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In this chapter we will consider master budget for manufacturing organisations. This chapter presents the following content: Cost classifications, product costs, manufacturing process, cost of production requires the preparation of the following budgets, factory overhead application rate,.and other contents. | Chapter 6 Master budget for manufacturing organisations 6- Cost classifications Product costs are the costs of converting raw materials into a finished product. 1. Raw materials 2. Direct labour 3. Factory overhead Period costs are all other costs associated with the business. 1. Marketing expenses 2. General and administration expenses 3. Financial expenses 6- Product costs Direct costs: major items of cost that can be relatively easily traced to the product, such as raw materials and direct labour. Raw materials and direct labour Prime cost Indirect costs: cannot not be easily traced directly to the product. All factory overhead. Factory overhead: all indirect costs of running a factory. Examples: indirect materials, indirect labour, factory insurance. 6- Manufacturing process input process output Direct materials Direct labour & factory overhead Finished goods 6- Cost of production requires the preparation of the following budgets Sales Production Direct . | Chapter 6 Master budget for manufacturing organisations 6- Cost classifications Product costs are the costs of converting raw materials into a finished product. 1. Raw materials 2. Direct labour 3. Factory overhead Period costs are all other costs associated with the business. 1. Marketing expenses 2. General and administration expenses 3. Financial expenses 6- Product costs Direct costs: major items of cost that can be relatively easily traced to the product, such as raw materials and direct labour. Raw materials and direct labour Prime cost Indirect costs: cannot not be easily traced directly to the product. All factory overhead. Factory overhead: all indirect costs of running a factory. Examples: indirect materials, indirect labour, factory insurance. 6- Manufacturing process input process output Direct materials Direct labour & factory overhead Finished goods 6- Cost of production requires the preparation of the following budgets Sales Production Direct materials usage Direct labour Factory overhead 6- Production budget (p. 131) 6- Factory overhead budget (p. 135) 6- Direct materials and labour budget 6- Factory overhead application rate This allows the business to charge the product with an estimated amount. Application rate can be calculated on different bases: per unit direct labour cost direct labour hours machine hours. Refer p. 136. 6- Cost of goods sold budget Merchandising business stock @ beginning add net purchases cost of goods available for sale less stock @ end cost of goods sold Manufacturing business stock @ beginning add cost of production cost of goods available for sale less stock @ end cost of goods sold 6-
