Góc học tập
16/10/2019 08:12:19 PM

How to plan - How to budget (P2)

The basic formula for the monthly direct materials purchasing budget, production budget, labor budget, and manufacturing overhead budget is:
  • Sales Forecast (in units)
  • Plus Desired End-of-Month Inventory
  • Less Beginning Inventory
  • Required Purchases (or Production/Labor/Overhead)

Rocky’s sales forecasts for the first two months of their fiscal year are: January 70,000 units and February 100,000 units. Company policy dictates that 20% of the next month’s sales forecast should be included in each month’s production budget. The ending inventory of finished goods on December 31 is 14,000 units (20% of the January forecast). Use the basic formula provided to create Rocky’s Production Budget for January:

 

January

Sales Forecast (in units)

70,000

Flus Desired End-of-Month Inventory (1/31)

20,000 (20% February’ Sales Forecast)

Less Beginning Inventory (1/1)

14,000

Required January Production

76,000 units

The Production Manager now has a specific and measureable production budget/goal for the month.

It requires one-quarter hour (15 minutes) of direct labor to produce one unit of finished product. The total hourly cost of Direct Labor for Rocky is $16. Prepare a Labor Budget for January in both hours and dollars:

 

January

76,000 units @ 0.25 hours

19,000 hours

19,000 hours @ $16/hour

$304,000 DL Cost

The Production Manager (and Controller) now have a specific and measureable labor schedule and target labor cost (budget/goal) for the month.

Note how each of these budgets (Production, DL hours, and DL cost) are derived from the sales forecast. Note how all other budgets for this company (manufacturing overhead, marketing and sales, distribution, administrative, others) are derived from the sales forecast as well. In other words, how much will it cost to generate $8,000,000 in sales?

The so-called Master Budget is simply next year’s projected income statement (and cover page) for all individual department budgets that come together to achieve the overall goals established by the company.

Once all budgets are established and the new calendar year begins, the focus now shifts to monitoring and achieving desired measureable outcomes. Department managers and owners prepare and focus on the following reports each month:

Line item

Budget

Vs.

Actual

=

Variance

Units/$s

Units/$s

Units/$s
 

Rocky’s Custom Candles is now one full month into their new budget cycle and reports the following results for the month of January:

 

Budget

Vs.

Actual

=

Variance

Production (units)

$76,000

 

82,350

 

6,350 Favorable

Labor Hours

19,000

 

19,100

 

(100) Unfavorable

Labor cost

$304,000

 

305,600

 

($1,600) Unfavorable

Department managers and owners focus and (possibly) act on the variances of each line item. What is your analysis of each of the above, and what, if anything would you do?

Fixing any and all significant unfavorable variances is the focus for all managers and owners. This allows for timely/monthly corrections to deviations from specific budgets. Work with your team to get back on track.