Ending Finished Goods Inventory Budget

Developing the Operating Budget

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In developing the operating budget for a business, you develop the ending finished goods inventory budget after the direct materials, direct labor, and overhead budgets are developed.

The ending finished goods inventory budget is necessary to complete the cost of goods sold budget and the balance sheet. This budget assigns a value to every unit of product produced based on raw materials, direct labor, and overhead.

The selling and administrative expense budget deals with non-manufacturing costs such as freight or supplies.

What is an Operating Budget?

The first order of budgeting for any small business owner is devising an operating budget, which is one of the two parts of the master budget. The purpose of the operating budget is to describe the income-generating activities of the firm such as sales, production, and finished goods inventory.

The ultimate conclusion of the operating budget is the pro forma income statement and the operating profit margin. The operating profit margin is not the same as net profit, which you cannot calculate until you prepare the financial budget. The operating budget is prepared before the financial budget since many of the financing activities aren't known until the operating budget is prepared.

What are the Major Parts of the Master Budget?

Depending on the size of the firm, the master budget is a comprehensive budget planning document.

It usually has two parts, the operating budget and the financial budget. The operating budget shows the income-generating activities of the firm, including revenues and expenses. The result is a budgeted income statement.

The financial budget shows the inflows and outflows of cash and other elements of the firm's financial position.

The inflows and outflows of cash come from the cash budget. As such, the result of the financial budget is the budgeted balance sheet. Operating budgets are prepared first as information from the operating budgets is needed for the financial budgets.

Example of an Ending Finished Goods Inventory Budget

In developing the entire operating budget as an example for a small business, we are using a small hypothetical business, Art Craft Pottery, as an example. The following information can be used to develop the ending finished goods inventory budget:

Information Needed

You have already developed the direct materials, direct labor, and overhead budgets. You use information from those budgets to develop this budget.

Exercise for Art Craft Pottery

Step 1 is to calculate the unit product cost using the budgets above.

Direct materials: Cost of Clay = $3; Cost of Color = $0.20

Cost of Direct Materials = $3.20

Direct Labor: 0.12 hr @ $10 = $1.20

Overhead: Variable: 0.12 @ $5 = 0.60

Fixed: 0.12 @ $9.59* = 1.15

Total Unit Cost = $3.20 (Direct Materials) + $1.20 (Direct Labor) + $1.75 (Overhead) = $6.15 per unit

*Budgeted Fixed Overhead/Budgeted Direct Labor Hrs = $6,580/686.4 = $9.59

Ending Finished Goods Inventory Budget for Art Craft Pottery

Pottery 200 units

Unit Cost X$6.95

Total Ending Inventory = $1,390

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