Note:
1.Cost of goods sold = beginning inventory + purchases − ending inventory.
Hence, purchases = cost of goods sold + ending inventory − beginning inventory
2.Gross profit (margin) = sales − cost of goods sold (or cost of sales). For example, percentagewise, 30% = 100% − 70%. For example, sales is $800,000, then the cost of goods sold is $800,000 × 70% = $560,000
The Direct Material Budget
When the level of production has been computed, a direct material budget should be constructed to show how much material will be required for production and how much material must be purchased to meet this production requirement.
The purchase will depend on both expected usage of materials and inventory levels. The formula for computation of the purchase is:
The direct material budget is usually accompanied by a computation of expected cash payments for materials.
Schedule 3
The Putnam Company – Direct Material Budget
| * | Given |
| ** | 25 percent of the next quarter’s units needed for production. For example, the 2nd quarter production needs are 3,640 lbs. Therefore, the desired ending inventory for the 1st quarter would be 25% × 3,640 lbs. = 910 lbs. Also note: 490 lbs = 25% × 1,960 = 490 lbs. |
| *** | Assume that the budgeted production needs in lbs. for the 1st quarter of 20C = 2,080 lbs. So, 25% × 2,080 lbs. = 520 lbs. |
| **** | The same as the prior quarter’s ending inventory. |
Schedule of Expected Cash Disbursements
| + | All of the $6,275 accounts payable balance (from the balance sheet, 20A) is assumed to be paid in the first quarter. |
| ++ | 50 percent of a quarter’s purchases are paid for in the quarter of purchase; the remaining 50% are paid for in the following quarter. |
The Direct Labor Budget
The production requirements as set forth in the production budget also provide the starting point for the preparation of the direct labor budget. To compute direct labor requirements, expected production volume for each period is multiplied by the number of direct labor hours required to produce a single unit. The direct labor hours to meet production requirements is then multiplied by the (standard) direct labor cost per hour to obtain budgeted total direct labor costs.
Schedule 4 4
The Putnam Company – Direct Labor Budget
*Both are given.
The Factory Overhead Budget
The factory overhead budget should provide a schedule of all manufacturing costs other than direct materials and direct labor. We must remember that depreciation does not entail a cash outlay and therefore must be deducted from the total factory overhead in computing cash disbursement for factory overhead.
To illustrate the factory overhead budget, we will assume that
Schedule 5
The Putnam Company – Factory Overhead Budget
*Depreciation does not require a cash outlay.
The Ending Finished Goods Inventory Budget
The ending finished goods inventory budget provides us with the information required for the construction of budgeted financial statements. After completing Schedules 1-5, sufficient data will have been generated to compute the per-unit manufacturing cost of finished product. This computation is required for two reasons: (1) to help compute the cost of goods sold on the budgeted income statement; and (2) to give the dollar value of the ending finished goods inventory to appear on the budgeted balance sheet.
Schedule 6
The Putnam Company – Ending Finished Goods Inventory Budget
| ** | Predetermined factory overhead applied rate = Budgeted annual factory overhead/budgeted annual activity units = $ 134,200/30,500 DLH = $4.40 (see Chapter 3; Accumulation of Costs – Job Order Costing). |
The Selling and Administrative Expense Budget
The selling and administrative expense budget lists the operating expenses involved in selling the products and in managing the business. Just as in the case of the factory overhead budget, this budget can be developed using the coat-volume (flexible budget) formula in the form of y = a + bx.
If the number of expense items is very large, separate budgets may be needed for the selling and administrative functions.
Schedule 7
The Putnam Company – Selling & Administrative Expense Budget
| * | Assumed. It includes sales agents’ commissions, shipping, and supplies. |
| ** | Scheduled to be paid. |
| *** | Paid for in the quarter incurred. |
The Cash Budget
The cash budget is prepared for the purpose of cash planning and control. It presents the expected cash inflow and outflow for a designated time period. The cash budget helps management keep cash balances in reasonable relationship to its needs. It aids in avoiding unnecessary idle cash and possible cash shortages. The cash budget consists typically of four major sections:
1.The cash receipts section, which is cash collections from customers and other cash receipts such
