FREE online courses on Refresher on Financial Planning - Chapter 2

 

Detail Budgets 

 

We also need to prepare several detail budgets for developing a Budgeted Income Statement. For example, production must be planned for our estimated sales of 16,000 units from Exhibit 1. The Production Department will need to budget for materials, labor, and overhead based on what we expect to sell and what we expect in inventory.

 

EXHIBIT 2 - PRODUCTION BUDGET

 

Planned Sales (Exhibit 1)               16,000

Desired Ending Inventory                 1,500

Total Units                                  17,500

Less Beginning Inventory               ( 3,000)

Planned Production                       14,500         

 

Once we have established our level of production (Exhibit 2), we can prepare a Materials Budget. The Materials Budget attempts to forecast the level of purchases required, taking into account materials required for production and inventory levels. We can summarize materials to be purchased as:

 

Materials Purchased = Materials Required + Ending Inventory - Beginning Inventory

 

EXHIBIT 3 - MATERIALS BUDGET

 

Lace Shoes require .25 square yards of leather and leather is estimated to costs $ 5.00 per yard next year. Materials Required = 14,500 (Exhibit 2) x .25 = 3,625 yards.

 

Materials Required for Production    3,625

Desired Ending Inventory                  375

Total Materials                                      4,000

Less Beginning Inventory               (  500)

Total Materials Required                3,500

Unit Cost for Materials                            x $ 5.00

Total Materials Purchased            $ 17,500        

 

The second component of production is labor. We need to forecast our labor needs based on expected production. The Labor Budget arrives at expected labor cost by applying an expected labor rate to required labor hours.

 

EXHIBIT 4 - LABOR BUDGET

 

Lace Shoes require .50 hours to produce one unit.

14,500 units x .50 = 7,250 hours.

The expected hourly labor rate next year is $ 12.00.

 

Estimated Production Hours               7,250

Hourly Labor Rate                         x 12.00

Total Labor Costs                          $ 87,000     

 

 

As production moves up or down, support services and other costs related to production will also change. These overhead costs represent the third major costs of production. Each item that comprises overhead may warrant independent analysis so that we can determine what drives the specific cost. For example, production rental equipment may be driven by production orders while depreciation is driven by levels of capital investment spending.

 

 

EXHIBIT 5 - OVERHEAD BUDGET

 

Estimated for each line item as follows:

 

Indirect Labor Costs *                            $ 12,000

Utilities                                                     5,000

Depreciation                                     3,000

Maintenance                                    1,000

Insurance and Taxes                         4,000

Total Overhead Costs                             $ 25,000       

 

*Production Supervision and Inspection

 

Once production costs (direct materials, direct labor, and overhead) have been budgeted, we can work these numbers into our beginning inventory levels for Direct Materials, Work In Progress, and Finished Inventory. Beginning inventory levels are actual amounts from the last reporting period. We need to apply our costs based on what we want ending inventory to be. The end-result is a Budget for Cost of Goods Sold, which we will use for our Forecasted Income Statement.

 

EXHIBIT 6 - COST OF GOODS SOLD BUDGET

 

                                                Direct           Work In         Finished

                                                Materials       Progress        Inventory

Beginning Inventory            $   2,500       $  16,000       $  46,000

Purchases (Exhibit 3)             17,500

Less Ending Inventory                     (  1,875)

Materials Required                 18,125

Direct Labor (Exhibit 4)                    87,000

Overhead (Exhibit 5)              25,000

Total Manufacturing Costs   $ 130,125         130,125

Total Work In Progress                                        146,125

Less Ending Inventory                                        (  12,000)

Cost of Goods Manufactured                    $ 134,125        134,125

Cost of Goods Available for Sale                                    180,125

Less Ending Inventory                                                         (  36,000)

Cost of Goods Sold                                                    $ 144,125

 

We can now finish our estimate of expenses by looking at all remaining operating expenses. The first major type of operating expense is marketing. Marketing and Sales Manager's will prepare and submit a Marketing Budget to upper level management for approval.

 

EXHIBIT 7 - MARKETING BUDGET

 

Estimated for each line item per the Marketing Department:

 

Marketing Personnel                      $ 75,000

Advertising & Promotion                    42,000

Marketing Research                         12,000

Travel & Personal Expenses                 6,500

Total Marketing Expenses                $ 135,500    

 

The final area of operating expenses is the administrative costs of running the overall business. These types of expenses will be estimated based on past trends and what we expect to happen in the future. For example, if the company has plans for a new computer system, then we should budget for additional technology related expenses. Several department managers will be involved in preparing the General and Administrative Expense Budget. 

 

EXHIBIT 8 - GENERAL &  ADMINISTRATIVE BUDGET

 

Estimated for each line item per Department Managers:

 

Management Personnel                  $110,000

Accounting Personnel                        55,000

Legal Personnel                                40,000

Technology Personnel                                 45,000

Rent & Utilities                                          25,000

Supplies                                         15,000

Miscellaneous                                   7,500

Total G & A Expenses                     $ 297,500