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 2024 (and of only sales for January 2023). (i) The units to be sold in different months are: (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 2024) (iv) Budgeted production and production costs for the year ending December 2024 are as thus: Prepare: (a) Production budget for the last six months of 2024 (b) Production cost budget for the same period Factory overhead per unit = $88,000 / 44,000 units = $2 per unit The following information regards the budgeted and actual production for the six months ending 31 December 2024. During the budgeted period: Prepare a production budget for the six months ending 30 June 2024. 1. Material cost increase is 15% over budget figures. For the six months ending June 2025, 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.Problem 1
Required
Solution
Production Budget
(July to December 2024)
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 2024)
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
Problem 2
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
Required
Solution
Budget 6 Months, Ending December 2024
Actual 6 Months, Ending December 2024
Budget 6 Months, Ending June 2025
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:
Production Budget: Practical Problems and Solutions FAQs
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.
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.
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.
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.
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 Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, 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.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
