28. Budgeting for Production Costs

Question 1

What are the three production cost budgets?

Answer 1

1. Direct materials budget
2. Direct labor budget
3. Manufacturing overhead budget

Question 2

Describe the process of creating a direct materials budget

Answer 2

1. Multiply budgeted production volume by the standard input quantity to determine total direct materials needed.
2. If the organization maintains inventory of direct materials, determine materials to purchase as follows: Production needs + Ending inventory – Beginning inventory.
3. Multiply the materials to be purchased by the standard price of materials to determine the final direct materials budget

Question 3

Describe the process of creating a direct labor budget.

Answer 3

1. Multiply budgeted production volume by the standard quantity of hours to determine direct labor hours needed
2. Multiply direct labor hours needed by the standard price for labor to determine the budgeted direct labor payroll

Question 4

Describe the two types of manufacturing overhead

Answer 4

Manufacturing overhead is separated into variable costs and fixed costs.

1. Variable costs will vary as a total amount but are constant (fixed) as a cost rate.
2. Fixed costs are fixed at the total amount, but will have a varying fixed cost rate based on changing levels of production volume.

Question 5

How are overhead allocation rates calculated?

Answer 5

Overhead allocation rate = Budgeted annual MOH costs ÷ Budgeted annual activity volume

Question 6

What is a standard cost sheet?

Answer 6

A standard cost sheet lists the standard input quantity and standard input price to determine the production cost for each unit of a certain good