Budget Process of HST - Report Example

23 November HST Master Budget HST Ltd manufactures French fries from Russet potatoes. These are sold to local restaurants. The company manufactures French fries using a single production line that runs eight hours per day. The potatoes are purchased and stored in suitable warehouses from which they are distributed on a first-in first-out (FFO) basis. The production of French fries involves a number of processes. They are: cleaning, sorting, peeling, manual inspection, cutting, machine inspection, blanching, drying, frying, draining, freezing, and packaging (Beijing Time Progress Development Co. Ltd 2002). When they are packed they are moved to the cold storage area of the warehouse. In order to ensure that sufficient finished goods are in stock the potatoes purchased in any month is equal to the current period’s sale plus 25 per cent of the following month’s sale. Sales commission is paid at a rate of 8% on sales. This is paid in the following month. HST’s goal is to breakeven every month. The company is currently selling more than enough 10lb bags of French fries to do this. Expansion may be necessary to meet the needs of customers. However, at this point there is no major demand French fries made from Russet potatoes. The company is planning to purchase another machine to produce French fries made from Idaho potatoes. This is necessary as the larger food chains prefer that brand. The demand for HST’s product would be greater and sales would be steadier. The months in which demand was higher are months in which Idaho potatoes were scarce. The following table shows the calculation of the variable cost of French fries, the relevant mark-up and the selling price per unit Calculation: Variable cost per 10lbs of French fries Direct material cost Quantity unit price ($) Cost ($) Total Potato (lbs) 12 0.1 1.2 Vegetable oil (gallons) 0.1 2 0.2 1.40 Direct labor 0.03 8 0.24 0.24 Total direct costs 1.64 Manufacturng overheads Utilities 0.1 indirect materials 0.05 indirect labor 0.2 0.35 Operating expenses Sales commission 0.08 Transportation cost 0.07 0.15 Total variable cost per 10lb french fries 2.14 Calculation: Sales price per 10lbs of French Fries Variable cost of French fries 2.14 Markup on variable cost 150% 3.21 selling price 5.36 The mark-up on cost is 150%. This should comfortably cover fixed cost. The master budget for HST Ltd consists of a sales budget, production budget, direct materials budget, direct labor budget, overhead budget, marketing budget, administrative budget and finished goods inventory budget. According to Horngren et al (2000) the sales budget is normally the starting point for preparing budgets. Sales budget The sales budget shows the budgeted sales for the 12 month period – January to December. Production and inventory levels normally depend on it (Horngren et al 2000). HST Sales Budget January February March April May June July August September October November December January Total Units Sold in 10 lb bags) 1154 1,256 985 1206 867 1047 976 1188 795 962 1463 1242 990 14131 Selling price ($) 5.36 5.36 5.36 5.36 5.36 5.36 5.36 5.36 5.36 5.36 5.36 5.36 5.36 5.36 Sales Revenue ($) 6180 6726 5275 6458 4643 5607 5226 6362 4257 5152 7834 6651 5301 75672 Collections: Month of sale 60% 3708 4036 3165 3875 2786 3364 3136 3817 2554 3091 4701 3991 42222 Following month 40% 2472 2690 2110 2583 1857 2243 2091 2545 1703 2061 3134 2660 28148 Total 3708 6507 5855 5985 5369 5221 5379 5908 5099 4794 6761 7124 70370 Receivables at the end of the year: Sales for the year 70370 Collections to December 31 67710 Receivables at 31st December 2660 Production/Purchases Budget The quantity of French fries produced depends on the budgeted sales for the period as well as the changes in the inventory levels (Horngren et al 2000). HST Production/Purchase Budget January February March April June July August September October November December Jauary Total Budgeted unit sales 1154 1256 985 1206 1047 976 1188 795 962 1463 1242 990 13141 Add target ending finished goods inventory 314 246 302 217 244 297 199 241 366 311 248 3285 3244 Total requirements 1468 1502 1287 1423 1291 1273 1387 1036 1328 1774 1490 4275 16385 Deduct opening finished goods 0 314 246 302 262 244 297 199 241 366 311 248 2997 Units to be produced 1468 1188 1040 1121 1029 1029 1090 837 1087 1408 1179 4028 13389 Cost of direct material 2149 1740 1523 1642 1507 1506 1595 1225 1592 2061 1726 5897 19601 Cost of direct labor 352 285 250 269 247 247 262 201 261 338 283 967 3213 Total direct cost 2501 2025 1773 1911 1754 1753 1857 1426 1853 2399 2009 6863 22814 The totals do not include January in blue The totals do not include the figures shaded in blue. After the production budget is prepared the direct materials followed by the and direct labor cost budget can be prepared. They are shown in the respective tables following. Direct Materials Budget HST Direct Material Usage Budget January February March April May June July August September October November December January Total Potatoes (12lbs bags) 1762 1426 1248 1346 1094 1235 1235 1308 1004 1305 1689 1415 4833 16066 Unit price 1 1 1 1 1 1 1 1 1 1 1 1 1 2114 1711 1498 1615 1313 1482 1482 1569 1205 1566 2027 1698 5800 19279 Vegetable Oil (gallons) 176 143 125 135 109 124 123 131 100 130 169 141 483 1607 Unit price 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 35 29 25 27 22 25 25 26 20 26 34 28 97 321 Cost of Direct Materials 2149 1740 1523 1642 1335 1507 1506 1595 1225 1592 2061 1726 5897 19601 Disbursements for material: Month of sale ($) 50% 1075 870 761 821 668 753 753 798 613 796 1030 863 2948 9800 Following month ($) 50% 0 1075 870 761 821 668 753 753 798 613 796 1030 863 8937 Total 1075 1944 1631 1582 1488 1421 1507 1551 1410 1408 1826 1894 3811 18738 Payables at the end of December: Purchases - Jan to Dec 19601 Less: Payments to Creditors - Jan to Dec 18738 Total payable for material 863 The direct materials used shows the amount of materials used to produced a given level of output as well as the cost per unit. Direct Labor Budget HST Direct Labor Budget January February March April May June July August September October November December January Total Units of production required 10lb bags 1468 1188 1040 1121 912 1029 1029 1090 837 1087 1408 1179 4028 13389 Labor hour per unit 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 Labor cost 352 285 250 269 219 247 247 262 201 261 338 283 967 3213 Disbursements for labor: Month of sale 75% 264 214 187 202 164 185 185 196 151 196 253 212 725 2410 Following Month 25% 0 88 71 62 67 55 62 62 65 50 65 84 71 733 Total 264 302 259 264 231 240 247 258 216 246 319 297 796 3143 Payable on 31st Dec: Labor cost - Jan to Dec 3213 Less: Payments 3143 Total payable 71 Overheads Budget This budget shows the indirect expenses that vary with the level of production. HST Overheads Budget January February March April May June July August September October November December January Total Units produced 1468 1188 1040 1121 912 1029 1029 1090 837 1087 1408 1179 4028 17416 Variable Manufacturing Overheads: Utilities 147 119 104 112 91 103 103 109 84 109 141 118 1339 Indirect materials 73 59 52 56 46 51 51 54 42 54 70 59 669 Indirect labor 294 238 208 224 182 206 206 218 167 217 282 236 2678 Total Variable Manufacturing O/H 514 416 364 392 319 360 360 381 293 381 493 413   4686 Fixed Manufacturing Overheads: Deprecation 120 120 120 120 120 120 120 120 120 120 120 120 1440 Maintenance 50 50 50 50 50 50 50 50 50 50 50 50 600 Supervision 100 100 100 100 100 100 100 100 100 100 100 100 1200 Total Fixed Manufacturing O/H 270 270 270 270 270 270 270 270 270 270 270 270   3240 Total Manufacturing Overheads 784 686 634 662 589 630 630 651 563 651 763 683 7926 Payments utilities following month 0 147 119 104 112 91 103 103 109 84 109 141 118 1339 Indirect materials in current month - 50% 37 30 26 28 23 26 26 27 21 27 35 29 0 335 Indirect materials in following month - 50% 37 30 26 28 23 26 26 27 21 27 35 29 335 Indirect labor in current month - 75% 220 178 156 168 137 154 154 163 126 163 211 177 0 2008 Indirect labor in following month - 25% 73 59 52 56 46 51 51 54 42 54 70 59 669 Maintenance - current month 75% 38 38 38 38 38 38 38 38 38 38 38 38 0 450 Maintenance - following month 25% 13 13 13 13 13 13 13 13 13 13 13 13 150 Supervision - current month 75% 75 75 75 75 75 75 75 75 75 75 75 75 0 900 Supervision - following month 25% 75 75 75 75 75 75 75 75 75 75 75 75 900 Total 369 665 590 578 556 540 560 571 537 537 637 653 294 7086 Less Payables 294 Payments for Jan to Dec 6792 The overheads budget shows the cost of all overheads – variable and fixed. Variable overheads change as the number of units produced changes. Marketing Budget The marketing budget shows the amounts paid to sales representatives as well as the transportation cost associated with selling. HST Marketing Budget January February March April May June July August September October November December January Total Sales Commission 8% 507 552 433 530 381 460 429 522 349 422 642 545 5770 Transportation 7% 433 471 369 452 325 392 366 445 298 361 548 466 4926 Total 939 1022 802 982 706 852 794 967 647 783 1191 1011 10696 Payments Sales Commission 507 552 433 530 381 460 429 522 349 422 642 545 5770 transportation - current month 50% 216 235 185 226 162 196 183 223 149 180 274 233 2247 Transportation - following month 50% 216 235 185 226 162 196 183 223 149 180 274 233 2463 Total payments due 216 958 972 843 918 739 839 834 893 678 877 1149 778 10480 Less Payables 778 Payments for Jan to Dec 31 9702 Administration Budget The administration budget shows the administrative costs that s expected to be incurred on the project. This includes the salaries of those who do not work in the factory but provide customer service and other matters associated with getting the products out in an efficient and reliable manner. HST Administration Budget January February March April May June July August September October November December January Total Deprecation 100 100 100 100 100 100 100 100 100 100 100 100 1200 Salaries 300 300 300 300 300 300 300 300 300 300 300 300 3600 Utilities 80 80 80 80 80 80 80 80 80 80 80 80 960 Other 30 30 30 30 30 30 30 30 30 30 30 30 360 Total Admnstration Expenses 510 510 510 510 510 510 510 510 510 510 510 510 6120 Disbursements: Salaries - current month 75% 225 225 225 225 225 225 225 225 225 225 225 225 2700 Salaries - following month 25% 75 75 75 75 75 75 75 75 75 75 75 75 900 Utilites - following month 80 80 80 80 80 80 80 80 80 80 80 80 960 Other - current month 50% 30 30 30 30 30 30 30 30 30 30 30 30 360 Other - following month 50% 30 30 30 30 30 30 30 30 30 30 30 30 360 Total 255 440 440 440 440 440 440 440 440 440 440 440 185 5280 Less payable at December 31 185 Payments for Jan to Dec 5095 Finished Goods Inventory Budget HST Finished Goods Inventory Budget January February March April May June July August September October November December January Total Number of units of finished goods 314 246 302 217 262 244 297 199 241 366 311 248 3285 6530 Direct cost per unit 2 2 2 2 2 2 2 2 2 2 2 2 0 2 Direct cost of inventory 515 404 494 355 429 400 487 326 394 600 509 406 0 5321 Add other variable cost 110 86 106 76 92 85 104 70 84 128 109 87 1150 1135 Cost of ending inventory 625 490 600 431 521 486 591 396 479 728 618 493 1150 6456 The cash budget along with the Budgeted Income Statement and balance sheets are shown following. HST Cash Budget January February March April May June July August September October November December Total Inflow Sales 3708 6507 5855 5985 5369 5221 5379 5908 5099 4794 6761 7124 67710 Total inflows 3708 6507 5855 5985 5369 5221 5379 5908 5099 4794 6761 7124 67710 Outflow Direct material 1075 1944 1631 1582 1488 1421 1507 1551 1410 1408 1826 1894 18738 Direct Labor 264 302 259 264 231 240 247 258 216 246 319 297 3143 Overheads 369 665 590 578 556 540 560 571 537 537 637 653 6792 Marketing 216 958 972 843 918 739 839 834 893 678 877 1149 9918 Administration 255 440 440 440 440 440 440 440 440 440 440 440 5095 Total outflows 2180 4310 3891 3708 3634 3380 3593 3654 3497 3309 4099 4432 43685 Cash b/f 0 1528 3726 5690 7967 9702 11543 13329 15583 17185 18669 21332 0 Net Cash Inflow 1528 2198 1964 2277 1735 1841 1786 2254 1602 1484 2663 2692 24024 Cash c/f 1528 3726 5690 7967 9702 #### #### 15583 17185 18669 21332 24024 24024 Pro-forma Income statement and Balance Sheet are shown in the following Pro-forma Income Statement HST Budgeted Income Statement $ $ Revenue 70370 Cost of Goods Sold: Opening inventory 0 Direct Production cost 22814 Variable Manufacturng Cost 4686 Fixed Manufacturng Cost 3240 Cost of Goods Available for sale 30740 Less: Closing inventory 493 Cost of Goods Sold 30247 Gross profit 40123 Operating Costs: Marketing 10696 Administration 6120 Total Operating Costs 16816 Net Income 23306 The Income Statement provides information on whether a profit s made or a loss is incurred for the year. The profit is carried to the profit and loss budget. Break-even Analysis The breakeven analysis is a very important measure it indicates the number of units that should be produced in order to cover different levels of production. The analysis using figures from Table 1 is shown below. Break Even Analysis Number of Bags Sold   0 1 10 50 100 150 155 158 159 Revenue @$5.36 per bag 0 5.36 53.6 268 536 804 830.8 846.88 852.24 Variable cost @ $2.14 per bag 0 2.14 21.4 107 214 321 331.7 338.12 340.26 Contribution margin @ $3.22 per bag 0 3.22 32.2 161 322 483 499.1 508.76 511.98 Fixed cost 510 510 510 510 510 510 510 510 510 Operating income (510.00) (506.78) (477.80) (349.00) (188.00) (27.00) (10.90) (1.24) 1.98 The table shows that approximately 159 units are required for HST to break-even. HST’s production levels surpasses that every month. Budgeted Balance Sheet Works Cited Beijing Time Progress Technology Development Co. Ltd. French Fries Production Line. 2002. Web. 11 Nov 2012 Horngren, C. T., Foster, G. & Datar, S. M. 10th ed. Cost Accounting: A Managerial Emphasis. USA: Prentice Hall, 2000. Print. Read More