Learning Outcomes
- Prepare an operating budget for a manufacturing company
We now have the following pieces in place:
- Sales Budget
- Production Budget
- Direct Materials Budget
- Direct Labor Budget
- Manufacturing Overhead Budget
- Cost of Goods Sold Budget
- Selling, General, and Administrative Expense Budget
And now, let’s review the entire operating budget as a whole.
The sales budget is the cornerstone and therefore the starting point:
Q1 | Q2 | Q3 | Q4 | Year | |
---|---|---|---|---|---|
Sales in Units | 40,000 | 42,000 | 44,100 | 46,305 | 172,405 |
Budgeted Price | $34 | $34 | $34 | $34 | |
Sales in Dollars | Single Line$1,360,000Double line | Single Line$1,428,000Double line | Single Line$1,499,400Double line | Single Line$1,574,370Double line | Single Line$5,861,770Double line |
From the sales budget, we build the production budget/schedule:
Q1 | Q2 | Q3 | Q4 | Year | |
---|---|---|---|---|---|
Budgeted/Project sales, in units | 40,000 | 42,000 | 44,100 | 46,305 | 172,405 |
Plus: ending inventory target | 27,000 | 24,000 | 21,000 | 16,200 | 16,200 |
Total units needed to meet goals | Single Line67,000 | Single Line66,000 | Single Line65,100 | Single Line62,505 | Single Line188,605 |
Less: units in beginning inventory | 30,000 | 27,000 | 24,000 | 21,000 | 30,000 |
Units needed to be produced to meet goals | Single Line37,000Double line | Single Line39,000Double line | Single Line41,100Double line | Single Line41,505Double line | Single Line158,605Double line |
The production budget will then drive the direct materials budget, the direct labor budget, and the manufacturing overhead budget:
Q1 | Q2 | Q3 | Q4 | Year | |
---|---|---|---|---|---|
Budgeted units to be produced | 37,000 | 39,000 | 41,100 | 41,505 | 158,605 |
Direct materials needed per unit (Kg) | 0.680 | 0.680 | 0.680 | 0.680 | |
Total Kg direct materials needed | Single Line25,160 | Single Line26,520 | Single Line27,948 | Single Line28,223 | Single Line107,851 |
Plus: desired DM in ending inventory (Kg) | 8,800 | 9,300 | 9,400 | 11,200 | 11,200 |
Less: DM in beginning inventory (Kg) | (25,000) | (8,800) | (9,300) | (9,400) | (25,000) |
Budgeted purchase of direct materials | Single Line8,960 | Single Line27,020 | Single Line28,048 | Single Line30,023 | Single Line94,051 |
Projected cost per Kg | Single Line$11 | Single Line$11 | Single Line$11 | Single Line$11 | |
Budgeted cost of direct materials to be purchased | Single Line$98,560Double line | Single Line$297,220Double line | Single Line$308,528Double line | Single Line$330,253Double line | Single Line$1,034,561Double line |
Q1 | Q2 | Q3 | Q4 | Year | |
---|---|---|---|---|---|
Budgeted units to be produced | 37,000 | 39,000 | 41,100 | 41,505 | 158,605 |
Direct Labor per unit in hours | 0.250 | 0.250 | 0.250 | 0.250 | |
Total direct labor hours needed | Single Line9,250 | Single Line9,750 | Single Line10,275 | Single Line10,376 | Single Line39,651 |
Projected labor cost per hour | $40 | $40 | $40 | $40 | |
Budgeted cost of direct labor | Single Line$370,000Double line | Single Line$390,000Double line | Single Line$411,000Double line | Single Line$415,040Double line | Single Line$1,586,040Double line |
Q1 | Q2 | Q3 | Q4 | Year | |
---|---|---|---|---|---|
Budgeted direct labor hours | 9,250 | 9,750 | 10,275 | 10,376 | 39,651 |
Variable overhead cost per unit | $20.00 | $20.00 | $20.00 | $20.00 | |
Budgeted manufacturing overhead costs | Single Line$185,000Double line | Single Line$195,000Double line | Single Line$205,500Double line | Single Line$207,520Double line | Single Line$793,020Double line |
The sales budget will drive the budget for cost of goods sold, which is informed by the production budget and the direct materials budget, the direct labor budget, and the manufacturing overhead budget.
We will use a FIFO inventory assumption and start with a beginning inventory of 30,000 units at a cost of $20 per unit. To that we add our direct materials purchases of $1,034,561 plus beginning materials, less ending materials inventory. That gives us the cost of direct materials used in production. To that we add the cost of direct labor incurred of $1,586,040 and our manufacturing overhead of $793,020, and we then have the cost of goods available for sale during the budget period:
Description | Amount 1 | Amount 2 | Total |
---|---|---|---|
Cost of beginning Inventory | $600,000 | ||
Subcategory, Direct Materials used in production | |||
Beginning inventory, at cost | 275,000 | ||
Purchases | 1,034,561 | ||
Less: ending inventory, at cost | (123,200) | 1,186,361 | |
Direct Labor used in production | Single Line | 1,586,040 | |
Rounding | 19 | ||
Manufacturing overhead | 793,020 | ||
Cost of goods produced during the period | Single Line | 3,565,440 | |
Goods available for sale | Single Line4,165,440 | ||
Less ending inventory, at cost (FIFO) | (364,176) | ||
Cost of goods sold | Single Line$3,801,264Double line |
The FIFO assumption (First-In, First-Out) assumes that beginning inventory is sold first, so the units produced in December would be the units remaining in ending inventory to be the first units sold in January. Therefore, the total cost of goods produced during the period (adjusted for the slight accumulation of rounding errors that have occurred during the series of computations) can also be calculated as follows:
Description | Units | Cost/Unit | Total Cost |
---|---|---|---|
Beginning inventory | 30,000 | $20.00 | $600,000 |
Goods produced during the period | 158,605 | $22.48 | $3,565,440 |
Goods available for sale | Single Line188,605 | Single Line$4,165,440 | |
Less ending inventory | 16,200 | $22.48 | $364,176 |
Cost of goods sold | Single Line172,405Double line | Single Line3,801,264Double line |
The resulting Cost of Goods Sold budget would look something like this:
Q1 | Q2 | Q3 | Q4 | Year | |
---|---|---|---|---|---|
Sales in Units | 40,000 | 42,000 | 44,100 | 46,305 | 172,405 |
Less: Beginning inventory sold | 30,000 | 30,000 | |||
Current product sold | Single Line10,000Double line | Single Line42,000Double line | Single Line44,100Double line | Single Line46,305Double line | Single Line142,405Double line |
Cost of beginning inventory sold @$20 | $ 600,000 | $ – | $ – | $ – | $ 600,000 |
Cost of current product sold @$22.48 | 224,800 | 944,160 | 991,368 | 1,040,936 | 3,201,264 |
Single Line$ 824,800Double line | Single Line$ 944,160Double line | Single Line$ 991,368Double line | Single Line$1,040,936Double line | Single Line$3,801,264Double line |
A company could also choose to use a LIFO assumption (Last-In, First-Out) which would assign the $20 costs to ending inventory because LIFO assumes that the first items sold would be the last ones produced. In addition, a company could choose a weighted average method or, in the case of unique items (job costing) the company could use specific identification, but for the sake of consistency and simplicity, we will use FIFO in these examples.
Once the Cost of Goods Sold budget is complete, the company prepares the SG&A budget and the components of the operating budget are complete.
Description | Q1 | Q2 | Q3 | Q4 | Year |
---|---|---|---|---|---|
Sales Salaries | $ 112,500 | $ 112,500 | $ 112,500 | $ 112,500 | $ 450,000 |
General and Administrative Salaries | 237,500 | 237,500 | 237,500 | 237,500 | 950,000 |
Payroll Taxes and Benefits | 30,000 | 30,000 | 30,000 | 30,000 | 120,000 |
Depreciation on Office Equipment | 25,000 | 25,000 | 25,000 | 25,000 | 100,000 |
Rent and Property Taxes | 37,500 | 37,500 | 37,500 | 37,500 | 150,000 |
Office Repairs and Maintenance | 12,500 | 12,500 | 12,500 | 12,500 | 50,000 |
Miscellaneous Expenses | 7,500 | 7,500 | 7,500 | 7,500 | 30,000 |
Total Selling, General and Administrative Expenses | Single Line$ 462,500Double line | Single Line$ 462,500Double line | Single Line$ 462,500Double line | Single Line$ 462,500Double line | Single Line$1,850,000Double line |
The next step in the budgeting cycle is to prepare the projected financial reports, include a cash-flow budget, but before we move on to that, we’ll take a look at operating budgets for a merchandising operation and a service operation.
Now, check your understanding of compiling the operating budget from its component parts.