Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld 6-1 Chapter 6 Master budget for manufacturing organisations

Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld 6-2 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  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld 6-3 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  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld 6-4 Manufacturing process input process output Direct materials Direct labour & factory overhead Finished goods

Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld 6-5 Cost of production requires the preparation of the following budgets  Sales  Production  Direct materials usage  Direct labour  Factory overhead

Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld 6-6 Production budget (p. 131)

Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld 6-7 Factory overhead budget (p. 135)

Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld 6-8 Direct materials and labour budget

Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld 6-9 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.  Refer p. 136.

Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Budgeting, second edition, by Banks & Giliberti Slides prepared by Mya Aronfeld 6-10 Cost of goods sold budget  Merchandising business beginning add net purchases cost of goods available for sale less end cost of goods sold  Manufacturing business beginning add cost of production cost of goods available for sale less end cost of goods sold