Highnoon Budgeting Project - Essay Example

Some of the assumptions taken to complete the product budgeting practice are stipulated below:
- The product is made up of two raw materials named Beflow and Affton.
- Two kinds of labor are used in the production process of the product, which are skilled and non-skilled labor.
- For capital expenditure, since this is the first year of operations, therefore, the organization has planned to invest only in furniture and equipment. The requirement for having a factory is fulfilled by arranging a facility on rent.
- Selling price of the product is set as £130 and £140 for the first and last six months of the first year.
- It is assumed that prices of raw materials and labor costs will remain steady and stable throughout the year.
- Overheads are estimated to be 75% of the direct labor cost.
- Closing stock is assumed to be around at least 15% of the next month’s sales volume.
- 65% of the sales are expected to be received in the month of sales whereas the remaining amount is assumed to be received in the next month of sales.
- 60% of the purchases are expected to be paid in the month of purchases whereas the remaining amount is assumed to be paid in the next month of purchases.
- Other expenses including labor and overhead costs are expected to be paid, in the month in which they are incurred.
- Drawings amounting to £1,000 are expected to be taken out by the owners of the business every month.
- The tax rate is assumed to be 25%.
- Depreciation is charged at 25% straight-line method.

Given the assumptions and market prices of the raw materials and labor costs, the unit cost of the product “Highnoon” is estimated at £121.75. This cost includes £20.25 in terms of direct material, £58 in terms of direct labor, and £43.5 in terms of overheads.

There are six kinds of budgets prepared for this product budgeting such as Capital Expenditure Budget, Sales Budget, Purchases Budget, Production Budget, Direct Labour Budget, and, lastly, Cash Budget, all of these are included in the analysis covering 12 months of the first year of operations of the business. The capital expenditure budget amounts to £45,000 in total; £20,000 are to be invested in the first six months, whereas the remaining amount is intended to be paid next six months.

The sales budget is allocated in such a manner that 450 units are expected to be sold out in the first quarter, 500 units in the next two quarters and 550 units in the last quarter amounting to total sales of around £871,500 for the whole year.

As far as the production budget is concerned, around 6,000 units are expected to be sold out whereas around 6,083 units are assumed to be produced. By multiplying the production units with unit costs provide the total production cost of the period amounts to £740,605. Closing inventory is also valued at the unit cost amounting to £10,105.

From the purchases budget, it can be viewed that the quantity of Beflow and Affton is expected to remain around 912 kg and 608 kg respectively with their corresponding rates of £55 and £120. The cumulative amount of total purchases of both raw materials are expected to be £128,707.