hour Slides prepared by Peter Miller ©National Core Accounting Publications

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

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

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

Factory Overhead Budget for the year ending… 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

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: Required: Prepare a Factory Overhead budget for the year. Slides prepared by Peter Miller ©National Core Accounting Publications

Solution Factory Overhead Budget for the Year Slides prepared by Peter Miller ©National Core Accounting Publications

Example Factory Overhead Budget (Flexible Budget) Slides prepared by Peter Miller ©National Core Accounting Publications

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

Other Manufacturing Budgets Expenses Budget Cost of Goods Sold Budget Budgeted Income Statement Slides prepared by Peter Miller ©National Core Accounting Publications

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