Production budgets are the heart and soul of budgeting for a manufacturing firm. How much should the company produce?

Production budgets are the heart and soul of budgeting for a manufacturing firm. How much should the company produce? What level of raw materials should be purchased? How much labor will be needed? What training level is necessary for that labor? What capacity is needed?

 

These are some of the questions that will be addressed as the production budgets are developed.

 

To help you gain the necessary skills to complete the weekly problems, you will be provided with problem demonstrations for various budget types. This week, we will focus on methods used to prepare the production budgets.

 

It is suggested that you view this problem demonstration before attempting to do this week’s homework. Enjoy the demonstration!!

 

Production Budgets (Links to an external site.)

 

Transcript

 

Scenario: Production, Purchase, and Labor Budgets

 

The Mullins Company finished their sales projections for the coming year. The company produces one product. Part of next year’s sales projections are as follows.

 

Projected Sales in Units

 

July

 

 150,000

 

August

 

 170,000

 

September

 

 164,000

 

October

 

 180,000

 

 November

 

 205,000

 

The budget committee has also completed the following information on inventories.

 

Raw Materials

 

Ending Balance, June, 25,000 lbs

 

Desired ending levels (monthly 5% of next month’s production needs)

 

Work-In-Progress

 

None

 

Finished Goods Inventory

 

Ending Balance, June, 14,000 units

 

Desired ending levels: 15% of next month’s sales

 

The Engineering Department has developed the following standards upon which the production budgets will be developed.

 

Item

 

Standard

 

Material usage

 

4 pounds per unit

 

Material price per pound

 

$1.80 per pound

 

Labor usage

 

 0.4 hours per unit

 

Labor rate

 

$35 per hour

 

Machine hours

 

3 machine hours per unit

 

The Mullins Company uses a modified allocation method for allocating overhead costs. The rates that will be used in the coming year are as follows.

 

Overhead Item

 

Allocation Rate

 

Utilities

 

$0.60 per machine hour

 

Inspection

 

$11 per unit produced

 

Factory supplies

 

$3 per unit produced

 

Depreciation

 

$40,000 per month

 

Supervision

 

$15,000 per month

 

Assignment Details

 

Important!

 

It is expected that the assignment will be completed using an Excel spreadsheet using formulas.

 

Prepare the following production budgets for July, August, and September for the Mullins Company.

 

Production Budget

 

Materials Purchases Budget

 

Direct Labor Budget

 

Overhead Budget

 

Manufactured Budget (for the quarter, quarter totals only)

 

Submit your Excel spreadsheet with its formulas to the Week 3 Homework Submission page.