Components of a Master Budget (continued)
2. Budgeted Production
The production department is an interested party in the company’s forecasted sales. Why? The sales forecast is the basis of computing how many units of the products are going to be produced. After obtaining the forecasted sales quantity, this is added to the desired ending inventory to obtain the total product requirement (quantity needed to have as stocks for the period). The result will be added to the remaining units from the previous month. In this example, 4,000 units were the remaining units for the previous month, September.
For budgeted production, therefore, we need the following data
Forecasted sales in units
Beginning inventory of Product Units
Desired Ending Inventory of the Product Units
Applying that to Apex Company:
Sales Budget in Units of Borjay, 10,000
Desired Borjay stocks at the end of October, 5,000 (might be based on experience or study)
Total Borjay Requirements for October, 15,000
Less: actual stocks left for September 4,000
Budgeted Production for Borjay for the month of October, 11,000
3. Budgeted Material Requirements
After determining the budgeted production for October, the materials needed to produce this quantity can also be calculated by multiplying the budgeted production quantity by the number of materials needed for one unit resulting in the total number of materials needed for the budgeted production. Since materials are also necessary to accommodate emergency sales, the department should provide ending stocks of materials. Thus, the desired ending of inventory for materials is added to the materials requirements with deduction of any remaining materials of September.
To illustrate the above explanation, let us continue with the Apex Company:
If 2 units of materials A and B are required to produce one unit of Borjay and the company has to maintain 20,000 and 10,000 beginning and ending units of materials, the budgeted material quantity is computed as follows:
Material A Material B
Material A = 11,000 multiplied by 2 = 22,000
Material B = 11,000 multiplied by 2 = 22,000
The total number of materials A and B needed to produce 11,000 Borjay are 22,000 and 22,000, respectively.
4. Budgeted Cost of Material Purchases
Based on number 3, if material A costs 2 dollars each and material B costs 3 dollars each, the budgeted production costs for Materials A and B are as follows:
Material A Material B
22,000 multiplied by $2 = $44,000
22,000 multiplied by $3 = $66,000
The total budgeted purchases for materials A and B total $110,000.
5. Budgeted Direct Hours
This statement shows the direct labor hours required for the budgeted production. It is a mere extension of the production quantity budget.
To calculate the budgeted direct labor cost, the budgeted quantity of production is multiplied by the required direct labor hours per quantity. This results in the total budgeted direct labor hours which is then multiplied by the direct labor rate per hour to determine the budgeted direct labor cost.
Still using the Apex Corporation, if the budgeted production is 11,000 Borjay units, and production needs 5 hours to produce one unit of Borjay, the total budgeted hours needed to produce 11,000 Borjay is computed as follows:
Budgeted Production for Borjay Units 11,000
Number of hours to finish one Borjay 5 hours/unit
Number of hours needed to finish 11,000 Borjay units = 55,000
6. Budgeted Direct Labor Cost
Furthermore, for Apex’s labor hours, if management wants to know how much will be spent in dollars, the following applies:
With the 55,000 of hours needed to finish 11,000 Borjay units, the cost of such labor hours can be determined by simply multiplying 55,000 by the cost per hour, say $4.
Applying the formula, 55,000 hours multiplied by $4/hour, the total direct labor cost is $220,000.
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