The budget is a detailed plan on how to acquire and use finances among other resources over the production time stipulated (TM 9-2, 2010). Budget control plans established in the organization to help achieve set goals. It also helps to quantify an organization as a way of determining its financial feasibility. As a result, it helps in controlling costs, evaluating performances, and making future decisions.
Phonia Phelps Company is making a budget preparation for the semi-annual of the year ending 30 July. For the period, the company has budgeted follows.
Sales Budget in Dollars
The sales budget is a schedule showing sales expected for a given time in detail. It is a forecast of the companys sales to customers at a given time.
The companys selling price is $250 per case. Therefore, the sales budget preparations are as below.
Production Budget in Units
In order for Phionia Phelps to meet the next month’s expected growth, the company’s desire is to maintain an inventory of 10% at the end of the month, which is equal to projected sales for the next month. Moreover, last year in December, the company had 500 (5000*10%) units on hand. With the above information, the production Budget is as below.
Production Budget=budget sales+ desired ending inventories – beginning inventories
Direct Materials Purchase in Pounds
Direct materials purchase budget expresses quantities and costs estimated for the raw materials and other components needed to meet the output demand of the production budget.
During production, all ingredient inventories for production are maintained at 5% of the next month’s production needs without exceeding 1,000 pounds for any ingredient.
Direct Materials Purchase in Dollars
Direct Manufacturing purchase Budget
Direct Manufacturing Labor Budget in Dollars
The manufacturing process requires labor to prepare ingredients at $18 and to cook and can the product at $24 per hour. In addition, the management of the firm is adjusting the workforce according to demands. Since processing one batch involves 1 hour and the batch produces 100 cases. Then, one case requires 0.01 hours.
The manufacturing overhead budget
Manufacturing overhead is fixed at $6,000 and $15 per case.
The production expense of the company in six months is $11,676. In case there is a $50,000 investment, the business plan remains viable since the production cost and total labor costs are low (TM 9-1, 2010). However, the direct purchase of raw materials is expensive than available cash. As a result, the business plan to be undertaken forces the investor to pursue other means of acquiring raw materials like credit (Accounting CPE, 2013).
The sales budget estimates the company sales. On the other hand, the production budget ensures the stock is maintained at economic levels. Direct material highlights the needed materials for optimum production, and labor budget shows the cost of optimum labor. Hence, these budgets can help to determine the feasibility of engaging in a certain business to reduce the chances of losses.
Accounting CPE (2013). Accounting Tools. Web.
TM 9-1 (2010). Agenda: Profile Planning (Budgeting).New York, NY: McGraw-Hill.
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