1. Step 2: PREPARE THE PRODUCTION BUDGET (IN UNITS). The next step in the budgeting process is to plan the production quantities of Casual and Deluxe tables. The only new information managers need to prepare the production budget is the desired level of finished goods inventory. High inventory levels increase the cost of carrying inventory, the costs of quality, and shrinkage costs. Low inventory levels increase setup costs and result in lost sales because of product unavailability. Stylistic’s management decides to maintain the inventory of Deluxe tables but increase the inventory of Casual tables to avoid the supply shortages that hurt the company in 2019.
  1. The manufacturing manager prepares the production budget, shown in Schedule 2. She calculates the units of finished goods to be produced as follows:

Budgetproduction(units)=Budgetsales(units) + Target endingfinished goodsinventory(units) − Beginningfinished goodsinventory(units)

<p>A table shows the production budget for the year ending December 31, 2020</p>

Schedule 2: Production Budget (in Units) for the Year Ending December 31, 2020 is as follows:

  1. Budgeted sales in units (Schedule 1)
    • Casual: 50,000 units
    • Deluxe: 10,000 units
  2. Add target ending finished-goods inventory
    • Casual: 11,000 units
    • Deluxe: 500 units
  3. Total required units
    • Casual: 61,000 units
    • Deluxe: 10,500 units
  4. Deduct beginning finished-goods inventory
    • Casual: 1,000 units
    • Deluxe: 500 units
  5. Units of finished goods to be produced
    • Casual: 60,000 units
    • Deluxe: 10,000 units
  1. The production budget drives budgeted production costs (for example, direct materials, direct manufacturing labor, and manufacturing overhead) after considering efficiency improvements planned for 2020. Costs are also influenced by actions such as product redesign needed to achieve the revenues budget.
  2. Managers are always looking to reduce costs, for example, by improving processes, streamlining manufacturing, and reducing the time to complete various activities such as setting up machines or transporting materials. Making these changes improves a company’s competitiveness, but also requires investment. The budgeting exercise is an ideal time for managers to evaluate plans and request the needed financial resources.

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  1. Step 3: PREPARE THE DIRECT MATERIALS USAGE BUDGET AND DIRECT MATERIALS PURCHASES BUDGET. The budgeted production, calculated in Schedule 2, and the efficiency with which workers use materials determine the quantities and dollars of direct materials used. In determining the direct materials usage budget, senior managers consider process improvements planned to improve quality and reduce waste. The budget motivates production managers to reduce direct material costs.
  2. Like many companies, Stylistic has a bill of materials stored in its computer systems that it constantly updates for efficiency improvements. This document identifies how each product is manufactured, specifying all materials (and components), the sequence in which the materials are used, the quantity of materials in each finished unit, and the work centers where the operations are performed. For example, the bill of materials would indicate that 12 board feet of red oak and 6 square feet of granite are needed for a Casual coffee table and 12 board feet of red oak and 8 square feet of granite are needed for a Deluxe coffee table. Direct materials inventories are costed using the first-in, first-out (FIFO) method. The management accountant uses this information to calculate the direct materials usage budget in Schedule 3A.
<p>A table shows the direct materials usage budget for Stylistic</p>

Schedule 3A: Direct Materials Usage Budget in Quantity and Dollars for the Year Ending December 31, 2020 gives the Physical Units Budget and the Cost Budget

The first table is the physical units budget, and details are as follows.

  1. Direct materials required for Casual tables: 60,000 units times 12 board feet of red oak and 6 square feet of granite:
    • Red oak: 720,000 board feet
    • Granite: 360,000 square feet
  2. Direct materials required for Deluxe tables: 10,000 units times 12 board feet of red oak and 8 square feet of granite:
    • Red oak: 120,000 board feet
    • Granite: 80,000 square feet
  3. Total quantity of direct materials to be used:
    • Red oak: 840,000 board feet
    • Granite: 440,000 square feet

The second table is the cost budget, and details are as follows.

  1. Available from beginning direct materials inventory, under a FIFO cost-flow assumption:
    • Red oak, 70,000 board feet times 7 dollars per board foot: 490,000 dollars
    • Granite, 60,000 square feet times 10 dollars per square foot: 600,000 dollars
  2. To be purchased and used this period
    • Red oak, 840,000 minus 70,000 board feet times 7 dollars per board foot: 5,390,000 dollars
    • Granite, 440,000 minus 60,000 square feet times 10 dollars per square foot: 3,800,000 dollars
  3. Direct materials to be used this period:
    • Red oak: 5,880,000 dollars
    • Granite: 4,400,000 dollars
    • Total: 10,280,000 dollars
  1. The only new information needed to prepare the direct materials purchases budget is the desired levels of direct materials inventory. During 2020, Stylistic’s managers plan to increase the inventory of red oak but reduce the inventory of granite as described in Steps in Preparing an Operating Budget. The purchasing manager then prepares the budget for direct material purchases, shown in Schedule 3B:
<p>A table shows the direct material purchases budget for Stylistic</p>

Schedule 3B: Direct Materials Purchases Budget for the Year Ending December 31, 2020 gives the Physical Units Budget and the Cost Budget

The first table is the physical units budget, and details are as follows.

  1. To be used in production (from Schedule 3A):
    • Red oak: 840,000 board feet
    • Granite: 440,000 square feet
  2. Add target ending inventory:
    • Red oak: 80,000 board feet
    • Granite: 20,000 square feet
  3. Total requirements:
    • Red oak: 920,000 board feet
    • Granite: 460,000 square feet
  4. Deduct beginning inventory:
    • Red oak: 70,000 board feet
    • Granite: 60,000 square feet
  5. Purchases to be made
    • Red oak: 850,000 board feet
    • Granite: 400,000 square feet

The second table is the cost budget, and details are as follows.

  1. Red oak, 850,000 board feet times 7 dollars per board foot: 5,950,000 dollars

  2. Granite, 400,000 square feet times 10 dollars per square foot: 4,000,000 dollars

  3. Direct materials to be purchased this period:
    • Red oak: 5,950,000 dollars
    • Granite: 4,000,000 dollars
    • Total: 9,950,000 dollars
  1. Step 4: PREPARE THE DIRECT MANUFACTURING LABOR COSTS BUDGET. To create the budget for direct manufacturing labor costs, Stylistic’s managers estimate wage rates, production methods, process and efficiency improvements, and hiring plans. The company hires direct manufacturing labor workers on an hourly basis. Workers do not work overtime. Manufacturing managers use labor standards, the time allowed per unit of output, to calculate the direct manufacturing labor costs budget in Schedule 4 based on information in Steps in Preparing an Operating Budget. 
<p>A table shows direct manufacturing labor costs budget for Stylistic</p>

Schedule 4: Direct Manufacturing Labor Costs Budget for the Year Ending December 31, 2020 is as follows:

  1. Casual:
    • Output units produced (Schedule 2): 60,000
    • Direct manufacturing labor-hours per unit: 4
    • Total hours: 240,000
    • Hourly wage rate: 20 dollars
    • Total: 4,800,000 dollars
  2. Deluxe:
    • Output units produced (Schedule 2): 10,000
    • Direct manufacturing labor-hours per unit: 6
    • Total hours: 60,000
    • Hourly wage rate: 20 dollars
    • Total: 1,200,000 dollars
  3. Total:
    • Total hours: 300,000
    • Total: 6,000,000 dollars

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