7.5: Operating Budget

Operating budgets include separate budgets for each of three key line items on the income statement.

1. Sales budget
2. Cost of goods sold budget *

   * To prepare the cost of goods sold budget, a manufacturer first prepares the following five supporting budgets:

   a. production budget	Requires sales budget result
   b. direct materials purchases budget	Requires production budget result
   c. direct materials cost budget	Requires materials purchases budget result
   d. direct labor cost budget	Requires production budget result
   e. factory overhead budget	Independent of previous budgets

3. Selling and administrative budget

   The results of all the individual operating budgets are combined to present a budgeted income statement, which culminates with the anticipated amount of net income.

   To illustrate, two distinct master budgets for 2019 for two different manufacturing companies will be presented side by side.

   The first company makes only one product, a 42” art deco replica of the Statue of Liberty, which it sells to wholesalers and souvenir shops. Only one direct material, metal, is used in producing these statues.

   The second company makes protective headgear and produces two products: bicycle helmets and ski helmets. Each type of headgear requires two direct materials: plastic and foam lining.

   The best approach is to first review the budgets for the statue souvenirs in the left column of the side-by-side budgets. It is the simpler of the two since it covers only one product that uses one direct material. It illustrates the basic concepts. The budgets for the helmets are similar to those for the statues, but they are a bit more complex since two products and two direct materials are involved. The manufacture of the helmets occurs in two departments: forming and assembly.

   The following information will be used to prepare a sales budget, production budget, direct materials purchases budget, direct materials cost budget, direct labor cost budget, factory overhead budget, selling and administrative budget, and budgeted income statement. The data in the left column is for the statue souvenirs; the information in the right column is for the helmets.

   Statue Souvenirs (1 product and 1 direct material)

   Estimated sales volume	3,000 units
   Selling price per unit	$200
   Estimated inventory of completed units on Jan. 1	2,600 units
   Desired inventory of completed units on Dec. 31	600 units
   Number of pounds of metal per completed unit	8.6 pounds
   Price per pound of metal	$6
   Estimated inventory of metal on Jan. 1	1,800 pounds, $10,800
   Desired inventory of metal on Dec. 31	300 pounds, 1,800
   Time spent for direct labor per completed unit	5 hours
   Direct labor rate per hour	$10
   Estimated factory overhead costs for the year:
   $\ \quad \quad$Supervisor salary	$7,600
   $\ \quad \quad$Utilities	1,900
   $\ \quad \quad$Indirect materials	1,700
   $\ \quad \quad$Depreciation	800
   Estimated work in process on Jan. 1	$25,100
   Desired work in process on Dec. 31	3,100
   Estimated finished goods on Jan. 1	$36,700
   Desired finished goods on Dec. 31	9,400
   Estimated selling costs for the year:
   $\ \quad \quad$Advertising expense	$16,300
   $\ \quad \quad$Sales commissions expense	14,100
   $\ \quad \quad$Utilities expense	12,000
   Estimated administrative costs for the year:
   $\ \quad \quad$Salaries expense	$87,700
   $\ \quad \quad$Utilities expense	11,400
   $\ \quad \quad$Office supplies expense	5,600
   Estimated tax rate	20%

   Bicycle and Ski Helmets (2 products and 2 direct materials)

   Estimated sales volume
   $\ \quad \quad$Bicycle helmets	2,600 units
   $\ \quad \quad$Ski helmets	4,800 units
   Selling price per unit
   $\ \quad \quad$Bicycle helmets	$50 per unit
   $\ \quad \quad$Ski helmets	$130 per unit
   Estimated inventory of completed units on Jan. 1
   $\ \quad \quad$Bicycle helmets (@ $24 per unit)	110 units
   $\ \quad \quad$Ski helmets (@ $95 per unit)	320 units
   Desired inventory of completed units on Dec. 31
   $\ \quad \quad$Bicycle helmets (@ $25 per unit)	150 units
   $\ \quad \quad$Ski helmets (@ $93 per unit)	280 units
   Number of pounds of plastic per completed unit
   $\ \quad \quad$Bicycle helmets	0.8 pounds
   $\ \quad \quad$Ski helmets	1.6 pounds
   Number of pounds of foam lining per completed unit
   $\ \quad \quad$Bicycle helmets	0.3 pounds
   $\ \quad \quad$Ski helmets	0.6 pounds
   Price per pound of plastic	$4
   Price per pound of lining	$2
   Estimated inventory of plastic on Jan. 1	120 pounds
   Desired inventory of plastic on Dec. 31	90 pounds
   Estimated inventory of foam lining on Jan. 1	100 pounds
   Desired inventory of foam lining on Dec. 31	140 pounds
   Estimated bicycle work in process on Jan. 1 (@$15)	450 units
   Estimated bicycle work in process on Dec. 31 (@$10)	610 units
   Estimated ski work in process on Jan. 1 (@$70)	520 units
   Estimated ski work in process on Dec. 31 (@$40)	500 units
   Number of direct labor hours of forming per completed unit
   $\ \quad \quad$Bicycle helmets	0.2 hours
   $\ \quad \quad$Ski helmets	0.4 hours
   Number of direct labor hours of assembly per completed unit
   $\ \quad \quad$Bicycle helmets	0.6 hours
   $\ \quad \quad$Ski helmets	1.2 hours
   Direct labor rate per hour for forming	$15
   Direct labor rate per hour for assembly	$12
   Estimated factory overhead costs for the year:
   $\ \quad \quad$Indirect factory wages	$59,900
   $\ \quad \quad$Depreciation plant and equipment	8,700
   $\ \quad \quad$Utilities	2,800
   $\ \quad \quad$Insurance and property tax	1,600
   Estimated selling costs for the year:
   $\ \quad \quad$Sales salaries expense	$129,200
   $\ \quad \quad$Advertising expense	60,800
   $\ \quad \quad$Telephone expense – selling	4,100
   $\ \quad \quad$Travel expense – selling	6,300
   Estimated administrative costs for the year:
   $\ \quad \quad$Office salaries expense	$22,700
   $\ \quad \quad$Depreciation expense – office	2,600
   $\ \quad \quad$Telephone expense – office	900
   $\ \quad \quad$Office supplies expense	800
   $\ \quad \quad$Miscellaneous office expense	700
   Estimated tax rate	25%