Below is an example of preparing a Budget.
Data
The company Plásticas del Sur, S.A. of C.V. produces three lines of plastic pens: Fine Point, Medium Point and Large Point. It is requested that the corresponding budgets be prepared according to the following information:
The cost of component B is $20,000 per kilogram. The cost of component A will be equal to 5% of the cost of kg of B, the cost of component C is estimated the same as the cost of component A.
The sales department estimates that it would be convenient to have an inventory at the end of the period of 700,000 feathers, composed as follows: 25% fine point, 60% medium point, and 15% large point.
The balance sheet for the year that just ended showed an inventory of 500,000 pens, which is for each line the same percentage that the sales department estimates for its final investment. The unit costs for each product line were: $5.00 for fine knit, $7.00 for medium knit, and $12.00 for large knit, last year.
Manufacturing overhead costs are as follows (applied based on direct labor hours); $10,000 in maintenance costs required; $7,000 for insurance payments; $80,000 for energy costs; 50% of the total budgeted labor cost will be paid in supervision expenses; $10,000 for fixtures, and depreciation on the equipment and building will be $12,000. The administration and sales expenses will be as follows:
Preparation of the Sales Budget:.
To prepare the Sales Budget we will use the data from the Sales Forecast in units and the sales price of each product.
Preparation of the Production Budget:.
To prepare this Budget, 3 aspects will be taken into account: a) Initial inventory, b) Desired Final Inventory and c) Units to be sold.
We will use the following formula:
Total to produce = Units to sell + Desired Final Inventory - Initial Inventory.
Example: Fine point pen: 500,000 + 175,000 -125,000 = 550,000.
Preparation of Raw Materials Use Budget:.
In this case, we will need the amount of raw material needed to produce one unit and the total number of units that will be produced.
For this case we will use the following formula:
Required raw material = Units to be produced × Unit quantity of the component.
Example: To produce a fine point pen, 1 gram of component A is required. According to our Production Budget, 550,000 units of the fine point pen will be produced, for this reason:
Note: At this stage one gram is considered in decimal number, that is, .001
Raw material required = 550,000 × .001=550 kg
550 kg of component A for the production of the Fine Point Pen.
Preparation of the Raw Materials Purchase Budget:.
To prepare this Budget, 3 aspects will be taken into account: a) Initial inventory, b) Desired Final Inventory and c) Use of Raw Materials in Production
We will use the following formula:
Total to buy = Material Use + Desired Final Inventory - Initial Inventory.
Example: Component A = 1,900 + 900 – 1,050 = 1,750 kilograms to purchase.
We have obtained the number of kilograms that will be needed, now we will determine the amount of money necessary to purchase the materials.
Preparation of the Labor Budget:.
To prepare this Budget we will consider the following data: a) the amount of time it takes to produce a unit and the number of units that will be produced, according to the Production Budget.
We will use the following formula:
Total labor hours = Unit time × ×Units to produce.
Example: To produce a fine point pen it takes .05 hours to make and 550,000 pens will be made.
Total labor hours = .05 × 550,000 = 27,500 hours.
Once the total time required to produce a type of pen is obtained, it will be multiplied by the cost of the hour of labor, which in our work is $20
Using the formula:
Labor cost = Total hours × Cost of labor hour.
Example: To produce the fine point pen, 27,500 hours are required and the hour of labor is paid at $20.
Labor cost = 27,500 × 20 = 550,000.
Preparation of the Indirect Manufacturing Expenses Budget:.
To make this Budget, the sum of all Indirect Manufacturing Expenses incurred is required.
To distribute these Expenses in the unit cost of each unit produced we will use the criterion of Labor Hours. In which an application rate of indirect expenses is determined, which is then multiplied by the number of hours of labor used in total production.
To determine the application rate, the following formula is used:.
Rate = (Total Indirect Manufacturing Expenses)/(Total hours of labor used).
Example: The total of Indirect Expenses is 928,000 and the total of hours that we will use in production is 80,900. For this reason:
rate=(928,000)/(80,900)=11.47.
The rate that will be applied will be 11.47, it is done as follows;
Preparation of the Inventory Budget:.
This Budget will determine the Unit Cost of each pen. For which 3 quantities will be taken into account: a) unit raw material cost, b) unit labor cost and c) unit indirect manufacturing expenses.
We will use the following formula:
Unit cost = Raw material cost + Labor cost + Indirect expense.
Determination of Cost of Sale:.
Next, we will evaluate our inventories to determine the cost of sales, and with this, prepare the Income Statement.
For them we will value the Inventories of both the Production of the period, as well as those that were already held at the beginning of the period.
The first to be determined is the final inventory of raw materials, where we will multiply the number of kilograms of each component by the purchase price.
Example: Of component A we will have a final inventory of 900 kg that were purchased at a price of $100. Therefore. Component A = 900 * 100 = 90,000.
Next, the Final Finished Product Inventory is determined where we will multiply the number of finished units of each product by the unit cost.
Example: For the fine point pen we will have a final inventory of 175,000 units that were produced at a cost of $6.1735.
Therefore. Fine point pen = 175,000 * 6.1735 = 1,080,362.50.
Now the Initial Inventory of Finished Goods is determined using the unit cost of production prior to the period. The procedure is the same as the Final Inventory of Finished Products, but in this case the unit cost that is presented in the initial data is used.
Example: For the fine point pen we will have an initial inventory of 125,000 units that were produced at a cost of $5.
Therefore. Fine point pen = 125,000 * 5 = $625,000.
With the data obtained, the Cost of Sales of the total Production can be determined.
The following formula will be used:
Preparation of the Income Statement:.
Finally, the pro forma Income Statement is prepared for the period.
We will use the formula:
In conclusion we can say that in the first quarter of 2013 the company Plásticas del Sur, S.A. of C.V. You will obtain a profit before taxes of: $7,080,645.
It is the one that will finally be exercised, coordinated, and controlled in the period to which it refers.