Page 150 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 8: Budgetary Control

Budgeted production and production costs for the whole year are as follows: Notes

Production in Units Product X Product Y
22,000 24,000
Per unit (`) Direct Material 10.00 15.00
Direct Labour 5.00 10.00
Total factory overhead apportioned 88,000 72,000

8.3.2 Materials/Purchase Budget

This budget takes place only after identifying the number of finished products expected to
produce to the tune of production budget, in meeting the needs and demands of the customers
and consumers during the season.
In order to produce to the tune of production budget to meet the market demands, the raw

materials for the production should be maintained sufficient to supply them without any

interruption. To have uninterrupted flow of production, the firm should go for the immediate
procurement of raw materials through the multiplication of raw material required to produce for
a single product with number of units expected to produce.
!
Caution Why the stock of raw materials is deducted from the expected volume of
materials procured for production to the tune of production budget?
If there is any existing stock of raw materials, i.e. opening stock of raw materials available
from the yester seasons or years should be deducted from the volume of materials required
for production to be ordered and placed. The remaining volume should be the volume to
be ordered for production.

Example: The sales manager of the MR Ltd. reports that next year he anticipates to sell
50,000 units of a particular product.

The production manager consults the storekeeper and casts his figures as follows:

Two kinds of raw materials A and B are required for manufacturing the product. Each unit
of the product requires 2 units of A and 3 units of B. The estimated opening balances at the
commencement of the next year are:
Finished product : 10,000 units
Raw Materials A : 12,000 units Raw Materials B : 15,000 units
The desirable closing balances at the end of the next year are
Finished products : 14,000 units
Raw materials A : 13,000 units Raw materials B : 1,000 units
Prepare production budget and materials purchase budget for the next year:

Solution:
The first step is to prepare the production budget. To identify the volume of materials required

for production by considering the production budget and the closing stock of materials of A and
B respectively.
Why the closing stock of raw materials has to be added with estimated consumption? The
purpose of adding the closing stock of raw materials is to anticipate the future demand of them,

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