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Hi,Sir.
I hope that you are don’t mind me to ask more questions from you.because I feel that October is coming,my mock exam is soon to come?I find it useful to ask question rather than study back for the notes?i hope this method is work for me?
Ratty has budgeted next month’s sales at 2500 units .Opening and closing inventories are as follows:
opening closing
(Actual). (Budgeted)
Finished goods(units). 2000. 2500
Raw materials(kilos). 400. 1400
Work in progress. – –Each item of finished goods requires:
2 kilos of direct material at $3 a kilo
1 hour of direct labour at $11 per hourFactory overhead is applied at $7 per direct labour hour.
What is the expected production cost for next month?
The answer is $72000
Kindly reply,
Thank you.
Production=Sales + closing bal finished goods – opening bal finished goods
Purchases=material usage +closing bal rm – opening bal rm
please note that these 2 equations are very very very important and used extensively.
——————————————————–the first eqn gives u the total units that need to be produced in the period. thus
production= 2500 + 2500 – 2000 = 3000 units
now that we know how many units r to be produced, we can calculate the amount of rm needed.
———————————————————–since 2 kg are used for each unit, means for 3000 units we need:
3000 x 2 = 6000 kg.
we can now calculate the purchases:
purchases = usage + cl bal – op bal
purchases = 6000 +1400 – 400 = 7000 kgthus we need to purchase 7000 kg and the cost will be:
7000 x 3 = $21,000
———————————————————–
For the labor cost, the rate is $11/hr and 1 labor hr is used to produce one unit of finished goods.so, the cost of 3000 units will be 3000 hrs x 11 = 33,000.
——————————————————–
the overhead rate is $7/hr of direct labor hour. since the labor hrs are 3000, the total overhead cost will be:
3000 hrs x 7 – 21,000
——————————————————-
total cost is: 21,000 + 33,000 + 21,000 =75,000
please re check ur answer
——————————————————–Mansoor has already explained it well.
You will have to say which part of his explanation you do not understand.
production budget means we have to calculate ALL costs that are related to produced the budgeted number of units.
these costs consist of:
direct materials
direct labor
direct expenses
production overheads————————————————————-
when bugeting, you decide on a SALES TARGET, ie., the number of units that u have targeted to sell in the coming period.
when u have set the target, u use the 2 equations above to calculate the ACTUAL NUMBER OF FINISHED GOODS TO BE PRODUCED.
most students get confused that if the sales target is set, lets say 1000 units, then we just need to produce 1000. and why do we have to use the complicated formula: production=sales-closing bal + opening bal.
well… the reason is that you already have inventory on hand (opening) and u will want some closing inventory to tide you over the next period.
ifr we take a simple example of opening inventory then lets say u had 300 units as opening inv and ur target sales is 1000.. by this, u only need to produce 700 units.
hope u understand this.
———————————————————
now, lets say u wanted that at end of period, u wanted 600 units left in closing inventory.
so from the previous para, u wd need to add 600 to 700 which will give u 1300 units to be produced.
these 2 are expressed as one equation:
production = sales +closing-opening
hope this clears up some confusion
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