Chapter 6
Master budget for
manufacturing
organisations
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
6-1
Cost classifications
 Product costs are the costs of converting
raw materials into a finished product.
1. Raw materials
2. Direct labour
3. Factory overhead
 Period costs are all other costs associated
with the business.
1. Marketing expenses
2. General and administration expenses
3. Financial expenses
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
6-2
Product costs
 Direct costs:
major items of cost that
can be relatively easily
traced to the product,
such as raw materials
and direct labour.
 Raw materials
and direct labour
Prime cost
 Indirect costs:
cannot not be easily
traced directly to the
product. All factory
overhead.
 Factory overhead:
all indirect costs of
running a factory.
Examples: indirect
materials, indirect
labour, factory
insurance.
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
6-3
Manufacturing process
input
Direct
materials
process
Direct labour &
factory
overhead
output
Finished goods
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
6-4
Cost of production requires the
preparation of the following
budgets





Sales
Production
Direct materials usage
Direct labour
Factory overhead
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
6-5
Production budget
(p. 131)
Production budget for the year ending 30 June
Units
sales
add desired ending inventory
total units needed
less beginning inventory
Units to be produced
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
6-6
Factory overhead budget (p. 135)
Factory overhead budget for year ended 30 June
$
Indirect materials
Indirect labour
Light & power
Rates
Factory insurances
Depreciation on factory equipment
Total factory overhead
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
6-7
Direct materials and labour budget
Direct material usage budget for period ending June 30 (p. 132)
Boxes to be prduced
kg per box
Cardboard needed for production(kg)
Cost per kg
cost of cardboard to be used in production ($)
Direct labour budget for period ending June 30 (p. 134)
Boxes to be produced
Boxes produced per hour
Direct labour required for production(hrs)
Direct labour cost per hour($)
Total direct labour cost($)
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
6-8
Factory overhead application rate
 This allows the business to charge the product with
an estimated amount.
 Application rate can be calculated on different
bases:
 per unit
 direct labour cost
 direct labour hours
 machine hours.
 Refer p. 136.
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
6-9
Cost of goods sold budget
 Merchandising
business
stock @ beginning
add net purchases
cost of goods available
for sale
less
stock @ end
cost of goods sold
 Manufacturing
business
stock @ beginning
add cost of
production
cost of goods available
for sale
less
stock @ end
cost of goods sold
Copyright  2003 McGraw-Hill Australia Pty Ltd
PPTs t/a Budgeting, second edition, by Banks & Giliberti
Slides prepared by Mya Aronfeld
6-10