Purposes of Budgeting Systems

Budgeta detailed plan, expressed

in quantitative terms, that specifies how resources will be acquired and used during a specified

period of time.

PlanningPlanning Facilitating Facilitating

Communication and Communication and CoordinationCoordination

Allocating ResourcesAllocating Resources Controlling Profit and Controlling Profit and

OperationsOperations Evaluating Performance Evaluating Performance

and Providing Incentivesand Providing Incentives

Types of Budgets

1999 2000 2001 2002

Continuous or Continuous or Rolling BudgetRolling Budget

This budget is usually a twelve-month budget that rolls forward one month as the current month is completed.

L o n g R a n g e B u d g e t sL o n g R a n g e B u d g e t s

Capital budgets with acquisitions that normally cover several years.

Overview of the Master Budget for Stylistic Furniture

Revenues Budget

Production Budget

Ending Inventory Budget

Direct Materials Costs Budget

Direct Manufacturing Labor

Costs

Manufacturing Overhead Costs

BudgetCost of Goods Sold Budget

R & D/Design Costs Budget

Marketing Costs Budget

Distribution Costs Budget

Customer-Service Costs Budget

Administrative Costs Budget

Budgeted Income

Statement

Budgeted Balance Sheet

Cash Budget

Capital Expenditure

s BudgetBudgeted

Statement of Cash Flows

Operating

Budget

Financial Budget

Stylistic Furniture

Stylistic furniture manufactures prestige coffee tables. Its job costing system comprises direct manufacturing, direct labor & manufacturing overheads. Manufacturing overheads, both variable & fixed are allocated to each coffee table using direct manufacturing labor hours as the allocation base.

The only source of revenue is sales of coffee tables. Units sold is the driver of revenues because prices are predicted to be unchanged throughout 2006. WIP inventory is negligible and is ignored. Unit costs of direct materials purchased & finished goods sold remain unchanged throughout each budget year but can change from year to year.

There are two types of direct materials: Particle board (PB) and Red oak (RO) & two types of direct manufacturing labor: Laminating labor and Machining labor. Direct labor costs are variable with respect to manufacturing labor hours. Manufacturing labor rates remain unchanged throughout each budget year. Labor workers are hired on an hourly basis; no overtime is worked.

Stylistic allocates all manufacturing overhead costs, variable and fixed, using direct labor hours.

Non manufacturing costs variable component, consisting mostly of commissions to sales personnel, is variable with respect to the amount of revenue.

Stylistic Furniture

a. Each coffee table has the following product specifications:

Direct Materials

Particle board (PB) 9.00 board feet (b.f.) per table

Red oak (RO) 10.00 board feet (b.f.) per table

Direct manufacturing labor

Laminating labor 0.25 hours per table

Machining labor 3.75 hours per table

b. Inventory information in physical units for 2006 is

Beginning Inventory

Target Ending Inventory

Direct materials

Particle board 20,000 b.f. 18,000 b.f.

Red oak 25,000 b.f. 22,000 b.f.

Finished goods

Coffee tables 5,000 units 3,000 units

c. Coffee table revenues expected for 2006 are

Selling price Rs.3,920 per table

Units sold 52,000 coffee tables

Stylistic Furniture

d. Costs expected for 2006 include:

2005 2006

Particle board (per b.f.) Rs.39 Rs.40

Red oak (per b.f.) Rs.58 Rs.60

Laminating labor (per hour) Rs.240 Rs.250

Machining labor (per hour) Rs.290 Rs.300

e. Other budgeted cost rats and amounts for 2006 are

Variable manufacturing overhead costsRs.95 per direct manufacturing labor-hour

Variable nonmanufacturing costs13.5% of revenues Fixed manufacturing overhead costsRs.1,60,00,000 Fixed nonmanufacturing costsRs.1,40,00,000

f. The inventoriable (manufacturing) cost is Rs.2,750 per coffee table in 2005

Stylistic Furniture

Schedule 1: Revenue Budget

For the Year Ended December 31, 2006

Selling Price

Units Sold

Total Revenues

Coffee tables Rs.3,920 52,000 Rs.20,38,40,000

Schedule 2: Production Budget (in Units)

For the Year Ended December 31, 2006

Coffee Tables

Budgeted unit sales (Schedule 1) 52,000

Add target ending finished goods inventory 3,000

Total requirements 55,000

Deduct beginning finished goods inventory 5,000

Units to be produced 50,000

Stylistic FurnitureSchedule 3A: Direct Materials Usage Budget

For the Year Ended December 31,2006

Particle Board (PB)

Red Oak (RO) Total

Physical Units Budget

PB: 50,000 units x 9.00 b.f. per unit 4,50,000

RO: 50,000 units x 10.00 b.f. per unit 5,00,000

To be used in production, b.f. 4,50,000 5,00,000

Cost Budget

(Available from beginning inventory)

PB: Rs.39 per b.f. x 20,000 b.f. Rs.7,80,000

RO: Rs.58 per b.f. x 25,000 b.f. Rs.14,50,000

To be obtained from purchases of this period:

PB:Rs.40 per b.f. x (4,50,000 B.F. – 20,000 b.f.)

1,72,00,000

RO: Rs.60 per b.f. x (5,00,000 b.f. – 25,000 b.f.)

2,85,00,000

Direct materials to be used Rs1,79,80,000

Rs.2,99,50,000

Rs.4,79,30,000

Stylistic FurnitureSchedule 3B: Direct Materials Purchases Budget

For the Year Ended December 31,2006

Particle Board (PB)

Red Oak (RO) Total

Physical Units Budget

Production usage (from Schedule 3A)

4,50,000 b.f. 5,00,000 b.f.

Add target ending inventory 18,000 b.f. 22,000 b.f.

Total requirements 4,68,000. b.f 5,22,000 b.f.

Deduct beginning inventory 20,000 b.f. 25,000. b.f

Purchases 4,48,000 b.f. 4,97,000 b.f.

Cost Budget

PB: 4,48,000 b.f. x Rs. 40 per b.f. 1,79,20,000

RO: 4,97,000 b.f. x Rs.60 per b.f. 2,98,20,000

Purchases Rs.1,79,20,000

Rs.2.98,20,000

Rs.4,77,40,000

Stylistic FurnitureSchedule 4: Direct Manufacturing Labor Budget

For the Year Ended December 31,2006

Laminating Labor (LL)

Machining Labor (ML) Total

Labor-Hours Budget

LL: 50,000 units x 0.25 hours/unit 12,500 hours

ML: 50,000 units x 3.75 hours/unit 1,87,500 hours

12,500 hours 1,87,500 hours 2,00,000 hours

Cost Budget

LL: Rs.250 per hour x 12,500 hours

Rs.31,25,000

ML: Rs.300 per hour x 1,87,500 hours

Rs.5,62,50,000

Rs.31,25,000 Rs.5,62,50,000

Rs.5,93,75,000

Stylistic Furniture

Schedule 5: Direct Manufacturing Overhead Budget

For the Year Ended December 31, 2006

At Budgeted Level of 2,00,000

Direct Manufacturing Labour-Hours

Variable manufacturing overhead costs

Supplies Rs.24,00,000

Indirect manufacturing labor 62,00,000

Power and energy 46,00,000

Maintenance 30,00,000

Miscellaneous 28,00,000 Rs.1,90,00,000

Fixed manufacturing overhead costs

Depreciation Rs.50,00,000

Property taxes 35,00,000

Property insurance 26,00,000

Plant supervision 21,00,000

Miscellaneous 28,00,000 1,60,00,000

Total manufacturing overhead costs Rs.3,50,00,000

Stylistic Furniture

Schedule 6A: Computation of Unit Costs of Ending Inventory of Finished Goods

December 31,2006

Cost per Unit of Input Input Total

Direct materials

Particle board Rs.40.0 per b.f. 9.00 b.f. Rs.360

Red oak 60.0 per b.f. 10.00 b.f. 600 Rs.960

Direct manufacturing labor

Laminating labor Rs.250 per hour 0.25 hours Rs.62.5

Machining labor Rs.300 per hour 3.75 hours 1,125 1,187.5

Manufacturing overhead Rs.175 per hour 4.00 hours 700

Total Rs.2,847.5

This Rs. 2,847.5 unit cost for 2006 compares to Rs.2,750 unit cost for 2005

Stylistic Furniture

Schedule 6B: Ending Inventories Budget

December 31,2006

Cost per Unit Units Total

Direct materials

Particle board Rs.40.0 per b.f. 18,000 b.f. Rs.7,20,000

Red oak 60.0 per b.f. 22,000 b.f. 13,20,000 Rs.20,40,000

Finished goods

Coffee tables Rs.2,847.5 per unit

3,000 units Rs.85,42,500

85,42,500

Total ending inventory

Rs.1,05,82,500

Stylistic Furniture

Schedule 7: Cost of Goods Sold Budget

For the Year Ended December 31, 2006

Beginning finished goods inventory, January 1,2006, Rs.2,750 x 5,000

Given Rs.1,37,50,000

Direct materials used Schedule 3A Rs.4,79,30,000

Direct manufacturing labor Schedule 4 5,93,75,000

Manufacturing overhead Schedule 3,50,00,000

Cost of goods manufactured 14,23,05,000

Cost of goods available for sale 15,60,55,000

Deduct ending finished goods inventory, December 31, 2006

Schedule 6B 85,42,500

Cost of goods sold Rs.14,75,12,500

Stylistic FurnitureSchedule 8: Non Manufacturing Costs Budget

For the Year Ended December 31,2006

Value-Chain FunctionVariable

Costs Fixed Costs Total

R&D/Product design Rs.30,57,600 Rs.25,00,000 Rs.55,47,600

Marketing 1,63,07,200 29,00,000 1,92,07,200

Distribution 50,96,000 22,00,000 72,96,000

Customer service 26,49,920 24,00,000 50,49,920

Administrative 4,07,680 40,00,000 44,07,680

Rs.2,75,18,400 Rs.1,40,00,000 Rs.4,15,18,400

Stylistic Furniture

Budgeted Income Statement for Stylistic Furniture for the Year Ended December 31,2004

Revenues Schedule 1 Rs.20,38,40,000

Cost of good sold Schedule 7 14,75,12,500

Gross margin 5,63,27,500

Operating costs

R & D/ Product design Schedule 8 Rs.55,57,600

Marketing costs Schedule 8 1,92,07,200

Distribution costs Schedule 8 72,96,000

Customer-service costs Schedule 8 50,49,920

Administrative costs Schedule 8 44,07,680 4,15,18,400

Opening income Rs.1,48,09,100