OP BudgetsOperating Budgets for 1st Qtr. 200XJanFebMarch1. Reve.docx

OP BudgetsOperating Budgets for 1st Qtr.
200XJanFebMarch1. Revenues BudgetUnits
sales120020002400Selling
price$15$15$15Total$18,000$30,000$36,0002. Production
BudgetPlanned Salespots1200200024002600+ Required Closing
Stock3000360039004050- Opening Stock-1800-3000-3600-
3900= Productionpots2400260027002750total pots =77003.
Materials Purchases BudgetRequired for productionpots X
8kgs19200208002160022000+ Required Closing
Stock208002160022000- Opening Stock-9600-20800-
21600=Purchaseskgs304002160022000Purchases ($)
@$0.50$15,200$10,800$11,0004. Direct Labour
BudgetProductionpots240026002700X standard labour input
(.50hrs/pot)$0.50120013001350X standard labour rate
($10/hr)$12,000$13,000$13,5005. Manufacturing Overhead
BudgetVariable Manufacturing Overhead Budget:std. lab. hrs
=120013001350X standard variable overhead rate (per dir lab
hr)$2.00$2,400$2,600$2,700Fixed Manufacturing Overhead
Budget:per schedule$3,500$3,500$4,250$11,250Total
Manufacturing Overheads$5,900$6,100$6,9506. Selling &
Administration Budgetvariable items (eg vary in relation to
revenues):per schedules$2,000$2,500$2,500sales commissions,
bad debts, etc$2,000$2,500$2,500fixed items:rent, salaries,
vehicle exps, etc
P&L BudgetInventories Budgets ($'s) for 1st Qtr. 200XRaw
(Direct) Materials:JanFebMarchBeginning
@/kg$4,800$10,400$10,800Ending
@/kg$10,400$10,800$11,000Finished Goods:CostUnit Costs -
QuantitiesRatesper unitRaw (Direct) Materials8kg
@$0.50per kg$4.00Direct Labour0.5hrs @$10.00per
hour$ 5.00Variable Manuf O/head Costs0.5labour hrs
@$2.00per l hr1.00Fixed Manuf O/head Costs$11,250 ÷ 7700
units =$1.46per unit1.46$11.46Fin Goods Inventory Valuations
-JanBeginning Inventory

@$11.46$20,630$34,383$41,260Ending Inventory
@$11.46$34,383$41,260$44,698BUDGETED INCOME (Profit
& Loss) STATEMENTJanRevenues$18,000$30,000$36,000less
Cost of Goods Sold:Opening Stock - Finished
Goods$20,630$34,383$41,260+ Cost of Goods
Manufactured(see below*)27,50029,50031,250less Closing
Stock - Finished Goods34,38341,26044,698= Cost of Goods
Sold13,74722,62327,812Gross Profit$4,253$7,377$8,188less
Operating ExpensesSelling and Administration Expenses-2,000-
2,500-2,500Net Profit before Tax$2,253$4,877$5,688less
Income Tax Expense-9011,9512,275Net Profit after
Tax$1,352$2,926$3,413*Cost of Goods Manufactured:Direct
(Raw) Materials:Opening Stock$4,800$10,400$10,800+
Purchases$15,200$10,800$11,000- Closing
Stock$10,40010,80011,0009,60010,40010,800Direct
Labour12,00013,00013,500Manuf
Overheads5,9006,1006,950*Cost of Goods
Manufactured:27,50029,50031,250
Sheet3
Prepare and monitor basic operating and financial budgets
BS508 Accounting Principles
1
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BS508B Accounting Principles
Module 4 - Budgets
QUOTE
Budget:
A mathematical confirmation of your suspicions.

A.A. Latimer
Budget Definition 1:
A budget is a detailed plan in writing (usually expressed in
monetary terms) that outlines the expected financial
consequences of management’s strategies for achieving the
organisation’s key objectives for the coming period.
Budgeting, A Practical Approach, 2nd Edition, National
Institute of Accountants, Russell Clowes & Vic Scriven,
Pearson, page.4
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Module 4 - Budgets
Budget Definition 2:
A budget is a financial document that expresses a future plan or
expectation contributing to the operation or control of an
organisation (e.g. expressing the expected future cash flows or
setting out the expected sales quantities or revenues for a future
period).
Why Budget ?
to be able to PLAN
(eg. resource requirements, so that you have them when you
need them)
and
to be able to CONTROL
(ie. monitor how you’re going, to ensure that you stay on-
track to achieve your plans)

Budgeting is a necessary element in the process of management
Cost accounting, a managerial emphasis, chapter 11 page 418.
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Module 4 - Budgets
Planning & Controlling
PLAN ing è via a MASTER BUDGET (static)
CONTROL ing è via a FLEXIBLE BUDGET (dynamic)
MASTER BUDGET
A set of interrelated budgets representing a comprehensive plan
of action for a specified time period.
Basically, the master budget is a combination of all the
individual budgets in an organisation, including the operating
and financial budgets.
Master Budget for Stylistic Furniture
Advantages of Budgets
Budgeting forces management to plan ahead.
Realistic performance targets are set against which actual
performance can be compared.
Budgeting assists all segments of the organisation to work
towards the same goals.
Budgeting contributes to better communication through the
exchange of financial information between departments.
Budgeting improves motivation by providing goals to be aimed
for.

Limitations of Budgeting
B are unable to provide up-to-date information in a fast-
changing environment.
B focus too much on short-term financial targets rather than
value-adding activities.
B limit innovation by lower level managers
B is too focussed on the functions rather than the processes of
the business.
B encourages incremental thinking, i.e. adding a percentage to
last year’s figures, rather than strategic planning.
Budgets can encourage using up the whole budgeted amount,
irrespective of need.
What is Budget Slack?
Budgets may be set in such a way that they are useless as either
a control tool or a motivator. A manager who sets a budget that
is known to be achievable without stretching (this is known as
budget slack) has gone through the motions of budgeting but has
not entered into the spirit of setting achievable but challenging
targets.
On the other hand, unrealistically high targets act as a
disincentive for staff and may produce resentment and reduce
motivation. (SMART goals)
Types of Budgets
Individual budgets that make up the master budget are often
classified as revenue budget, operating budgets or financial
budgets.
Revenue budgets set out the estimates of the income of the firm
(e.g. sales, fees and other income).
Operating budgets set out the estimates of the costs associated
with different aspects of the operations of the firm (e.g.
purchases budget, cost of goods sold budget, selling expenses

budget, administration expenses budget and financial expenses
budget).
Financial budgets set out the estimates of financing activities
and the expected summary results for the coming period (e.g.
cash budget, income statement budget, balance sheet budget and
capital expenditure budget)
Budgeting, A Practical Approach, page 18
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Module 4 - Budgets
The Process of Budgeting
& the Interrelationships of Budgets
Market Research/Trend Analysis/Demand Forecasting
Operating Budgets
Capital Exp Budgets
P & L Statement Budgets
Cash Flow Budgets
Balance Sheet Budgets
Operating Budgets
Revenues (Sales) Budget
Production Budget

Materials Purchases Budget
Direct Labour Budget
Manufacturing Overhead Budget
Non-Manufacturing Costs (Operating) Budgets
BUDGETED INCOME (P&L) STATEMENT
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Module 4 - Budgets
Operating Budgets
Illustrative Example:
Brentware Ltd (a manufacturer of clay pots)

Purchases Budget Exercise
Jesse idol’s DVD sales business
Jesse expects to sell 7000 DVDs in October and 7800 in
November.
Jesse requires that the physical stock on hand at the end of each
months (i.e. closing inventory) equals 25% of the sales expected
for the next month.
Jesse buys the DVDs for $15 each and sells them for $30 each.
Create the Purchases Budget for October.
Budgeting a practical approach, page 63
Module 4 - Budgets
3/11/2013
20
Jesse idol’s Purchases Budget
Cost/unit $50 + (100% mark-up)$50 = $100 SP
Projected Sales for July 5,600 units
August 6,200 units
Opening Stock: 1 July 1400 (25% of July Sales)
Closing Stock : 31 July 1550 (25% of Aug Sales)
a) Purchases for July: 5600 + 1550 – 1400 = 5750 units x $50 =
$287,500
Jesse idol’s Purchases Budget
Sales 560,000
Less COS:

Open Inv. 70,000 (1400 x $50)
+ Purchases 287,500
Clos Inv (77,500) 280,000
Gross Profit $280,000
Variances
A Variance is the difference between
a budgeted amount and the actual amount
Budgeted amounts may be based on:
past costs (but considering future changed conditions &/or past
inefficiencies)
expected costs
best practice
“standards” (a combination of expected conditions & best
practices)
Budgets
Static Budget – is the original budget based on the original
planned level of output (ie. the master budget level)
- used for resource planning purposes
Flexible Budget – is the static budget restated for the actual
level of output achieved
used for analysis, after the ‘actuals’ have occurred,
► for performance evaluation purposes
enables a proper comparison of “apples with apples”
A simple example of this concept:
Assume you are the Functions Catering Manager at a large hotel
→ see next slide

Variance Analysis
Prices Prices Price Variances
X X
Quantities Quantities Qty Variances
Variances
Budget
(plan)
Actuals
Variances
(for evaluation of
performance)
Costs
Costs
For example: your petrol budget for next weekBudget
▼Actuals
▼Variances10 c12 cPrice variance(2 c) x 300 km= $(6)
Uxx200 km300 kmQty variance(100) km x 10 c= $(10)
U▼▼$20$36 Total variance= $(16) U

Formulas
to calculate variances:
Price Variance = price diff. x actual qty
Qty Variance = qty. diff. x budgeted price
Exercise
Lampa Ltd manufactures lamps. It has set up the following
standards per finished unit for direct materials and direct
labour:
BudgetActualVariances$4.50/kg$5/kgPrice Variance$0.50x
12kg
= $(6) Uxx10 kg12 kgQty
Variance2kg x $4.50= $(9)U==$45$60Total Variance=$(15)U
Sales Budget
SALES
(in units)
= required
PRODUCTION
= required
(in units)
Sales
Production Budget
+ Required Closing Stock
- Opening Stock
Manufacturing Overhead Budget
(in units & $'s)
PURCHASES

Required for production
- Opening Stock
(in hours & $'s)
Sheet1Sales BudgetProduction BudgetMaterials Purchases
BudgetSALESSalesRequired for production(in units)+ Required
Closing Stock+ Required Closing Stock- Opening Stock-
Opening Stock= requiredPRODUCTION=
requiredPURCHASES(in units)(in units & $'s)Direct Labour
Budget(in hours & $'s)Manufacturing Overhead Budget
Sheet2
Sheet3
for example:
Sales Budget
SALES100 100 290kg
(in units) +50+ 80kg
- 5 - 60kg
= required
PRODUCTION= 145
= required
= 310kg
(in units)
= 72.5hrs
- Opening Stock
(in hours & $'s)
(in $'s)
Sales
Production Budget
- Opening Stock
Manuf. O'head Budget
(in units & $'s)

PURCHASES
@
2kg
@
½ hr
Sheet1for example:Sales BudgetProduction BudgetMaterials
Purchases BudgetSALES100Sales100Required for
production290kg(in units)+ Required Closing Stock+50+
Required Closing Stock+ 80kg- Opening Stock- 5- Opening
Stock- 60kg= requiredPRODUCTION= 145=
requiredPURCHASES= 310kg(in units)(in units & $'s)Direct
Labour Budget= 72.5hrs(in hours & $'s)Manuf. O'head
Budget(in $'s)
@ 2kg
@ ½ hr
Sheet2
Sheet3
Projected Data for 1st Qtr. 200X
a). Product Specifications
Raw (Direct) Materials - clay 8kg. per pot$0.50per kg
Direct Labour0.5hrs. per pot$10per hour
b). Projected Sales JanFebMar
AprMay
Projected Sales
units
pots120020002400
26002700
Projected Selling
price
$15.00per pot
c). Projected Inventories JanFebMar
Finished Goods:
Beginning pots1800
Ending ► enough for next mths. sales x 1.5
Raw (Direct) Materials:
Beginning clay kgs9600

Ending ► enough for next mths. prodn.
d). Projected Overheads
Variable Manuf. O/head Costs:
electricity, maintenance, indirect labour etc $2.00per labour
hour
Fixed Manuf. O/head Costs: JanFebMar
total
insurance, depreciation, salaries etc $3,500$3,500$4,250
$11,250
e). Projected Selling & Admin Expenses
variable items
(eg vary in relation to revenues):
sales commissions, bad debts, etc
fixed items:
rent, salaries, vehicle exps, etc
f). Projected Tax Rate
40%
$2,000$2,500
BRENTWARE LTD - a manufacturer of clay pots
$2,500
Quantities Costs
per schedules
Sheet1Projected Data for 1st Qtr. 200Xa). Product
SpecificationsQuantitiesCostsRaw (Direct) Materials - clay8kg.
per pot$0.50per kgDirect Labour0.5hrs. per pot$10per hourb).
Projected
SalesJanFebMarAprMaypots12002000240026002700$15.00per
potc). Projected
InventoriesJanFebMarBeginningpots1800Ending ► enough for
next mths. sales x1.5Beginningclay kgs9600Ending ►
enough for next mths. prodn.d). Projected OverheadsVariable
Manuf. O/head Costs:electricity, maintenance, indirect labour
etc$2.00per labour hourFixed Manuf. O/head
Costs:JanFebMarinsurance, depreciation, salaries
etc$3,500$3,500$4,250$11,250e). Projected Selling & Admin
Expensesper schedulessales commissions, bad debts,

etc$2,000$2,500$2,500fixed items:rent, salaries, vehicle exps,
etcf). Projected Tax Rate40%
Sheet2
Sheet3
Operating Budgets for 1st Qtr. 200X
JanFebMar
1. Revenues Budget
Units sales 120020002400
Selling price
$15$15$15
Total
$18,000$30,000$36,000
2. Production Budget
Apr
Planned Salespots120020002400
2600
+ Required Closing Stock 300036003900
4050
- Opening Stock -1800-3000-3600
-3900
= Production
pots240026002700
2750
total pots =
3. Materials Purchases Budget
pots X 8kgs
192002080021600
22000
+ Required Closing Stock 208002160022000
- Opening Stock -9600-20800-21600
=Purchases
kgs304002160022000
Purchases ($) @
$0.50
$15,200$10,800$11,000

4. Direct Labour Budget
Production
pots
240026002700
X standard labour input (.50hrs/pot)
std. lab. hrs =
120013001350
X standard labour rate (
$10
/hr)
$12,000$13,000$13,500
5. Manufacturing Overhead Budget
Variable
Manufacturing Overhead Budget:
std. lab. hrs =
120013001350
X standard variable overhead rate
(per dir lab hr)$2.00
$2,400$2,600$2,700
Fixed
Manufacturing Overhead Budget:
total
per schedule $3,500$3,500$4,250
$11,250
Total Manufacturing Overheads
$5,900$6,100$6,950
6. Selling & Administration Budget
variable items
(eg vary in relation to revenues):
sales commissions, bad debts, etc
fixed items:
rent, salaries, vehicle exps, etc
7700
$2,000$2,500$2,500
per schedules

Projected
potc). Projected
etcf). Projected Tax Rate40%Operating Budgets for 1st Qtr.
200XJanFebMar1. Revenues BudgetUnits
BudgetAprPlanned Salespots1200200024002600+ Required
Closing Stock3000360039004050- Opening Stock-1800-3000-
3600-3900pots2400260027002750total pots =77003. Materials
Purchases BudgetRequired for productionpots X
21600kgs304002160022000Purchases ($)
@$0.50$15,200$10,800$11,0004. Direct Labour
BudgetProductionpots240026002700std. lab. hrs
=120013001350$12,000$13,000$13,5005. Manufacturing
Overhead Budgetstd. lab. hrs
=120013001350$2.00$2,400$2,600$2,700per
schedule$3,500$3,500$4,250$11,250Total Manufacturing
Overheads$5,900$6,100$6,9506. Selling & Administration
Budgetper schedulessales commissions, bad debts,
etcInventories Budgets ($'s) for 1st Qtr.

200XJanFebMarBeginning
@/kg$0.50$4,800$10,400$10,800Ending
@/kg$0.50$10,400$10,800$11,000CostUnit Costs -
hour5.00Variable Manuf O/head Costs0.5labour hrs @$2.00per
labour hr1.00Fixed Manuf O/head Costs$1.46per
unit1.46$11.46Fin Goods Inventory Valuations -
JanFebMarBeginning Inventory
& Loss)
STATEMENTJanFebMarRevenues$18,000$30,000$36,000Openi
ng Stock - Finished Goods$20,628$34,380$41,256+ Cost of
Goods Manufactured(see below*)27,50029,50031,250-34,380-
41,256-44,69413,74822,62427,812Gross
Profit$4,252$7,376$8,188Selling and Administration Expenses-
2,000-2,500-2,500Net Profit before Tax$2,252$4,876$5,688-
901-1,950-2,275Net Profit after Tax$1,351$2,926$3,413Direct
Purchases15,20010,80011,000- Closing Stock-10,400-10,800-
11,0009,60010,40010,800Direct
Labour12,00013,00013,500Manuf
Overheads5,9006,1006,95027,50029,50031,250
Sheet2
Sheet3
Inventories Budgets ($'s) for 1st Qtr. 200X
Raw (Direct) Materials:
JanFebMar
Beginning @/kg$0.50$4,800$10,400$10,800
Ending @/kg$0.50$10,400$10,800$11,000
Finished Goods:
Cost
Unit Costs - per unit
Raw (Direct) Materials 8kg @$0.50per
kg$4.00

Direct Labour 0.5hrs @$10.00per
hour5.00
Variable Manuf O/head Costs 0.5labour hrs
@$2.00per labour hr1.00
Fixed Manuf O/head Costs $1.46per unit1.46
$11.46
Fin Goods Inventory Valuations -
JanFebMar
Beginning Inventory @
$11.46
$20,628$34,380$41,256
Ending Inventory @
$11.46
$34,380$41,256$44,694
BUDGETED INCOME (Profit & Loss) STATEMENT
JanFebMar
Revenues $18,000$30,000$36,000
less Cost of Goods Sold:
Opening Stock - Finished Goods $20,628$34,380$41,256
+ Cost of Goods Manufactured
(see below*)
27,50029,50031,250
less Closing Stock - Finished Goods
-34,380-41,256-44,694
= Cost of Goods Sold
13,74822,62427,812
Gross Profit $4,252$7,376$8,188
less Operating Expenses
Selling and Administration Expenses -2,000-2,500-2,500
Net Profit before Tax $2,252$4,876$5,688
less Income Tax Expense
-901-1,950-2,275
Net Profit after Tax $1,351$2,926$3,413
*Cost of Goods Manufactured:
Direct (Raw) Materials:
Opening Stock $4,800$10,400$10,800

+ Purchases 15,20010,80011,000
- Closing Stock -10,400-10,800-11,000
9,60010,40010,800
Direct Labour 12,00013,00013,500
Manuf Overheads 5,9006,1006,950
27,50029,50031,250
Quantities Rates
$11,250 ÷ 7700 units =
*Cost of Goods Manufactured:
Projected
potc). Projected
etcf). Projected Tax Rate40%Operating Budgets for 1st Qtr.
200XJanFebMar1. Revenues BudgetUnits
BudgetAprPlanned Salespots1200200024002600+ Required
Closing Stock3000360039004050- Opening Stock-1800-3000-
3600-3900pots2400260027002750total pots =77003. Materials
Purchases BudgetRequired for productionpots X
21600kgs304002160022000Purchases ($)
@$0.50$15,200$10,800$11,0004. Direct Labour

BudgetProductionpots240026002700std. lab. hrs
=120013001350$12,000$13,000$13,5005. Manufacturing
Overhead Budgetstd. lab. hrs
=120013001350$2.00$2,400$2,600$2,700per
schedule$3,500$3,500$4,250$11,250Total Manufacturing
Overheads$5,900$6,100$6,9506. Selling & Administration
Budgetper schedulessales commissions, bad debts,
etcInventories Budgets ($'s) for 1st Qtr.
200XJanFebMarBeginning
@/kg$0.50$4,800$10,400$10,800Ending
@/kg$0.50$10,400$10,800$11,000CostUnit Costs -
hour5.00Variable Manuf O/head Costs0.5labour hrs @$2.00per
labour hr1.00Fixed Manuf O/head Costs$11,250 ÷ 7700 units
=$1.46per unit1.46$11.46Fin Goods Inventory Valuations -
JanFebMarBeginning Inventory
& Loss)
STATEMENTJanFebMarRevenues$18,000$30,000$36,000Openi
ng Stock - Finished Goods$20,628$34,380$41,256+ Cost of
Goods Manufactured(see below*)27,50029,50031,250-34,380-
41,256-44,69413,74822,62427,812Gross
Profit$4,252$7,376$8,188Selling and Administration Expenses-
2,000-2,500-2,500Net Profit before Tax$2,252$4,876$5,688-
901-1,950-2,275Net Profit after Tax$1,351$2,926$3,413Direct
Purchases15,20010,80011,000- Closing Stock-10,400-10,800-
11,0009,60010,40010,800Direct
Labour12,00013,00013,500Manuf
Overheads5,9006,1006,95027,50029,50031,250
Sheet2
Sheet3
Booking for a wedding reception

Expected number of guests100guestsMaster (Static) Budget for
100 guests
(for planning purposes)
Quoted Price$30per guestRevenue$3,000
Est Costs: food, beverages, labour, etc$20per guestCosts2,000
Expected Profit$10per guestProfit$1,000
Actual number of guests120guestsActual Results for 120 guests
Revenue$3,600
Costs2,280
Profit$1,320
Static BudgetActualVariance
Costs2,0002,280-280
Flexible BudgetActualVariance
Revenue
($30 x 120)
$3,600$3,6000
Costs
($20 x 120)
$2,4002,280120Favourable cost control ?? - YES
Profit
($10 x 120)
$1,200$1,320120
Functions Catering Dept - Cartman's Hotel
Evaluation ??
Evaluation ??
OR should the Evaluation be:
Evaluation of Cost Performance ??
Unfavourable - Poor cost control ??
Sheet1Functions Catering Dept - Cartman's HotelBooking for a
wedding receptionExpected number of guests100guestsMaster
(Static) Budget for 100 guests(for planning purposes)Quoted
Price$30per guestRevenue$3,000Est Costs: food, beverages,
labour, etc$20per guestCosts2,000Expected Profit$10per
guestProfit$1,000Actual number of guests120guestsActual
Results for 120
guestsRevenue$3,600Costs2,280Profit$1,320Evaluation of Cost

Performance ??Static BudgetActualVarianceEvaluation
??Costs2,0002,280-280Unfavourable - Poor cost control ??OR
should the Evaluation be:Flexible
BudgetActualVarianceEvaluation ??Revenue($30 x
120)$3,600$3,6000Costs($20 x 120)$2,4002,280120Favourable
cost control ?? - YESProfit($10 x 120)$1,200$1,320120
Sheet2
Sheet3
1. SALES AND PRODUCTION BUDGET
Chong Ltd expects sales in 2014 of 440,000 units of serving
tray. Chong ltds beginning inventory for 2014 is 33,000 trays,
target ending inventory, 55,000 trays. Compute the number of
trays budgeted for production in 2014 .
2. DIRECT MATERIAL BUDGET
Dog trap Ltd produces wine. The company expects to produce
2500,000 two litre bottles of merlot in 2014. Dog trap purchases
empty glass bottles from an outside vendor. Its target ending
inventory of such bottles is 88,000, its beginning inventory is
50,000. For simplicity, ignore breakage. Compute the number of
bottles to be purchased in 2014.
3. REVENUE, PRODUCTION AND PURCHASES BUDGETS
Kawasaki ltd has a division that manufactures two wheel
motorcycles. Its budgeted sales for Model G in 2014 are
450,000 units. Kawasakis target ending inventory is 40,000
units and its beginning inventory is 50,000 units. The companys
budgeted selling price to its distributors and dealers is 4,000 per
motorcycle.
Kawasaki buys all its wheels form an outside supplier. No

defective wheels are accepted. (Kawasakis needs for extra
wheels for replacement parts are ordered by a separate division
of the company.) The companys target ending inventory is
30,000 wheels and its beginning inventory is 25,000 wheels.
The budgeted purchase price is $160 per wheel.
Required:
1. Compute the budgeted revenues in dollars
2. Compute the number of motorcycles to be produced.
3. Compute the budgeted purchases of wheels in units and in
dollars.
4. BUDGETS FOR PRODUCTION AND DIRECT
MANUFACTURING LABOUR.
Zhan Manufacturing makes and sells artistic frames for
photographs for weddings, graduations and other special events.
Trevor Robinson, the financial controller, is responsible for
preparing Zhan manufacturing’s master budget and has
accumulated the following information for 2014.
2014
Jan
Feb
Mar

Apr
May
Estimated sales in units
10,000
12,000
8,000
9,000
9,000
Selling price
$54.00
$51.50
$51.50
$51.50
$51.50
Direct Manufacturing labour-hours per unit
2.0
2.0
1.5
1.5
1.5
Wage per direct manufacturing labour hour
$10.00
$10.00
$10.00
$11.00
$11.00
In addition to wages, direct manufacturing labour related costs
include pension contributions of $0.50 per hour, workers
compensation insurance of $0.15 per hour, employee medical
insurance of $0.40 per hour, and compulsory superannuation
contributions. Assume that as of 1 January 2014, the
superannuation guarantee obligations are 9% of wages. The cost
of employee benefits paid by Zhan Manufacturing on its
employees is treated as a direct manufacturing labour cost.
Zhan Manufacturing has a labour contract that calls for a wage

increase to $11 per hour on 1 April 2014. New labour saving
machinery has been installed and will be fully operational by 1
march 2015. Zhan Manufacturing expects to have 16,000 frames
on hand at 31 December 2014, and it has a policy of carrying an
end of month inventory of 100% of the following month’s sales
plus 50% of the second following month’s sales.
Required:
Prepare a production budget and a direct manufacturing labour
budget for Zhan Manufacturing by months for the first quarter
of 2014.
Both Budgets may be combined in one schedule. The direct
manufacturing labour budget should include labour-hours and
show the details of each labour cost category.

OP BudgetsOperating Budgets for 1st Qtr. 200XJanFebMarch1. Reve.docx

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