Question

1. Which of the manufacturing budgets would not be used by a merchandiser?
2. What additional budget would a merchandising company need?
3. Suppose you work for a company that currently purchases a component of its product, rather than manufactures it. You do not have to describe the product or the component. Write a short memo to management describing the additional budgets that will be needed if the component is to be produced in-house rather than purchased.

Answer 1

1. A merchandising company will not have a production budget, direct material budget, direct labor, and overhead budget because these are components of the production process and A merchandising company does not involve in production work directly.

2. A merchandising company prepares a Merchandising Purchase Budget additionally. It is prepared- to compute the purchases for each quarter, to estimate the cost of the goods to be sold during the quarter and to estimate the inventory required at the end of the quarter.

3. Memorandum-

Memorandum

To: The General Manager,

From: XXXXX

Date: 12 October 2020

Subject- The adoption of additional budgets that will be needed if the component is to be produced in-house rather than purchased.

During recent years the management of XX Ltd has used the traditional approach of buying the component from an external supplier (also known as outsourcing) instead of produced in-house.

As a part of the company, my suggestion is to manufacture its own parts rather than purchase from an outsider. I believe that we can manage quality better by manufacturing their own parts and materials instead of depending on the quality control standards of external suppliers. We can realize revenue from the parts and material that it is “making” rather than “buying” in addition to income from its usual operations. We can make economies of scale by producing parts in large quantity. These economies of scale can cause better quality and lower expenses than would be possible if the business were to endeavour to manufacture the parts or provide a service by itself. At the same time, a business should be careful to retain control over those tasks that are necessary for maintaining its competitive position.

So if the company is producing its own parts, following additional budgets will be adopted by the company-

1.Materials Budget-The materials budget (or materials purchases budget) is used to plan how much raw materials we need to have available to meet budgeted production. This budget is prepared similarly to the production budget as the company must decide how much raw materials inventory they want to have on hand at the end of each quarter. This is typically determined as a percent of next quarter’s material needs. In a materials budget, we will deal with units first and then add the budgeted cost near the end. We also need to know how many direct materials are needed for each unit.

2.Direct Labour Budget-The direct labour budget is a very easy one. We need to know the units required from the production budget. Next, we need to know how many direct labour hours it takes to complete one unit and the cost per labour hour. Using this information, we can determine how many direct labour hours are required to meet the budgeted level of production. We will take the production units x direct labour per unit to get the number of direct labour hours. Finally, we will take direct labour hours x the rate per hour.

3.Manufacturing Overhead Budget-The final budget for manufacturing is the manufacturing overhead budget. The manufacturing overhead budget is prepared depending on how the company allocates overhead. The company can choose to allocate overhead using one predetermined overhead rate, departmental rates or using activity-based costing. Further, the company can choose to separate the fixed and variable overhead costs and assign costs to overhead using only the variable overhead.

So finally I believe that if we adopt this policy and budgeting procedure, we will be benefitted in said manners.

Signed: XXXXXXX

Please mention your doubts in the comment box, if any.

Thanks & all the best,...