Income And Expenditures
A budget is an estimate of income and expenditures for a selected period of time. In this section of your project you are going to work on creating a production cost budget.
When evaluating the costs used for budgeting, there are various cost behavior patterns which will impact the budgeting of the costs at various production levels. The following are the most common:
Variable costs: Costs that change in proportion to changes in production volume. For example, the cost of materials used in the production of the product.
Fixed costs: Costs that do not change in response to changes in activity levels. For example, the depreciation cost associated with owning a machine used in the production process.
Mixed costs: Costs that contain both a variable element to cost and a fixed element to the cost. For example, an employee may receive a salary plus commissions.
Step Costs: Costs that remain fixed for a range of volume but then increases to a higher cost once a threshold is exceeded. For example, a third shift is being added to handle the increased production level, requiring the addition of a salaried supervisor for the new shift.
The most important step in coming up with a cost budget is properly identifying which behavior type each cost displays so that it can be properly budgeted. Once you have identified which category the identified cost belongs, you are then able to estimate how that cost would vary (if at all) based on the projected production level. Now the production cost budget can be prepared based on the production level and the behavior patterns of the associated costs.
You are given the following costs from last month based on a production level of 800 units. Based on the production level increasing to 1,000 units for this month, determine the production cost budget for next month:
|Cost Detail||Cost Behavior|
|Direct labor||$ 20,100||Variable|
|Supervisor salaries||$ 22,000||Fixed|
|Indirect materials||$ 610||Variable|
For costs that vary based on the production level, we will divide the original cost by the original production level to get a cost per unit. Then we can calculate the cost for the current budget by multiplying the cost per unit by the new production level. Fixed costs do not vary, so they would remain the same for the current production cost budget
|Current Budget Units||1,000|
|Cost Detail||Cost Behavior||Cost per Unit||Budgeted Costs|
|Material||$ 50,000||Variable||$ 62.50||$ 62,500|
|Direct labor||$ 20,100||Variable||$ 25.13||$ 25,125|
|Depreciation||$ 8,000||Fixed||N/A||$ 8,000|
|Supervisor salaries||$ 22,000||Fixed||N/A||$ 22,000|
|Indirect materials||$ 620||Variable||$ 0.78||$ 775|
|Rent||$ 5,500||Fixed||N/A||$ 5,500|
|Total||$ 106,220||$ 123,900|
Based on a production level of 1,000 units, the cots would be $123,900 for the month.