Budgeting Process - Clean Finishing Furniture ltd - Essay Example

To successfully accomplish this task, it has been estimated that the number of employees that could achieve the desired production level, this report has projected would be 4, plus additional employees being aged in the sales and administration department. This report shows an extensive budgeting process that began from the sales budgeting process to the cash budget-making.  The six-month venture ended on November 30, 2014.

Sales Forecasts (units) for the six month period

Month

Units

June

13

July

15

August

21

September

27

October

33

November

35

The projected selling price for each Three-T would be £790 for the entire six-month period and would be fixed at that price.

Anticipated Receipt of Cash from the sales of Three-T

1. The company anticipates a sale of it’s of all its products in the six-month period ending November 31, 2014.
2. Of the sales, 60% are expected to be received in cash in the month of the sale, and the remaining part is to be collected in the following month.

Production
All the Three-T’s sold monthly would be produced in the same month. The high number of customer base in the city from the feasibility study will buy all the furniture products produced in the month of production. Therefore production will equal sales.

Direct Materials Budget 

• To produce a product of Three-T, we would need a combination of timber and other materials. A total of 30 feet of timber will be sufficient enough to build a product.
• Other materials will be: nails 3kg

 Clear vanish 4 liters

• The company receives all the materials necessary for the month’s production on the last day before the month of operations.
• The prices of the raw materials per unit will be: timber £ 5 per foot

Clear vanish £ 20 per liter.
 Nails per kg £2

Anticipated payments of all the Raw Materials

1. 70% of the timber bought in the month would be paid for in the same month, and the balance is paid in the month that follows.
2. 30% of the clear vanish bought in the month would be bought in the same month, and the balance to be paid in the month that will follow.
3. Nails would be paid for in cash every month

Direct Labour Budget

1. One unit of Three-T will be produced by 10 hours of direct labor
2. An hour of producing Three-T would cost the company £ 10.
3. Direct labor is paid for in its entirety in the same month.
4. The cost of paying direct labor is subject to an inflationary pressure of 3% computed monthly.

Manufacturing Overhead Budget
In the company’s budget, the manufacturing overheads consist of both variable manufacturing and fixed manufacturing overheads.

1. Fixed manufacturing overheads per month would cost the company £ 120 monthly; however, depreciation would be deducted from the fixed overheads at the rate of 5% per month.
2. The company would incur variable manufacturing overhead equivalent to £10 per direct labor.

In developing the income statement and the balance sheet, the company would employ the absorption costing system ( Stice, Stice & Diamond, 2006, Needles, Powers & Crosson 2010).  The formula for developing the overhead rate per hour would be as below. This will help in arriving at the value of the cost of the goods sold.

Determinable overhead rate/hour = Total manufacturing overhead

Total direct labor
Rent and office expenses

While the company produces its product at a rundown workshop, the products will be sold in a centralized shop on the seventh street close to the targeted market.

1. The products will be sold by an appointed salesman who will earn £10 variable selling and administrative expenses per unit sold.
2. Rent and other fixed expenses have been projected to cost the company £ 115 every month and a depreciation rate of 10% on the fixed expenses will be made every month.

Cash Budget
The cash budget is the instrument that highlights borrowings and repayment, though more importantly, it exposes money received and those that are paid in cash (Mowen, 2012). The following issues have been projected related to the anticipated venture:

• An overdraft credit has been arranged with the bank in case of a shortfall in cash to meet the intended expenses at £10
• The interest applicable to the overdraft as has been arranged would be 1%., but it is included in the variable selling expenses allowance.
• Furniture and equipment purchases that have been scheduled for the operation have been estimated to cost £ 3000 and they will be procured on July 1, 2014. Just before the operations commence.
• Furniture and equipment totaling £ 7,320 were given to the project by the local authority, under the youth empowerment program to facilitate the process.
• Personal savings in cash on June 1, 2014, stood at £ 3680.
• Corporation tax of 30% would be charged on the net profit earned
• Insurance premiums on the company’s properties would be assumed to be zero for each month.