Question

May Co. makes three (3) types of cosmetic products, C1, C2 and C3. Sales forecast for next year (2021) are estimated to grow by 10% from the current year’s figure. Sales figures in the year 2020 are as follows: C1 is 8,500 units, C2 is 6000 units and C3 is 9,000 units. The anticipated selling price in year 2021 will be as follows: C1: $90/unit, C2: $130/unit and C3: $50/unit. At the end of the year 2020 there will be closing inventory of 600 units, 800 units and 1,000 units of C1, C2 and C3 respectively. The company plans to maintain its ending inventory level in year 2021 equivalent to three weeks of sales for each of the goods. Assume: four weeks in a month or 48 weeks in a year. There was damaged goods of 100 units in the closing inventory for each of the goods in the year 2020 which has not been accounted for in the accounting books of the company. The damages in the closing inventory in year 2021 for each of the goods are estimated as follows: C1: 66 units, C2:187 units and C3: 281 units. The following data is given about the raw materials required to produce C1, C2 and C3 and other related product costs for the year 2021. C1 C2 C3 Per unit of finished good: Direct Material - X (kg) 3 4 5 Direct Material - Y (kg) 4 6 8 Direct labour (minutes) 45 70 80 Direct Materials X Y - Desired closing inventory (kg) 2,200 1,500 - Opening inventory (kg) 1,400 2,700 Standard Prices and Rates: Direct material - X $6.00 per kg Direct material - Y $7.00 per kg Direct labour rate $15.00 per hour Production Overheads - Variable $5.00 per direct labour hour - Fixed $8.00 per direct labour hour Non-Production Overheads - Variable 5% of total revenue - Fixed $225,950

Required: Prepare the following operational budgets for the year 2021: a) Sales Budget

b) Production Budget

c) Raw Material Usage and Purchase Budget

d) Direct Labour Budget

e) Total Overheads Budgets

Answer 1

Sales budget
	C1	C2	C3
Units 2020	8500	6000	9000
Increase	10%	10%	10%
	=8500*1.1	=6000*1.1	=9000*1.1
Units 2021	9350	6600	9900
Price	90	130	50
Total Sales Value	841500	858000	495000

Production budget	C1	C2	C3
Opening inventory Finished goods	600	800	1000
Danaged goods in opening inventory	-100	-100	-100
Net opening inventory	500	700	900
Closing inventory	=9350*3/48	=6600*3/48	=9900*3/48
Closing inventory	584	413	619
Normal damage	66	187	281
Sales units	9350	6600	9900
Production required	=9350+66+584-500	=6600+187+413-700	=9900+619+281-900
	9500	6500	9900

Raw Material usage	C1	C2	C3	Total
Total units produced	9500	6500	9900
Direct material X required per unit	3	4	5
Total units X required	28500	26000	49500	104000
Direct material Y required per unit	4	6	8
Total units Y required	38000	39000	79200	156200

Purchase Budget
Direct material	X	Y
opening	1400	2700
Closing	2200	1500
Units required in production	104000	156200
Raw materials to be procured	104800	155000
Price	6	7
Total purchase cost	628800	1085000

Direct labor minutes	C1	C2	C3
Production units	9500	6500	9900
Labor minutes required	45	70	80
Labor hours required	=45/60	=70/60	=80/60
Hours per unit required	0.75	1.17	1.33
Total hours required	7,125.00	7,583.33	13,200.00
Rate	15	15	15
Total direct labor costs	106875	113750	198000

Production overhead
Direct labor hours	7,125.00	7,583.33	13,200.00
Variable rate	5	5	5
Total variable overheads	35625	37917	66000	139541.7
Fixed overhead rate	8	8	8	(assuming per hour rate is adjusted for current year calculated)
	57000	60667	105600	223266.7
Total production overhead	92625	98583	171600	362808.3
Non-production
Total revenue	841500	858000	495000
Variable overheads	42075	42900	24750	109725
Fixed				225950
Total non-production overhead				335675
Total overheads				698483.3

If the fixed production overheads are same as last years
Production overhead
Direct labor hours	7,125.00	7,583.33	13,200.00
Variable rate	5	5	5
Total variable overheads	35625	37917	66000	139541.7
Units year 2020 base year	8500	6000	9000
Hours per unit	0.75	1.17	1.33
Total hours	6,375.00	7,000.00	12,000.00
Fixed overhead rate	8	8	8	24
Total production overhead	51000	56000	96000	203000
Non-production
Total revenue	841500	858000	495000
Variable overheads	42075	42900	24750	109725
Fixed				225950
Total non-production overhead				335675
Total overheads				538675