Problem 1

The following information about Fishplates X has been made available from the accounting records of payment of Precision Tools Ltd. for the last six months of 2019 (and of only sales for January 2020). 

(i) The units to be sold in different months are:

  • July: 2,200
  • August: 2,200
  • September: 3,400
  • October: 3,800
  • November: 5,000
  • December: 4,600
  • January 2020: 4,000

(ii) There will be no work-in-progress at the end of any month

(iii) Finished units equal to half the sales for the next month will be in stock at the end of every month (including June 2019)

(iv) Budgeted production and production costs for the year ending December 2019 are as thus:

  • Production units: 44,000
  • Direct materials per unit: $10.00
  • Direct Wages per unit: $4.00
  • Total factory overheads apportioned to the product: $88,000

Required

Prepare:
(a) Production budget for the last six months of 2019
(b) Production cost budget for the same period

Solution

Production Budget
(July to December 2019)
July August Sept. Oct. Nov. Dec. Total
Estimated Sales 2,200 2,200 3,400 3,800 5,000 4,600 21,200
Add: Stock at the End 1,100 1,700 1,900 2,500 2,300 2,000 11,500
3,300 3,900 5,300 6,300 7,300 6,600 32,700
Less: Stock at the Beginning 1,110 1,110 1,700 1,900 2,500 2,300 10,600
Production Required 2,220 2,800 3,600 4,400 4,800 4,300 22,100

Production Cost Budget

Production Cost Budget
(July to December 2019)
July Aug. Sep. Oct. Nov. Dec. Total
Direct Material $10 22,000 28,000 36,000 44,000 48,000 43,000 221,000
Wages $4 8,800 11,200 14,400 17,600 19,200 17,200 88,400
Factory O/H $2 4,400 5,600 7,200 8,800 9,600 8,600 44,200
Total Cost 35,200 44,800 57,600 70,400 76,800 68,800 353,600

Factory overhead per unit = $88,000 / 44,000 units = $2 per unit

Problem 2

The following information regards the budgeted and actual production for the six months ending 31 December 2019.

Units 40,000 (Budgeted) Units 50,000 (Actual)
Material Consumed 45,000 units 135,000 55000 units = 190,000
Wages at 3 hrs. per unit @ $1.5 per hr. 180,000 245,000
Variable Overhead @ $2 PU 80,000 125,000
Fixed Overheads 75,000 100,000
Total 470,000 660,000

During the budgeted period:

  • Production is expected to increase to 60,000 units
  • The prices of materials are expected to increase further in the same manner as they had increased over the budgeted price
  • Labor charges are expected to increase by 50 pairs per hour above the actual rate shown above
  • Efficiency is expected to decline by 20%
  • Fixed overheads are expected to increase by 10%

Required

Prepare a production budget for the six months ending 30 June 2019.

Solution

Budget 6 Months, Ending December 2019 Actual 6 Months, Ending December 2019 Budget 6 Months, Ending June 2020
Per unit Total Per unit Total Per unit  Total
Production Level 40,000 50,000 60,000
Material 45,000 x 3 135,000 55,000 x 3 190,000 65,000 x 3.978 258,750
Wages 3 hrs. x 1.50 180,000 3 hrs. x 1.633 245,000 3 hrs. 36 mnts x 2.133 460,728
Variable Overheads 2 x 4,000 (0) 80,000 2.5 x 500 125,000 2.75 x 60,000 165,000
Fix Overheads 75,000 100,000 120,000
470,000 660,000 1,004,298

Hint:
1. Material cost increase is 15% over budget figures. For the six months ending June 2020, an increase of 15 over $3,455 is assumed.
2. Efficiency decrease by 20% leads to 20% more time, i.e., 36 minutes. The total time required is 216,000 hrs. Per hr. rate increases by $0.50 to $2.133.

Do you want to further test your knowledge about budgeting? We have prepared more quizzes for you.

Frequently Asked Questions

What is a production budgeting?

Production budgeting is a kind of financial planning. It deals with the determinations and allocations of production resources and activities necessary to produce the future requirements for goods or services within time periods. It can be viewed as an extension of production planning that addresses concerns over longer term, usually more than one year.

What is the importance of a production budgeting in a manufacturing industry?

In manufacturing industries, it can be said that a base for planning and control has been provided by the establishment of a production budget. In turn, this will allow for an advance understanding of what to expect from various levels in the organization. If one or more levels fall short of their goals, then they can be pointed out to before the budget cycle, allowing them time to adjust accordingly.

How can you estimate production budget?

Estimating production budget is indeed a complex task because it involves many factors, but there are some guidelines that can help in doing so. Among these factors include: number of employees, investment in plant and equipment, materials and supplies, utilities, cost of transportation to market, costs associated with administration and manufacturing.

What is the importance of a production budgeting in a business?

Production budgeting is important for businesses because it provides a tool which can be used in order to manage day-to-day activities. This way the company will not budget for more or less than what they need. Usually it is important to have good control over your budget, so you must monitor the actual costs you are spending against the estimated cost of goods sold. Once this is determined, if there are any differences between actual and estimated cost of goods sold, then adjustments should be done by either reducing expenses or increasing the cost of goods sold.

What is the importance of controlling the production budget?

Through production budgeting and control, managers can increase their level of awareness to any problems that may affect the company before these problems cause major damage to the company. This way, if there is a problem with materials or personnel, managers should be able to see the problem and take action before it gets out of hand.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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