{"id":165,"date":"2015-09-15T16:06:34","date_gmt":"2015-09-15T16:06:34","guid":{"rendered":"https:\/\/courses.candelalearning.com\/managacct2x10xmaster\/?post_type=chapter&p=165"},"modified":"2016-01-01T14:03:04","modified_gmt":"2016-01-01T14:03:04","slug":"production-cost-budgets","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-managacct\/chapter\/production-cost-budgets\/","title":{"raw":"7.4 Manufacturing Budgets","rendered":"7.4 Manufacturing Budgets"},"content":{"raw":"In a manufacturing company, you will have a budget for all of your manufacturing costs including Direct Materials, Direct Labor and Overhead.\u00a0 Each cost will have their own budget.\u00a0 You will need the information from the Sales and Production budgets to complete these 3 budgets.\r\n\r\nMaterials Budget\u00a0 <\/strong>\r\n\r\nThe materials budget (or materials purchases budget) is used to plan how much raw materials we need to have available to meet budgeted production.\u00a0 This budget is prepare similarly to the production budget as the company must decide how much raw materials inventory they want to have on hand at the end of each quarter.\u00a0 This is typically determined as a percent of next quarter's material needs.\u00a0 In a materials budget, we will deal with units first and then add the budgeted cost near the end.\u00a0 We also need to know how many direct materials are needed for each unit.\r\n\r\nhttps:\/\/youtu.be\/jgN_E4qlkI4\r\n\r\nFor Leed Company, our budgeted cost is $2 per pound.\u00a0 We need 5 pounds of materials for each unit.\u00a0 We want to maintain 25% of next quarter's\u00a0production needs\u00a0in ending inventory.\u00a0 Beginning raw materials inventory was 20,000\u00a0pounds (at $2 per pound) and we are expecting ending raw materials inventory to be 30,000 pounds.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Leed Company\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Materials Purchases Budget\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0<\/strong><\/td>\r\nQtr 1<\/strong><\/td>\r\nQtr 2<\/strong><\/td>\r\nQtr 3<\/strong><\/td>\r\nQtr 4<\/strong><\/td>\r\nYEAR<\/strong><\/td>\r\n<\/tr>\r\n
Units to be produced (from production budget)<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 21,000<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0 32,000<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0 22,000<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0 21,000<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 96,000<\/td>\r\n<\/tr>\r\n
x\u00a0lbs. of materials required per unit<\/td>\r\nx 5 lb.<\/span><\/td>\r\nx 5 lb.<\/span><\/td>\r\nx 5 lb.<\/span><\/td>\r\nx 5 lb<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
Pounds of materials required for production<\/td>\r\n105,000<\/td>\r\n160,000<\/td>\r\n110,000<\/td>\r\n105,000<\/td>\r\n480,000<\/td>\r\n<\/tr>\r\n
Add: Desired Ending Inventory<\/td>\r\n40,000<\/span><\/td>\r\n27,500<\/span><\/td>\r\n26,250<\/span><\/td>\r\n30,000<\/span><\/td>\r\n30,000<\/span><\/td>\r\n<\/tr>\r\n
Total Material Needed<\/td>\r\n145,000<\/td>\r\n187,500<\/td>\r\n136,250<\/td>\r\n135,000<\/td>\r\n510,000<\/td>\r\n<\/tr>\r\n
Less: Beginning Inventory<\/td>\r\n(20,000)<\/span><\/td>\r\n(40,000)<\/span><\/td>\r\n(27,500)<\/span><\/td>\r\n(26,250)<\/span><\/td>\r\n(20,000)<\/span><\/td>\r\n<\/tr>\r\n
Material to be Purchased (in lbs)<\/td>\r\n125,000<\/td>\r\n147,500<\/td>\r\n108,750<\/td>\r\n108,750<\/td>\r\n460,000<\/td>\r\n<\/tr>\r\n
x $2 cost per pound<\/td>\r\nx $ 2<\/span><\/td>\r\nx $ 2<\/span><\/td>\r\nx $ 2<\/span><\/td>\r\nx $ 2<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
Total Material to be Purchased (in $)<\/td>\r\n$250,000<\/td>\r\n$295,000<\/td>\r\n$217,500<\/td>\r\n$217,500<\/td>\r\n$980,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nJust like with the production budget, please note the following items:\r\n
    \r\n\t
  • Ending inventory is calculated as NEXT quarter's production needs x 25% for all but quarter 4.<\/li>\r\n\t
  • Quarter 4 ending inventory is the same as the ending inventory for the year and was given in the example.<\/li>\r\n\t
  • Beginning inventory refers to the previous quarters ending inventory for all quarters except quarter 1.\u00a0 For quarter 1, beginning raw materials was given in the problem and should also be the beginning inventory for the YEAR.\u00a0 If beginning inventory is not provided, assume the company followed the same inventory policy last year and multiply Quarter 1 pounds of materials needed x percent provided for ending inventory.<\/li>\r\n\t
  • Quarter 2 beginning is quarter 1 ending inventory.\u00a0 Quarter 3 beginning is quarter 2 ending inventory and quarter 4 beginning is quarter 3 ending inventory.<\/li>\r\n<\/ul>\r\nThe total material to be purchased will be used later in the cash disbursement section of the CASH budget.\r\n\r\nDirect Labor Budget<\/strong>\r\n\r\nThe direct labor budget is a very easy one.\u00a0 We need to know the units required from the production budget.\u00a0 Next, we need to know how many direct labor hours it takes to complete one unit and the cost per labor hour.\u00a0 Using this information, we can determine how many direct labor hours are required to meet the budgeted level of production.\u00a0 We will take the production units x direct labor per unit to get the number of direct labor hours.\u00a0 Finally, we will take the direct labor hours x the rate per hour.\r\n\r\nhttps:\/\/youtu.be\/sqUuV_Y5TYM\r\n\r\nFor Leed Company, each unit requires 0.5 hours of direct labor and the hourly rate is $12 per hour.\u00a0 The direct labor budget would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Leed Company\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
    Direct Labor Budget\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
    \u00a0<\/strong><\/td>\r\nQtr 1<\/strong><\/td>\r\nQtr 2<\/strong><\/td>\r\nQtr 3<\/strong><\/td>\r\nQtr 4<\/strong><\/td>\r\nYEAR<\/strong><\/td>\r\n<\/tr>\r\n
    Units to be produced<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0 21,000<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 32,000<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 22,000<\/td>\r\n\u00a0\u00a0 21,000<\/td>\r\n\u00a0\u00a0 96,000<\/td>\r\n<\/tr>\r\n
    x 0.5 DL hour per unit<\/td>\r\nx 0.5 hr<\/span><\/td>\r\nx 0.5 hr<\/span><\/td>\r\nx 0.5 hr<\/span><\/td>\r\nx 0.5 hr<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Direct Labor Hours Required<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0 10,500<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 16,000<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 11,000<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 10,500<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 48,000<\/td>\r\n<\/tr>\r\n
    x $12 per hour<\/td>\r\nx $12<\/span><\/td>\r\nx $12<\/span><\/td>\r\nx $12<\/span><\/td>\r\nx $12<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Budgeted direct labor dollars<\/td>\r\n$126,000<\/td>\r\n$192,000<\/td>\r\n$132,000<\/td>\r\n$126,000<\/td>\r\n$576,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe budgeted direct labor dollar amount will be used later in the cash disbursement section of the CASH budget.\r\n\r\nManufacturing Overhead Budget<\/strong>\r\n\r\nThe final budget for manufacturing is the manufacturing overhead budget.\u00a0 The manufacturing overhead budget is prepare depending on how the company allocates overhead.\u00a0 The company can choose to allocate overhead using one predetermined overhead rate, departmental rates or using activity-based costing.\u00a0 Further, the company can choose to separate the fixed and variable overhead costs and assign costs to overhead using only the variable overhead.\r\n\r\nhttps:\/\/youtu.be\/nb9SoL8M5AU\r\n\r\nLeed Company has decided to allocate variable overhead on the basis of $1.50 per\u00a0direct labor hour\u00a0and fixed overhead is $75,000 per quarter.\u00a0 Depreciation on the factory\u00a0machinery of $10,000 per quarter is included in the fixed overhead.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Leed Company\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
    Mfg. Overhead Budget\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
    \u00a0<\/strong><\/td>\r\nQtr 1<\/strong><\/td>\r\nQtr 2<\/strong><\/td>\r\nQtr 3<\/strong><\/td>\r\nQtr 4<\/strong><\/td>\r\nYEAR<\/strong><\/td>\r\n<\/tr>\r\n
    Budgeted direct labor hours (from direct labor budget)<\/td>\r\n10,500<\/td>\r\n16,000<\/td>\r\n11,000<\/td>\r\n10,500<\/td>\r\n48,000<\/td>\r\n<\/tr>\r\n
    x Variable OH per unit<\/td>\r\nx $1.50<\/span><\/td>\r\nx $1.50<\/span><\/td>\r\nx $1.50<\/span><\/td>\r\nx $1.50<\/span><\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Variable Overhead Cost<\/td>\r\n$15,750<\/td>\r\n$24,000<\/td>\r\n$16,500<\/td>\r\n$15,750<\/td>\r\n$72,000<\/td>\r\n<\/tr>\r\n
    Fixed Overhead Cost<\/td>\r\n75,000<\/span><\/td>\r\n75,000<\/span><\/td>\r\n75,000<\/span><\/td>\r\n75,000<\/span><\/td>\r\n300,000<\/span><\/td>\r\n<\/tr>\r\n
    Total Overhead Cost<\/strong><\/td>\r\n$90,750<\/strong><\/td>\r\n$99,000<\/strong><\/td>\r\n$91,500<\/strong><\/td>\r\n$90,750<\/strong><\/td>\r\n$372,000<\/strong><\/td>\r\n<\/tr>\r\n
    Less: Depreciation on Factory Machinery<\/td>\r\n(10,000)<\/span><\/td>\r\n(10,000)<\/span><\/td>\r\n(10,000)<\/span><\/td>\r\n(10,000)<\/span><\/td>\r\n(40,000)<\/span><\/td>\r\n<\/tr>\r\n
    Total Cash payments for mfg overhead<\/td>\r\n$80,750<\/td>\r\n$89,000<\/td>\r\n$81,500<\/td>\r\n$80,750<\/td>\r\n$332,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe will use the information from the overhead budget in the cash disbursement section of the cash budget.","rendered":"

    In a manufacturing company, you will have a budget for all of your manufacturing costs including Direct Materials, Direct Labor and Overhead.\u00a0 Each cost will have their own budget.\u00a0 You will need the information from the Sales and Production budgets to complete these 3 budgets.<\/p>\n

    Materials Budget\u00a0 <\/strong><\/p>\n

    The materials budget (or materials purchases budget) is used to plan how much raw materials we need to have available to meet budgeted production.\u00a0 This budget is prepare similarly to the production budget as the company must decide how much raw materials inventory they want to have on hand at the end of each quarter.\u00a0 This is typically determined as a percent of next quarter’s material needs.\u00a0 In a materials budget, we will deal with units first and then add the budgeted cost near the end.\u00a0 We also need to know how many direct materials are needed for each unit.<\/p>\n