COMPUTATION TIPS FOR PREPARING THE BUDGETS

The preparation of the Fantastic, Inc. budget will require some basic mathematic skills. The following
information may be of some assistance to you when making the necessary computations.

Sales Budget:
The sales volume is in the number of units produced. If the increase over the prior year is
5%, the budgeted volume will be 105% of the prior year's production in units.
The budgeted dollar sales is the sales volume in units (calculated above) times the selling
price per unit.

Production Budget:
The projected sales (in units) plus the desired ending finished goods inventory equals the
total units that will be needed during the period. Deducting the beginning finished goods
inventory from this amount gives the production (in units) that will be required to meet
sales needs.
Projected Sales in Units
+ Desired Ending Inventory Finished Goods in Units
= Units Needed During Period in Units
-Beginning Inventory Finished Goods in Units
= Required Production in Units

Direct Materials Budget

The same general relationship as described for the Production Budget will be needed
here. The production needs for direct material (in units) plus the desired ending direct
material inventory equals the total units that will be needed during the period. Deducting
the beginning direct material inventory from this amount gives the purchases (in units)
that will be required to meet projected production.
Projected Production Needs for Direct Material in Units
+ Desired Ending Inventory Direct Material in Units
= Direct Material Needed During Period in Units
-Beginning Inventory Direct Material in Units
= Required Purchases of Direct Material in Units

If the material price increase is projected to be 5%, than the expected purchase price per
unit will be 105% of the prior year's unit cost for the inventory items. Rounding to the
nearest penny will give sufficient accuracy for the budget.
The purchases (in units) times the expected cost per unit equals the cost of the projected
inventory purchases that will be needed.
Be careful to remember that each gallon of paint will require 2 pounds of pigment;
therefore, if 100 gallons of paint needed to be produced, 200 pounds of pigment would be
needed for that production.

Direct Labor Budget

The expected production (in units) times the machine hours needed to produce each
gallon will give the projected machine hours needed for the coming year. This figure
times the labor hours needed per machine hour will furnish the projected labor hours for
the budget. The projected labor hours needed times the expected labor rate will give the

projected cost for direct labor.

The number of employees needed for the coming year can be calculated by dividing the
number of labor hours that will be required by the maximum number of hours each
employee can work. Remember that you can not have a fraction of an employee. All
numbers must be rounded up to the nearest whole number. A similar calculation will be
necessary to determine how many supervisors will be required (manufacturing overhead).
For example, if one supervisor is needed for every 8 employees and if there were 42
employees in a particular department, then 6 supervisors would be needed. ( 42/8 = 5.25;
however, since you cannot have 0.25 supervisor, you will need 6 supervisors.)

Overhead Budget
The calculations for the variable overhead items are straight forward. Be sure, however,
to be very careful to determine whether you are dealing with number of gallons to be
produced, machine hours that will be required, or direct labor dollars. The calculations of
the variable items will need to be done separately for each department (Super and
Stupendous).
The calculations for the total projected fixed overhead items are relatively simple;
however, these total amounts must be allocated to the two departments. Most of the fixed
overhead items will be allocated to the departments based upon the production levels in
gallons. For example, if the Super Department accounts for 75% of the total production,
then 75% of a particular fixed overhead expense will be allocated to that department. The
depreciation (2012 rates plus additional depreciation for any new equipment purchased in
2013) will be allocated according to 2012 rates plus additional depreciation for any new
equipment needed by a particular department.

2012 depreciation expense

+ Depreciation for new equipment
= 2013 depreciation expense

Selling Budget and Administrative Budget

Again, be careful to determine what you are dealing with - gallons sold, gallons
produced, or machine hours. Benefits will relate only to the number of people or wages
paid in that particular department.

Capital Expenditures Budget

The expected number of machine hours needed for the desired production divided by the
maximum hours that can be provided by one machine will give the number of machines
that will be needed. Remember that you cannot have a fraction of a machine so all
number will have to be rounded up to the next whole number. The number of machines
needed less the machines that each department already has will give the number of new
machines that will need to be purchased. Determining the cost for these purchases as well
as the determination of the cash outlay and increased debt needed is fairly straightforward.

Budgeted Cost of Goods Manufactured (absorption)

Much of the information will come from other budgets or the information provided.

Budgeted Income Statement (absorption)

Much of the information needed for this budget will come from other budgets such as the
Sales Budget.

The finished goods ending inventory will have to be calculated by departments since the
cost of producing one gallon of Super Paint differs from the cost of producing one gallon
of Stupendous Paint. Remember that the company uses a FIFO inventory so all raw
materials contained in the finished product will use the costs in effect during the year.
The cost of the finished goods will be comprised of:
1. direct materials
cans (1 can per gallon)
pigment (2 pounds per gallon)
2. direct labor
3. overhead
The overhead per unit produced in each department will have to be calculated in order to
price the ending finished goods inventory. Remember that the OH per unit will differ for
Super and Stupendous.
When calculating the interest expense for the year, remember that any new debt is added
on January 1st and that any debt repayments occur on December 31st.
Since the company uses a FIFO inventory, all direct materials in the ending inventory
will
bear the costs in effect during the current year.

Cash Budget
The cash receipts are tied to the company's credit policy and collection experience rate.
The receipts can be calculated as follows based upon the fact that sales occur evenly
throughout the year:
Beginning accounts receivable (represents sales from the prior period to be
collected currently)
+ Projected sales
- All sales occurring during December 2013 (Total projected sales / 12)
- 25% of November
= Cash receipts for the year
The material purchases are tied to the company's payment policy. The cash payments for
materials can be calculated as follows based upon the fact that purchases occur evenly
throughout the year:
Beginning accounts payable (represents purchases from the prior period paid
currently)
+ Project material purchases
- All material purchases made during December 2013 (Total projected
purchases/12)
= Cash payments for the year
Wages paid would use a similar formula as shown above for material purchases. The total
wages paid during the year would be the sum of direct labor, sales salaries and
commissions, and administrative salaries. Since wages are paid every two weeks, only
1/24th of the total wages will be due to the employees on December 31.
Other expenses paid would also use the material purchases formula. Other expenses requiring cash
payments include all expense items except direct material, direct labor, depreciation, interest, and
income taxes. Remember that depreciation does not require cash.
Other information such as interest paid can be taken directly from other schedules or is in the
information provided.

The ending cash balance on the cash budget must equal the cash balance shown on the balance
sheet.

opening

Budgeted Balance Sheet

A number of items needed for the Budgeted Balance Sheet were used when calculating
items required for the cash budget:
Cash
Accounts receivable
Accounts payable
Accrued wages
Accrued other
The balance for the raw materials inventory will come from the Budgeted Cost of Goods
Manufactured, and the balance for the finished goods inventory will come from the
Budgeted Income Statement.
The balance for Plant & Equipment can be calculated by adding the additions to the
balance given in the prior periods Balance sheet provided.
Long-term debt will be the beginning balance, plus additions, less principle repayments.
Retained earnings will be the beginning balance, plus net income, less dividends paid.
Remember, a good check on your balance sheet is that asset = liabilities + owners' equity.