Management Accounting: Costing and Budgeting Assigment 2

Blue Bubble – Assignment 2

1

BANKING ACADEMY, HANOI
BTEC HND IN BUSINESS (FINANCE)
ASSIGNMENT COVER SHEET

NAME OF STUDENT
REGISTRATION NO.
UNIT TITLE
ASSIGNMENT TITLE
ASSIGNMENT NO
NAME OF ASSESSOR
ASSIGNMENT ISSUE DATE
SUBMISSION DEADLINE

Unit 9: Management Accounting: Costing and Budgeting
Budgetary Planning and Control
2 of 2
Ms. Nam Giang Dao
26th June 2012

We, Blue Bubble Group hereby confirm that this assignment is our own work and not copied or
plagiarized from any source. We have referenced the sources from which information is
obtained by us for this assignment.
Members Full Name

English Name

Signature

Date

Đỗ Linh Chi

Julie

26 th June 2012

Bùi Thanh Hằng

Phoebe

26 th June 2012

Nguyễn Phương Thảo

Pitts

26 th June 2012

Cao Nguyên Hồng Anh

Chip

26 th June 2012

---------------------------------------------------------------------------FOR OFFICIAL USE

Assignment Received By:

Date:


Blue Bubble – Assignment 2

2

Unit Outcomes
Outcome

Evidence for
the criteria

Feedback

Assessor’s decision
First
attempt

Prepare
forecast
s and
budgets
for a
busines
s

LO 3

Monitor
perform
ance
against
budgets
within a
busines
s

Explain the
purpose and
nature of the
budgeting
process

3.1

Select
appropriate
budgeting
methods for
the
organisation
and its needs

3.2

Prepare
budgets
according to

the chosen
budgeting
method

3.3

Prepare a
cash budget

3.4

Calculate
variances,
identify
possible
causes and
recommend
corrective
action

4.1

Prepare an
operating
statement
reconciling
budgeted and
actual results

4.2

Rework

Internal
Verification


Blue Bubble – Assignment 2

Outcome

LO4

3

Evidence for
the criteria

Feedback

Assessor’s decision

Report
findings to
management
in accordance
with identified
responsibility
centres

Internal
Verification

4.3

Merit grades awarded

M1

M2

M3

Distinction grades awarded

D1

D2

D3

Assignment
( ) Well-structured; Reference is done properly / should be done (if any)
Overall, you’ve
Areas for improvement:

ASSESSOR SIGNATURE

DATE

NAME:..................................................................
(Oral feedback was also provided)

STUDENT SIGNATURE

DATE

NAME :..............................................................................
FOR INTERNAL USE ONLY

VERIFIED
DATE

YES

NO

: ....................................................

VERIFIED BY : ....................................................
NAME

: ....................................................

/

/

/

/


Blue Bubble – Assignment 2

4

BUDGETARY PLANNING AND CONTROL

Prepared for: Ms. Nam Giang Dao
The Unit Leader for Managing Financial Resources and Decisions
Unit 9: Management Accounting: Costing and Budgeting
Banking Academy, Hanoi
BTEC HND in Business (Finance)

Submitted: 26th June, 2012

Prepared by:
Do Linh Chi – Julie (F04-029) – F04B
Bui Thanh Hang – Phoebe (F04-054) – F04B
Nguyen Phuong Thao – Pitts (F04-156) – F04B
Cao Nguyen Hong Anh – Chip (F04-002) – F04B


Blue Bubble – Assignment 2

5

EXECUTIVE SUMMARY
Budgets are established with many purposes such as planning the use of resources; vehicle for

forecasting; means of controlling the activities of various groups within the firm, motivating
individuals to achieve performance levels agreed and set, or communicating the wishes and
aspirations of senior management. Some examples above have shown the importance of budget
in Management Accounting. Through budgets, the manager can control activities in the
organization by measuring progress against the original plan, making adjustments where
necessary.
In this report, the researchers will show real applications in Phong Phu Company, Vinabike
Company, and Riley Labs. Form the data is given by three companies; budgeting methods, cash
budget, operating statement and performance report are prepared, calculated, analyzed based on
the knowledge and investigation of the researchers. According to these specific examples, the
researchers hope to provide useful information about Management Accounting for readers.

Table of Contents


Blue Bubble – Assignment 2

6

INTRODUCTION
Aims/Purpose, Scope
The purpose of this report is to prepare forecasts and budgets for a business. At the same time,
monitor performance against budgets within the business. The scope of the report includes:

• Explain the purpose and nature of the budgeting process
• Select appropriate budgeting methods for the organisation and its needs
• Prepare budgets according to the chosen budgeting method
• Prepare a cash budget
• Calculate variances, identify possible causes and recommend corrective action
• Prepare an operating statement reconciling budgeted and actual results

• Report findings to management in accordance with identified responsibility centres
Sources of information
In this report, sources of information are mainly from our own calculating, analyzing, from the
scenario. Beside is searching information in the internet and from textbooks.
Limitation of report


Blue Bubble – Assignment 2
The limitation of time to calculate, analyze, present and explain the result of data.

7


Blue Bubble – Assignment 2

8

MAIN BODY

Task 1: Operating Budgets

1. Budget definition
“A Budget is a plan that outlines an organization's financial and operational goals. So a budget
may be thought of as an action plan; planning a budget helps a business allocate resources,
evaluate performance, and formulate plans” (Ward, 2012).
According to “Budgeting for the Better Performance” (published in 2003) budget has four basic
characteristics:

-

The budget must be quantified: it must be indicated by the numbers, often some real

-

money. In addition, the budget may include funds plan on time, workforce planning, …
The budget must be prepared in advance: it must be made before the plan to implement

-

that budget. The data in real time or after the budget is not listed in the budget.
The budget must be applied to a specific period of time: it is made for a period of time

-

specified (usually a year).
The budget is a plan of action: in addition to the actual figures, tables also include
budget data related to what has not happened.

2. Comparing standard costing and budgeting
Standard Costing and Budgeting are intended to help businesses achieve maximum efficiency, as
well as good cost control. In both methods, the actual performance is compared with predetermined criteria, based on the difference of them for analysis, evaluation and reporting.
Besides, they also interact with each other, “budgeting is essential to determine standard costs
while standard costing is necessary for planning budgets” (Anon, 2012).


Blue Bubble – Assignment 2

9

However, they also have some differences, and they are shown in the table below:

BUDGETING
STANDARD COSTING
Prepared for the short-term operating
Prepare for the long-term operating
Based on standard cost, historical costs and Based on technical information and is fixed
estimates.
scientifically.
Used for different functional departments Used mainly for production, management and
(sales, production, finance, personnel, etc), so marketing function so it does not require
it requires functional coordination.
coordination between departments.
Emphasize cost levels should not be exceeded. Emphasize the cost levels should be reduced
Based on comparison between actual and Based on variances to analysis
budgeted results to analysis
It is not useful for controlling or reducing costs It is useful for controlling and reducing costs,
because it often sets maximum limitation based on the actual measurement is set.
without considering the cost effectiveness of
expenditure.
It is completed before the beginning of each It is reform when having a change in the basic
accounting period.
assumptions and basis.
It expresses financial accounts
It expresses cost accounts.
Table 1: The differences between Budgeting and Standard Costing

3. Purposes and benefits of budgeting process
Every organization has developed strategies for each period, with using budget they will ensure
achievement of the objectives as planned. In this scenario, Phong Phu Ltd manufactures and sells
two products (A and B with high standard), as well as they are manufactured in two processes
(cost centres P1 and P2). According to BPP Professional Education, 2004, page 155, “using a

budget has six further purposes/ benefits”, they are show as follow:
PURPOSES/
BENEFITS
Planning

EXPLANATION
The managers are always busy with the daily business operations of each
department, they tend to avoid formal plan if they are not related to their
specific job. Therefore, the use of funds will help managers establish a formal
plan. It enables them to find out the problems in the implementation plan and
provide solutions to stop them before they occur in practice. In addition, costs


Blue Bubble – Assignment 2

Organizing

Controlling

Co-ordinate
activities

Communicatin
g

Motivating

10

to prevent errors that may occur is always less than the cost of error correction

after the plan is done so enterprises now often made before the budget work.
The system of control helps the manager in comparing the actual results with
the budget results. By dividing economic and human resources in the most
financially potential areas, each department can find out the cause leading to
each mistake and take the replacement in time.
By investigating variances of differences between actual and budgeted, the
company can find out problems and failures in actual operation, and then
taking corrective actions. From that, managers can have an insight whether
operations are up to expectations.
Each department has its own responsibility in a company. The budgeting
process links the plans and financial budgets of each department. It can be said
that, it encourages communication up the organization from subordinates to
superiors, and across departments also. For example, there are two cost centres
P1 and P2 in manufacturing process of Phong Phu Ltd. They have to coordinate closely together to gain the product's quantity or revenue as planned.
Ava to communicate ideas and plans in a company, a formal system is sorely
needed. Based on it, the employee can identify their own works in the general
plan. “Communication might be one-way, with managers giving orders to
subordinates, or there might be a two-way dialogue” (BPP Professional
Education, 2004, page 155)
When there is a system that helps employees to recognize their performance at
high or low, good or bad will stimulate them to work hard and maintain an
enthusiastic attitude towards the job. Besides, it also helps the manager
understands the strengths and weaknesses of each employee. From that, he/
she can improve or adjust the position reasonably to develop the whole
potential of their staff.
Table 2: The purposes of budgeting process

4. Budgeting methods
Every business needs a budget to plan activities. There is no right or wrong way to create a
budget, but it is the best way to monitor the volume of cash business and predicts its future

earnings and expenses. There are three pairs of budgeting methods as follow:


Blue Bubble – Assignment 2

-

11

Fixed budget and Flexible budget
Incremental budget and Zero based budget
Top-down (imposed) budget and Bottom-up (participated/self-imposed) budget

Each method has its own advantages and disadvantages, so depending on the current financial
situation, each company will choose different budget methods which are suitable.

4.1.

Definition

Applying

Fixed budget and Flexible budget
FIXED BUDGET
A fixed budget (static budget)
is made without regard to potential
variations in business activity. Such
budgeting might be effective for
companies with low variable costs,
but otherwise is likely to be

inaccurate. (Anon, 2012)
For example, if total annual
budget of the company is static
budget in which actual sales in the
year could reach $ 10 million, $ 20
million or more, the advertising
costs is always $ 500,000.
This budget should be used for
companies have monthly expenses
almost fixed, as well as in a stable
economic conditions. It can take
non-profit organizations are typical
examples

- No need to adjust the budget each

Advantages

month because in the fixed budget,
annual expenses are unchanged.
- Allow to plan ahead because it will
take into account all expenses and
allow companies to plan according
to their goals and needs
- Easier to Track and Keep Budget
because the amount is not changed
in every month, so it does not need
to spend much time in tracking
fixed budget.

FLEXIBLE BUDGET
A flexible budget is developed
using budgeted revenues or cost
amounts based on the level of output
actually achieved in the budget
period. (Perego, 2006)
For example, a company (using
flexible budget) has cost the
advertising expense accounts for 6%
monthly revenue, so the amount paid
for these costs will increase or
decrease based on sales volumes.
It expresses clearly advantages
in the economic environment
changes, as well as in businesses with
the cost of frequent changes in each
period. It also shows that profit
organizations should apply to this
kind of budget.
- Show revenues and expenses that
should have occurred at the actual
level of activity
- Reveal variances due to good cost
control or lack of cost control.
From that, managers can evaluate
the working effect of employee to
motivate them and make an
appropriate plan in the future.
- Improve performance evaluation

Blue Bubble – Assignment 2

12

-

No clear difference between the
sales of the year because this
- Makes prediction difficult because
budget
does
not
require
in construction, there are many
companies calculate the inflation
costs are not completely changed.
rate in the period when prices
Too many variables make
change.
mangers
get
difficulty
in
Disadvantages - It does not have any flexibility to
controlling costs of departments.
deal with change in the
environment,
such
as: - Complicated because it needs a lot

of time to develop cost steps,
emergencies,
personnel,
especially when in the middle of
competitive pressure.
creating budget standards.
- All competitors know your weak
point so they can outspend you.
Table 3: Distinguish between Fixed budget and Flexible budget
To sum up, any budget has its own advantages and disadvantages. However, in the real life, most
businesses should be using both static and flexible budgets during the course of their business
operations. Thus, they can choose the more appropriate budget for the particular department in
each period of time.

4.2.

Definition

Applying

Advantages

Incremental budget and Zero-based budget
INCREMENTAL BUDGET
Incremental budget is the forecast
of fixed overhead costs, computed by
adding or subtracting a predetermined
percentage from the historical costs,
current or past budgets. (Anon,
Incremental Budgeting, n.d)

This is a budget prepared using a
previous period’s budget or actual
performance as a basis with
incremental amounts added for the new
budget period

-

ZERO-BASED BUDGET
Zero-based budget is a method
for preparing cash flow budgets and
operating plans which every year
must start from scratch with no preauthorized funds. (Anon, Zero
Based Budgeting n.d.)
Zero-based budget requires
each activity to be justified on the
basis of cost-benefit analysis,
assumes
that
no
present
commitment exists, and that there is
no balance to be carried forward
The budget is stable and change is - Forces budget setters to examine
gradual.
every item.
Managers can operate their - Allocation of resources linked to
departments on a consistent basis.
results and needs.
The system is relatively simple to - Develops a questioning attitude.

Blue Bubble – Assignment 2

13

operate and easy to understand.
- Wastage and budget slack
- Conflicts should be avoided if
should be eliminated.
departments can be seen to be
- Prevents creeping budgets based
treated similarly.
on previous year’s figures with
- Co-ordination between budgets is
an added on percentage.
easier to achieve.
- Encourages managers to look
- The impact of change can be seen
for alternatives.
quickly.
- No incentive for developing new - It a complex time consuming
ideas in activities and method of
process.
working.
- Short term benefits may be
- No incentives to reduce costs.
emphasized to the detriment of
Disadvantage - Encourages spending up to the
long term planning,

s
budget so that the budget is - Affected by internal politics maintained next year.
can result in annual conflicts
over budget allocation.
- The priority for resources may have
changed since the budgets were set
originally.
Table 4: Distinguish between Incremental budget and Zero-based budget
Summary, Both zero-based budget and incremental budget are popular financial methods used
by successful companies. Each method works differently and they both have their advantages
and disadvantages. Incremental budget often leads to wasteful spending by employees because
they do not want to lose their budget. The biggest drawback of zero based budget is that it
requires much more work to implement this method and it is often unpopular with employees.
Therefore, the companies should have the balance between two methods to avoid disadvantages
of them.

4.3.

Definition

Top-down budget and Bottom-up budget
TOP-DOWN BUDGET
BOTTOM-UP BUDGET
Top down Budget is where budget
Bottom up budget is a type of
is created by starting from the highest budgeting
that
attempts
to
level working towards the bottom using determine the underlying costs for

parametric relationships. (Arthur, n.d)
each individual department or
segment of an organization and then
total up each department. (Anon,


Blue Bubble – Assignment 2

Applying

The upper-level management of a
company comes up with the
budget. The budget numbers are
passed down the corporate ladder to the
lower-level departments of a business.

Advantages

-

Do not have to rely on lower-level
managers to come up with
budgeting information.
Allow the lower-level managers to
focus on their departments and
what they do best.
Take less time.
Promote upper- level commitment.

14

Overview of Bottom Up Budget,
n.d)
This process starts out small
by looking at the individual
components and costs. Then, the
information is gotten from each
manager and total it up in order to
come up with a budget for the
company as a whole.
- Provide accurate estimate of
costs.
- Improve the morale of the
employees based on their
involvement in the budgeting
process.
- Every department will be
expected to come up with the
new budget.
- Clear and detailed information.

-

Upper-level executives may not
have enough knowledge about the - Upper- level management has
individual departments to come up
less influence on budgeting
with a budget.
process.
Disadvantage
s

- The budgets may not be realistic - The
budget
might
be
because of this lack of intimate
exaggerated.
knowledge.
- Time consuming and costly.
- Low motivation of lower- level.
Table 5: Distinguish between Top-down budget and Bottom-up budget
It can be said that, Top-down and bottom-up are methods for allocating and reporting budget
amounts, it means they both have their particular effectiveness in the organization. Therefore, the
organization can use one method for its entire business, or use a combination of two methods by
choosing the method that is most appropriate for each part of the organization.

5. Prepare budgets for Phong Phu Company
5.1.
Select appropriate budgeting method for Phong Phu Company
To prepare the budget for Phong Phu Company, the first thing needs to do is defining what kind
of method which the company should apply into make its budgets. Phong Phu focuses on


Blue Bubble – Assignment 2

15

producing two products A and B, so among six methods, flexible budget and zero-based budget
methods are more useful to set budget for the company in the future. Moreover, this company
also has some fixed manufacturing overhead cost, which incur during the production process, so
the flexible budget is not totally suitable to set budget for Phong Phu Company. Besides,

according to the scenario, Phong Phu uses two process to produce (cost centre P1 and P2), and
the zero-based budgeting encourages setting budgets systematically, so it seems to be more
appropriate to establish budget for the firm.

5.2.

Prepare budgets for Phong Phu Company

In zero-based method, there are many budgets can be planned, such as: sales/ revenue budget,
production budget, raw material budgets, direct labor budgets, and manufacturing budgets.
Firstly, sales/ revenue budget was set to make basis of identify budget for production.
Revenue budget
A
B
Budgeted sales in units
11,200
12,900
Budgeted selling price
£ 150
£ 90
Budgeted revenues
£ 1,680,000
£ 1,161,000
Table 6: Sales budget of Phong Phu Company (unit: £)
Note for sales budget:
Applying the formula:
Budgeted revenue = budgeted sales in units x budgeted price per unit

-

Budgeted revenue of product A = 11,200 x £ 150 = £ 1,680,000
Budgeted revenue of product B = 12,900 x £ 90 = £ 1,161,000


Blue Bubble – Assignment 2

16

Next, P2 budget production was established from two products A and B through two processes in
a specified order. To calculate the number of finished products to be manufactured in P1, the
total required for products used in the process 2 must be determined first. Production required
from process 2 will be established basing on finished good required that is relied on budgeted
sales in units.
Production budget (P2)
A
Budgeted sales in units
11,200
Plus: Ending finished goods inventory
700
Total units required
11,900
Less: beginning finished goods inventory
500
Required production in units
11,400
Good yield
95%
Gross product require
12,000
Table 7: Production budget in the department 2 (unit: £)

B
12,900
180
13,080
200
12,880
92%
14,000

Note for production budge in P2:
According to scenario, in manufacturing process, reject rates arising from an inspection at the
end of cost center 2 (P2) are 5% of product A and 8% of product B.

 Good yield of product A and product B in cost centre 2 respectively:
- Good yield in cost centre P2 of product A = 100% - 5% = 95%
- Good yield in cost centre P2 of product B = 100% - 8% = 92%
Based on good yield, gross production needed from cost center P2 can be calculated by the
formula:
Gross product require for product =

-

Gross product require for product A = 11,400 : 95% = 12,000 (units)
Gross product require for product B = 12,880 : 92% = 14,000 (unit)


Blue Bubble – Assignment 2

17

Production budget of process 1 is based on production budget of process 2
Production budget (P1)
A
Budgeted sales in units
12,000
Plus: Desired ending work in process
300
Total units required
12,300
Less: beginning work in process inventory
150
Required production in units
12,150
Good yield
90%
Gross product required
13,500
Table 8: Production budget of the department 1 (unit: £)

B
14,000
125
14,125
100
14,025
85%
16,500

Note for production budge in P1:

According to scenario, in manufacturing process, reject rates arising from an inspection at the
end of cost center 1 (P1) are 10% of product A and 15% of product B.

 Good yield of product A and product B in cost centre 1 respectively:
- Good yield in cost centre P1 of product A = 100% - 10% = 90%
- Good yield in cost centre P1 of product B = 100% - 15% = 85%
Based on good yield, gross production needed from cost center P1 can be calculated by the
formula:
Gross product require for product =

-

Gross product require for product A = 12,150 : 90% = 13,500 (unit)
Gross product require for product B = 14,025 : 85% = 16,500 (unit)

Thirdly, it is assumed that all direct material issues will be utilized in cost center P1, so Direct
Material budget will be built based on production required of cost center P1.
Direct material budget
Required production in units (P1)
Direct material per unit

X
(Product A)
13,500
2.5

Y
(Product B)
16,500
3

Blue Bubble – Assignment 2

18

Total Direct material required

33,750

49,500

500

300

600
33,850
£ 20
£ 677,000

350
49,550
£8
£ 396,400

Less: beginning Direct material inventory
Plus: desired ending Direct material inventory
Direct material to be purchased in unit
Budgeted direct material cost

Budgeted cost of Direct material to be purchased

Table 9: Direct material budget in P1 (unit: £)

Note for direct material budget in P1:
We have: Product A is manufactured by material X and product B is produced by material Y.

 Total direct material = Required production x Direct material needed per unit
- Total direct material X required for product A = 13,500 x 2.5 = 33,750 (pound)
- Total direct material Y required for product B = 16,500 x 3 = 49,500 (pound)
- Budgeted cost of direct material X = 33,750 x £ 20 = £ 677,000
- Budgeted cost of direct material Y = 49,500 x £ 8 = £ 396,400
Fourthly, direct labor budget of P1 and P2 are based on required production.
Budgeted direct labor cost in Process 1
Gross production in units
DL required per unit, in hours
Total DL hours required
Budgeted cost per DL hour
Budgeted direct labor cost in P1

A
13,500
1
13,500
£ 10
£ 135,000

Table 10: Budgeted direct labor cost in P1 (unit: £)
Note for direct labor cost budget in P1:
We have: Require product in units = Gross production required in each department.

-

Total direct labor required for product A in P1

= 13,500 x 1= 13,500

B
16,500
0.6
9,900
£ 10
£ 99,000


Blue Bubble – Assignment 2

-

Total direct labor required for product B in P 1
Budgeted cost of direct labor for product A in P1
Budgeted cost of direct labor for product B in P 1

19
= 16,500 x 0.6 = 9,900
= 13,500 x $10 = £ 135,000
= 9,900 x $10 = £ 99,000

Budgeted direct labor cost in Process 2
A

Gross production in units
12,000
DL required per unit, in hours
2
Total DL hours required
24,000
Budgeted cost per DL hour
£ 10
Budgeted DL cost in P2
£ 240,000
Table 11: Budgeted direct labor cost in P2 (unit: £)

B
14,000
0.9
12,600
£ 10
£ 126,000

Note for direct labor cost budget in P2:
We have: Require product in units = Gross production required in each department.

-

Total direct labor required for product A in P2
Total direct labor required for product B in P2
Budgeted cost of direct labor for product A in P2
Budgeted cost of direct labor for product B in P2

= 12,000 x 2 = 24,000

= 14,000 x 0.9 = 12,600
= 24,000 x £ 10 = £ 240,000
= 12,600 x £ 10 = £ 126,000

Fifthly, manufacturing overhead budgets of cost centre P1 and P2 will be created by direct labor
hours of each cost centre.
Budget for fixed manufacturing overhead in P1
Budgeted DL hours required for each product
Budgeted total DL hours required in P1
Budgeted fixed manufacturing overhead rate
Budgeted fixed overhead allocated to each product

A
13,500
23,400

B
9,900

£ 3.5
£ 47,250

£ 34,650

Table 12: Budgeted for fixed manufacturing overhead in P1 (unit: £)
Note for budgeted for fixed manufacturing overhead in P1:

-

Total DL hours required = 13,500 +9,000 = 23,400

Budgeted fixed overhead rate =
= = £ 3.5 per hour


Blue Bubble – Assignment 2

-

20

Budgeted fixed overhead allocated to product A = £ 3.5 x 13,500 = £ 47,250
Budgeted fixed overhead allocated to product B = £ 3.5 x 9,900 = £ 34,650

After that, Manufacturing overhead in P1 will be built by results of fixed manufacturing
overhead budget as follow:
Budget for total manufacturing overhead in P1
Total DL hours required
Budgeted variable overhead per DL hours
Total budgeted variable manufacturing overhead

A
13,500
£5
£ 67,500

B
9,900
£5
£ 49,500

Plus: Total budgeted fixed manufacturing overhead
£ 47,250
£ 34,650
Total budgeted manufacturing overhead
£ 114,750
£84,150
Table 13: Budget for total manufacturing overhead in P1 (unit: £)
Note for budget for total manufacturing overhead in P1:

-

Total budgeted variable mfg. OVH of product A = 13,500 x £ 5 = £ 67,500
Total budgeted variable mfg. OVH of product B = 9,900 x £ 5 = £ 49,500
Manufacturing overhead cost of product A = £ 67,500 + £ 47,250 = £ 114,750
Manufacturing overhead cost of product B = £ 49,500 + £ 34,650 = £ 84,150

Setting fixed manufacturing overhead and manufacturing overhead budgets in cost center P2 in
the same way
Budget for fixed manufacturing overhead in P2
Budgeted DL hours required for each product
Budgetet total DL hours required in P1
Bugeted fixed manufacturing overhead rate
Budgeted fixed overhead allocated to each product

A
B
24,000
12,600
36,600
£ 3.4

£ 1,600
£ 42,840

Table 14: Budget for fixed manufacturing overhead in P2 (unit: $)
Note for budgeted for fixed manufacturing overhead in P2:

-

Total DL hours required = 24,000 + 12,600 = 36,600
Budgeted fixed overhead rate = = = £ 3.4 per hour
Budgeted fixed overhead allocated to product A = £ 3.4 x 24,000 = £ 81,600
Budgeted fixed overhead allocated to product B = £ 3.4 x 12,600 = £ 42,840


Blue Bubble – Assignment 2

21

After that, Manufacturing overhead in P2 will be built by results of fixed manufacturing
overhead budget as follow:
Budget for total manufacturing overhead in P2
A
Total DL hours required
24,000
Budgeted variable overhead per DL hours
£3
Total budgeted variable overhead
£ 72,000
Budgeted fixed overhead
£ 81,600

Total budgeted overhead
£ 153,600
Table 15: Budget for total manufacturing overhead in P2 (unit: £)

B
12,600
£3
£ 37,800
£ 42,840
£ 80,640

Note for budget for total manufacturing overhead in P2

-

Total budgeted variable mfg. OVH of product A = 24,000 x £ 3= £ 72,000
Total budgeted variable mfg. OVH of product B = 12,600 x £ 3 = £ 37,800
Manufacturing overhead cost of product A = £ 72,000 + £ 81,600 = £ 153,600
Manufacturing overhead cost of product B = £ 37,800 + £ 42,840 = £ 80,640

Sixthly, making Expense budget of Material used regarded as material expenditure in P1.
Ending inventory budget for materials
Budgeted cost of DM purchase
+ Beginning DM inventory
DM available for use
- Budgeted cost of desired ending DM inventory

X
£ 677,000
£ 9,000

£ 686,000
£ 12,000

Budgeted cost of DM to be use
£ 674,000
Table 16: Ending inventory budget for materials (unit: £)
Note for Ending inventory Budget for materials:
We have:
Budgeted cost of ending DM inventory = Ending DM inventory x Cost per DM unit

-

Budgeted cost of ending DM inventory of X = £ 20 x 600 = £ 12,000
Budgeted cost of ending DM inventory of Y = £ 8 x 350 = £ 2,800

Y
£ 396,400
£ 1,800
£ 398,200
£ 2,800
£ 395,400


Blue Bubble – Assignment 2

22

Seventhly, building budget of work-in-process and costs of work-in-process to be used in P2
Ending inventories budget for WIP
A

B
Budgeted cost of DM to be used
£ 674,000
£ 395,400
Budgeted direct labor cost
£ 135,000
£ 99,000
Total budgeted overhead
£ 114,750
£ 84,150
Budgeted total manufacturing costs in P1
£ 923,750
£ 578,550
Total good units of output in P1
12,150
14,025
Budgeted cost per unit of WIP
£ 76
£ 41
Budgeted ending WIP inventory in units
300
125
Budgeted cost of ending WIP inventory
£ 22,800
£ 5,125
Table 17: Ending inventories budget for WIP in P1 (unit: £)
Note for ending inventories budget for WIP in P1

-

Budgeted cost per unit A of WIP = = £ 76
Budgeted cost per unit B of WIP= = £ 41
Budgeted cost of ending WIP inventory of product A = £76 x 300 = £ 22,800
Budgeted cost of ending WIP inventory of product B = £ 41 x 125 = £ 5,125

Budgeted cost of WIP to be used in P2 is cost budget of units which are transferred from cost
center P1.
Budgeted cost of WIP to be used in P2
Cost of beginning WIP
Plus: Total budgeted manufacturing cost in P1

A

B

£ 9,750

£ 3,800

£ 923,750

£ 578,550


Blue Bubble – Assignment 2

23

Cost of total WIP available for use
£ 933,500

Less: budgeted ending WIP
£ 22,800
Budgeted cost of WIP to be used in P2
£ 910,700
Table 18: Budgeted cost of WIP to be used in P2 (unit: £)

£ 582,350
£ 5,125
£ 577,225

Eighthly, setting Ending inventories Budget for finished goods and cost of goods sold. Besides,
ending inventories Budget is based on manufacturing costs and production required of P2.
Ending inventories budget for FG

A

Budgeted cost of WIP to be used
£ 910,700
Budgeted direct labor cost in P2
£ 240,000
Total budgeted overhead in P2
£ 153,600
Total budgeted manufacturing cost in P2
£ 1,304,300
Good units of output in P2
11,400
Budgeted cost per unit of FG
£ 114.5
Budgeted ending FG in units
700

Budgeted cost of ending FG
£ 80,150
Table 19: Ending inventories budget for FG (unit : £)

B
£ 577,225
£ 126,000
£ 80,640
£ 783,865
12,880
£ 60.9
180
£ 10,962

Note for ending inventories budget for FG:

-

Budgeted cost per unit A of FG= = £ 114.5
Budgeted cost per unit B of FG= = £ 60.9
Budgeted cost of ending FG inventory of product A = £ 114.5 x 700 = £ 80,150
Budgeted cost of ending FG inventory of product B = £ 60.9 x 180 = £ 10,962

Cost of goods sold budget is established after setting ending finished goods for finished goods.
Budgeted Cost of goods sold
A
Cost of beginning finished goods
£ 50,000
Plus: Total budgeted manufacturing cost in P2
£ 1,304,300

Cost of goods manufactured
£ 1.354,300
Less: budgeted cost of ending FG
£ 80,150
Budgeted cost of goods sold
£ 1,274,150
Table 20: Budgeted Cost of goods sold (unit: £)

B
£ 11,000
£ 783,865
£ 794,865
£ 10,962
£ 783,903


Blue Bubble – Assignment 2

24

Finally, Budgeted Income Statement can be set to show gross profit which the company expects
to achieve in future operation.
Budgeted income statement

A

B

Total

Sales
£ 1,680,000
£ 1,161,000 £ 2,841,000
Cost of goods sold
£ 1,274,150
£ 783,903 £ 2,058,053
£ 405,850
£ 377,097
£ 782,947
Gross profit
Table 21: Budgeted income statement of Phong Phu Company (unit: £)
Note for budgeted income statement:
We have:
Sales of product = Number of unit x Price per unit
- Sale of product A = 11,200 x £ 150 = £ 1,680,000
- Sales of product B = 12,900 x £ 90 = £ 1,161,000

-

Gross profit of product = Sales – Cost of goods sold
Gross profit of product A = £ 1,680,000 - £ 1,274,150 = £ 405,850
Gross profit of product B = £ 1,161,000 - £ 783,903 = £ 377,097

Task 2: Cash budget

1. Cash budget for the second quarter
April
May
June
July

Sales.................................................
$670,000 $700,000 $680,000 $650,000
Cost of goods sold............................
469,000 490,000 476,000 455,000
Gross margin....................................
201,000 210,000 204,000 195,000
Selling and administrative expenses:
Selling expense.............................
82,000
83,000
83,000
84,000
Administrative expense*...............
75,000
78,000
79,000
77,000
Total selling and administrative expenses
157,000 161,000 162,000 161,000
Net operating income.......................
$ 44,000 $ 49,000 $ 42,000 $ 34,000
Table 22: Income statements for April- July
*Includes $16,000 of depreciation each month.

April

May

June

Quarter


Blue Bubble – Assignment 2
Cash sales
Credit sales
February
March
April
May
June
Total cash collections

25
$268,000
76,800
273,000
40,200

$280,000

$272,000

$820,000
$1,206,600

78,000
281,400
42,000

80,400
294,000
40,800
$658,000
$681,400
$687,200 $2,026,600
Table 23: Schedule of expected cash collections

Sales are 40% for cash and 60% on account. So, we have:

• Cash sales of April = $670,000 x 40% = $268,000
Sales on account are collected over a three-month period with 10% collected in the month of
sale, 70% collected in the first month following the month of sale, and the remaining 20%
collected in the second month following the month of sale. February’s sales totaled $640,000,
and March’s sales totaled $650,000.

• Sales on account of April = $670,000 x 60% = $402,000
=> Credit sales of April that are collected in April = $402,000 x 10% = $40,200

• Sales on account of March = $650,000 x 60% = $390,000
=> Credit sales of March that are collected in April = $390,000 x 70% = $273,000

• Sales on account of February = $640,000 x 60% = $384,000
=> Credit sales of February that are collected in April = $384,000 x 20% = $76,800
The way to calculate cash collections is the same with May and June.

April
Budgeted cost of goods sold
Add desired ending inventory

May

June

Quarter

$469,000

$490,000

$476,000

$1,435,000

98,000

95,200

91,000

284,200