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Chapter 08 - Lecture Notes
8-11
Learning Objective 4: Prepare a direct materials
budget, including a schedule of expected cash
disbursements for purchases of materials.
C. The direct materials budget
i. Assume the information as shown to enable the
preparation of Royal’s direct materials budget
which quantifies the raw materials that must be
purchased to fulfill the production budget and to
provide for adequate inventories.
1. The first step in preparing the direct
materials budget is to insert the required
production in units from the production
budget.
2. The second step is to calculate the monthly
and quarterly production needs, which in
this case are stated in terms of pounds of
direct material.
3. The third step is to calculate the materials
to be purchased for April (140,000 pounds).
Notice:
a. The desired ending inventory of
23,000 pounds is 10% of the
following month’s production.
b. The beginning inventory of 13,000
pounds is the same as the March 31st
ending inventory.
Quick Check – direct material purchases
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4. The fourth step is to calculate the materials
to be purchased for May (221,500 pounds).
Notice:
a. April’s desired ending inventory
becomes May’s beginning inventory.
5. The fifth step is to calculate the materials to
be purchased for June (142,000 pounds) and
to calculate the quarterly totals. Notice:
a. We are assuming a desired ending
inventory for June of 11,500 pounds.
b. April’s beginning inventory and
June’s ending inventory carry over to
the “Quarter” column.
Helpful Hint: Tell the students that the inventory
purchases budget or the raw materials purchase budget
are really just the elements of a cost of goods sold
schedule in a different order.
ii. Assume the information as shown regarding
Royal’s expected cash disbursements for materials.
1. The first step in calculating Royal’s cash
disbursements is to insert the beginning
accounts payable balance ($12,000) into
the April column of the cash disbursements
schedule.
a. This balance will be paid in full in
April.
2. The second step is to calculate the April
credit purchases that will be paid during
each month of the quarter.
a. $28,000 ($56,000 × 50%) will be
paid in April and $28,000 ($56,000 ×
50%) will be paid in May.
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Chapter 08 - Lecture Notes
8-13
(1). The $56,000 is derived by
multiplying 140,000 pounds by
the $0.40 per pound purchase
price.
Quick Check – cash disbursements calculations
3. The remaining steps include:
a. Calculating the May and June credit
purchases that are paid during each
month of the quarter.
b. Calculating the totals for all columns
in the schedule and the total for the
quarter ($185,000).
Learning Objective 5: Prepare a direct labor budget.
D. The direct labor budget
i. Assume the information as shown to enable the
preparation of Royal’s direct labor budget which
enables the company to match its direct labor hours
provided with its production needs.
1. The first step in preparing the direct labor
budget is to insert the production in units
from the production budget.
2. The second step is to compute the direct
labor hours required to meet the production
needs. Notice:
a. 0.05 direct labor hours are needed per
unit.
3. The third step, in this particular example, is
to compute the direct labor hours paid.
Notice:
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Chapter 08 - Lecture Notes
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a. In this example, there are
guaranteed labor hours that will be
paid for regardless of production
needs.
4. The fourth step is to compute the total
direct labor cost. Notice:
a. With direct labor, we computed all
three months at the same time. This is
because there is no beginning and
ending inventory to consider.
Quick Check – direct labor cost calculations
Learning Objective 6: Prepare a manufacturing
overhead budget.
E. The manufacturing overhead budget
i. Assume the information as shown to enable the
preparation of Royal’s manufacturing overhead
budget. This budget provides a schedule of all
costs of production other than direct materials and
direct labor.
1. The first step in preparing the
manufacturing overhead budget is to
calculate the variable manufacturing
overhead costs for each month and in total.
Notice:
a. The direct labor hours required is
taken directly from the direct labor
budget.
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2. The second step is to add the fixed
manufacturing overhead costs ($50,000 per
month) to the variable overhead costs to
arrive at total manufacturing overhead costs
for each month and in total. Notice:
a. We can determine the predetermined
overhead rate for the quarter
($49.70).
b. Once the level of fixed costs has been
determined in the budget, the costs
really are fixed; hence, the time to
adjust fixed costs is during the
budgeting process.
3. The third step is to calculate the cash
disbursements for manufacturing overhead
by subtracting noncash expenses from the
total manufacturing overhead costs
computed in step two.
a. In this example, $20,000 of
depreciation is deducted from each
month’s total overhead costs to arrive
at the cash disbursements for
manufacturing overhead costs.
Helpful Hint: Have the students trace the amounts from
the raw materials purchase, direct labor, and
manufacturing overhead budgets to the cash budget.
Information from some of the budgets is needed by
more than one individual—in this case the
manufacturing department—and the controller would
require the information from these budgets.
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F. The ending finished goods inventory budget
i. Now Royal can complete the ending finished goods
inventory budget.
1. The first step in preparing this budget is to
compute the direct materials cost per unit
($2.00).
a. The information needed can be
derived by referring back to the direct
materials budget.
2. The second step is to compute the direct
labor cost per unit ($0.50).
a. The information needed can be
derived by referring back to the direct
labor budget.
3. The third step is to compute the
manufacturing overhead cost per unit
($2.49) and the total inventoriable cost per
unit ($4.99). Notice:
a. Royal is using an absorption costing
approach to valuing its inventory.
b. The quantities shown for direct labor
and manufacturing overhead are the
same (0.05 hours) because direct
labor hours is the overhead allocation
base.
c. The predetermined overhead rate was
calculated when we prepared the
manufacturing overhead budget.
4. The fourth step is to calculate the value of
the ending finished goods inventory
($24,950). Notice:
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