Tutorial 8 - Budgeting

1. Manufacturing Budget

Retro, Inc., produces a single product. The projected sales for the first month of the coming year and the beginning and ending inventory data are as follows:

Month #1 Month #2

Sales 80,000 units 78,000 units

Unit price $12 $12

Beginning inventory 6,000 units

Desired ending inventory* 10% of the same month budgeted sales units

Each unit requires three kilos of material costing $2 per kilo. The beginning inventory of raw materials is 2,500 kilos, and the company wants to maintain minimum material in inventory at equivalent to 5% of the month production need. Each unit requires one hour of direct labor time @ $8 per hour.

Retro has been using direct labor hours to allocated/estimate production overhead cost. Total estimated O/H for the year is $800,000 and total direct labor hours estimated for the year is 1,000,000 hours.

Required:

1. Prepare a production budget (how many to produce) for the first month.
2. Prepare a direct materials purchases budget for the first month.
3. Prepare direct labor and manufacturing overhead budget for the 1^st month.
4. Prepare a pro-forma income statement for the FIRST month; estimated price $20 per unit.