Accounting Business Reporting for Decision Making

394 Accounting: Business Reporting for Decision Making

Developing the labour budget

To develop the labour budget Anni met with both the production manager and the human resource man-

ager. Based on production requirements, she was advised of the labour hours required to meet the pro-

duction and the type of employee skills required to undertake the tasks. Wage rates were then sourced

from the payroll manager. Based on these discussions, Anni identified that the quantity and cost of

labour per mountain bike are expected to be two hours per bike at $20 per hour. Anni prepares the labour

budget, which forecasts the number of total labour hours and the total labour costs required per quarter

to produce the 101 000 bikes (illustrative example 9.8).

ILLUSTRATIVE EXAMPLE 9.8

Mountain Blue Bikes labour budget

Mountain Blue Bikes Labour budget for the year ended 31 December 2016

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Units to be produced (refer production budget) Labour time per bike Total required labour hours Labour cost per hour

31 000 × 2 62 000 × $20

20 000 × 2 40 000 × $20

10 000 × 2 20 000 × $20

40 000 × 2 80 000 × $20

101 000 × 2 202 000 × $20

Total labour cost $1 240 000 $ 800 000 $ 400 000 $1 600 000 $4 040 000

Developing the production overhead budget and the selling

and administrative expense budget

In addition to the costs of labour and material, other production and support department costs need to be

included in the budgetary process. Information collected from last year’s budget and updated for current

prices assists in preparing the production overhead budget and the selling and administrative expense

budget as shown in illustrative examples 9.9 and 9.10.

ILLUSTRATIVE EXAMPLE 9.9

Mountain Blue Bikes production overhead budget

Mountain Blue Bikes Production overhead budget for the year ended 31 December 2016

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Depreciation Supplies Indirect labour Miscellaneous

$1 000 000 1 000 000 1 500 000 200 000

$1 000 000 500 000 1 000 000 200 000

$1 000 000 250 000 750 000 200 000

$1 000 000 250 000 250 000 200 000

$ 4 000 000 2 000 000 3 500 000 800 000

Total production overhead $3 700 000 $2 700 000 $2 200 000 $1 700 000 $ 10 300 000