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Management Accounting and Business

Lecture 7, Topic 5

Lecture Illustration – 

Budgeting for a Retail Firm

Amelia and King, a small retailer has provided you with the following estimates forthe coming period:

Month Sales (Units)March 10,000

April 15,000

May 10,000June 15,000

July 10,000

  Budgeted selling price is $15 per unit.

  Management has a policy that closing inventory must equal 25% of that month’s

sales.

  The price of purchases is currently $7.00 per unit and is expected to increase to$7.50 per unit on 1 June.

  Collections from customers are as follows:

o  60% in the month following the month of sale

o  30% two months after the month of sale

o  10% three months after the month of sale

 The following information regarding operating expenses is available:o  Marketing expenses are estimated to be $20,000 per month.

o  In addition to marketing expenses, sales commission of 5% of sales is paid inthe month following the month of sale.

o  Administration expenses are estimated to be $12,000 per month, includingdepreciation of $900 per month.

o  Administration expenses include insurance of $6,000 per annum, paid in June

of each year.o  All expenses and purchases are paid in the month incurred, unless otherwise

specified.

Required:

a) Prepare a purchases budget in units and dollars for the months of June and July

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e)  Calculate the budgeted operating expenses for the months of June and July.

Note: Expenses are recorded using the principles of accrual accounting.

f)  Calculate the budgeted cash outflow for operating expenses for the months of June

and July.Note: Cash outflow is recognised in the period in which the cash payment ismade.

a)  Purchases Budget for the months of June and July

June July

Sales (units)+ Closing inventory (units) 25% of current month’s sales 

= Required units

- Opening inventory (units) 25% of previous month’s sales 

= Purchases (units)x price per unit

= Purchases ($)

b)  Budgeted Cost of Goods Sold Schedule for June

Units sold

Units from opening inventory

Units from purchases (15,000 – 2,500)Cost of goods sold

c)  Valuing closing inventory using FIFO for June

Closing inventory (units)

x purchase price

Value of closing inventory using FIFO

Valuing closing inventory using Weighted Average for June 

Closing inventory (units)

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Management Accounting and Business

Lecture 8, Topic 5 cont.

Lecture Illustration – Budgeting for a Manufacturing Firm

A firm’s budget reveals the following estimated monthly sales in units:

January 10,000February 12,000March 15,000April 18,000May 20,000

The firm’s management has an inventory policy for finished goods of holding, at thestart of any particular month, 20% of that month’s expected sales. Closing inventoryis valued at the average cost of the current month’s production. Assume openinginventory of finished goods for January is valued at $50 per unit.

To produce one unit of finished product the manufacturer requires:

•  3 kgs of direct material

•  2 hours of direct labour (@ $10 per hour)

•  variable manufacturing overhead is $5 per unit

On 1st March the purchase price of direct materials will increase from $8 to $9 per

unit.

The firm’s inventory policy for direct materials is that opening inventory each monthmust equal 10% of that month’s expected production requirements. Materials areissued to production using the first in first out (FIFO) method of inventory valuation.Assume opening inventory of direct materials is valued at $8 per kilogram.

Fixed overhead is applied to production using a predetermined plant-wide rate basedon direct labour hours. Annual budgeted fixed overhead is $180,000. Annualbudgeted direct labour hours is 360,000 hours.

Assume WIP inventory is negligible and therefore ignore.

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MAB – Lecture 8, Topic 5 cont. Illustration Page 3 of 4

Cost of Direct Materials Used Budget for quarter ending 31 March

January February March Total

Direct material usage (kg) 15. From purchases budget

- opening inventory (kg) 16. From purchases budget

= current month's purchases (kg) 17. Calculation

Cost of materials from inventory 18. Opening stock kg x prev month’s price

Cost of materials from purchases 19. Current mth’s purch (kg) x current price

Total Cost of Materials Used 20. Calculation (total)

Direct Labour Budget for quarter ending 31 March

January February March Total

Estimated production (units) 21. From production budget

x direct labour hours per unit 22. Given

Total direct labour hours 23. Calculation

x cost per hour 24. Given

= Direct Labour Cost 25. Calculation (to COGM budget)

Predetermined fixed overhead rate = 180,000/360,000 = $0.50 per direct labour hour

Manufacturing Overhead Budget for quarter ending 31 March

January February March Total

Production (units) 26. From production budget

x variable cost per unit 27. Given

= variable overhead 28. Calculation

+ fixed cost 29. Predetermined rate x direct labour hours

Total Overhead 30. Calculation (to COGM budget)

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