Week 6 – Chapter 5 OPERATING BUDGETS (manufacturing) FNSACC503A Manage Budgets and Forecasts
1. Give some examples of manufacturing organisations in Australia.2.1 Explain some cost classification concepts relevant to manufacturing organisations.2.2 Describe the manufacturing process.3. Prepare all budgets for a manufacturing organisation (sales, production, direct materials, direct labour, factory overhead, ending inventory, COGS and operating expenses budgets).4. Prepare a budgeted income statement, cash budget and budgeted balance sheet for a manufacturing organisation.
MASTER BUDGETS (chapter 1 : budgeting fundamentals)
Budget income statementMERCHANDISING PROFESSIONAL SERVICES*
Sales Fees income Sales
Purchases >> COGS Professional and support labour costse.g. dentist + dentalassistant * direct labour
>> COGSMarketing expenses Marketing expensesAdmin. expenses Admin. expenses Admin. expensesFinancial expenses Financial expenses
Cash budget Capital expenditure budget
Budgeted balance sheet* sells expertise and knowledge
MANUFACTURINGBudget income statement
Marketing expenses
Financial expenses
Production + Ending Inventories
* direct materials (usage + purchases)
* factory overhead
1. Examples of manufacturing companies in Australia
Company This company manufacturesCSR Aluminium and building productsTontine Group (part of Pacific Brands) PillowsBristol Paints Decorating suppliesMalvern Star Bicycles
2. Manufacturing OrganisationsKEY CONCEPTS
1. Cost classification1. Product versus Period costs2. Direct versus Indirect costs
2. The manufacturing process3. Types of inventories
1. Finished goods2. WIP3. Materials
Cost Classification(PRODUCT vs. PERIOD costs)
Product costs are costs of converting raw materials into a finished product e.g. packaging boxes
MANUFACTURING or PRODUCTcosts include:(1) Direct materials e.g. cardboard(2) Direct labour (3) Factory overhead
Cost Classification(PRODUCT vs. PERIOD costs)
Period costs are all other costs associated with the business (i.e. expired costs).
1. Marketing expenses2. Admin. expenses3. Financial expenses
The Manufacturing Process
Is about converting raw materialsinto finished goods with the use of
direct labour and factory overhead.
DIRECT versus INDIRECT costs
DIRECT COSTS
Direct labour Direct materials
Costs that cannot be traced very easily to a particular product.
All factory overhead.
INDIRECT COSTS
Major items of cost that can be traced quite easily to a
particular product
FACTORY OVERHEAD:All indirect costs of
running a factory e.g. indirect materials
and labour; factory insurance; light and power used by the factory
What is factory overhead? Includes all factory costs other than direct
materials and direct labour. Is also referred to as indirect manufacturing
costs.Cannot be traced or are not worthwhile
tracing (cost vs. benefit) to individual units of production.
Examples: * Factory insurance * Factory supervisor’s salary* Factory light & power
What is factory overhead? Although factory overhead costs cannot be
traced (or are not worthwhile tracing) to individual units of production, the TOTAL FACTORY OVERHEAD COST incurred must be allocated to individual units of production REGARDLESS.
This means that each product has to be charged with an estimated amount of factory overhead which is expected to cover the actual TOTAL cost incurred.
How do we do this?
Applying factory overheadManufacturing overhead costs incurred during a period
are allocated to units of production based on a predetermined overhead rate.
This overhead rate is based on the budgeted overhead costs for the period
and the estimated level of activity
(e.g. no. of units produced, direct labour hours etc.)
Applying factory overheadTo apply factory overhead to individual units of production you have to:a. Estimate total factory overhead expected to be incurred during the periodb. Establish an application rate (based on the relevant cost driver e.g. no. units; direct labour hours; machine hours etc.c. Apply this predetermined rate to the total factory overhead to arrive at an estimate of the cost to be allocated/charged to each individual unit of production.
Types of inventoriesMaterials includes stocks of raw material and
factory supplies e.g. lubricating oils for machinery.
Work-in-progress are partly completed goods that will be completed in the future e.g. cardboard pieces cut out and ready to be glued.
Finished goods are fully completed products ready for sale e.g. toy boxes.
Clip
* STUDENT ACTIVITY *Copy and paste the following URL into your Internet browser and watch
this YouTube Clip which takes you for a tour of the Ferrari Factory in Maranello, Italy. See if you can identify and name at least one example of DIRECT MATERIAL, DIRECT LABOUR and FACTORY OVERHEAD.
http://www.youtube.com/watch?v=La73Oy9ZGVw
Case StudyLITTLE PEOPLE INC.
You are now going to learn how to prepare the different types of budgets for the manufacturing
industry using this case study.
Case StudyLITTLE PEOPLE INC.
Little People Inc. manufactures cardboard boxes which are used for transporting very special toys to
toy stores all around Australia. We need you to prepare the company’s budgets for the
coming year ending 30 June.
3. BUDGETS FOR AManufacturing Organisation
To work out an estimate for the cost of production you need to prepare the following budgets:1.Production budget (LESSON 3 – PURCHASES BUDGET)2a. Direct materials usage budget (NEW)2b. Direct materials purchases budget (NEW)3. Direct labour budget (NEW)4. Factory overhead budget (NEW)5. Ending inventory budget (NEW)These budgets are used to prepare the COGS budget.
3. BUDGETS FOR AManufacturing Organisation
You also need to prepare the
SALES BUDGET (LESSON 2)and
OPERATING EXPENSES BUDGETS (LESSON 3)
before preparing the
BUDGETED INCOME STATEMENT.
Ending inventory budget(budget 5 in case study)
Recall: There are 3 basic types of inventories:1. Finished goods2. Materials 3. Work in progress (beyond the scope of this text)
Before we can prepare the ending inventory budget, we need work out how much it costs to produce one completed unit e.g. box.
COGS budget (budget 6 in case study)
MERCHANDISING MANUFACTURINGBeginning inventory xx Beginning inventory xxAdd: Planned purchases xx Add: Cost of production xxTotal available for sale xx Total available for sale xxLess: Ending inventory xx Less: Ending inventory xxCOGS xx COGS xx
Major difference : Manufacturing firm’s COGS budget:COST OF PRODUCTION of finished goods replaces the PURCHASES of finished goods.Therefore;Step 1: Calculate the total cost of production.Step 2: Prepare the COGS budget.
Case StudyLITTLE PEOPLE INC.
Please refer to the following document which will take you through the case study: