Mama Italiano Sauce is in the process of preparing a production cost budget for

Question

Mama Italiano Sauce is in the process of preparing a production cost budget for May. The actual costs in April were:

Mama Italian Sauce

Production Cost Budget

April 2008

Production - Jars of sauce

20,000

Ingredient cost (variable)

$16,000

Labor cost (variable)

9,000

Rent (fixed)

4,000

Depreciation (fixed)

6,000

Other (fixed)

1,000

Total

$36,000

Using this information, prepare a budget for May stating the total amount for the May budget. Assume the budget will increase to 25,000 jars of sauce reflecting anticipated sales increase related to a new marketing campaign

Mama Italian Sauce

Production Cost Budget

April 2008

Production - Jars of sauce

20,000

Ingredient cost (variable)

$16,000

Labor cost (variable)

9,000

Rent (fixed)

4,000

Depreciation (fixed)

6,000

Other (fixed)

1,000

Total

$36,000

Explanation / Answer

Production Cost Budget for May, 2008

budgeted units for production (given)        =25000 jars

Ingredient Cost *(working note-1)                                                           = $ 20000

Labour Cost * (working note-2)                                                              = $ 11250

Rent (Working Note -3)                                                                       = $ 4000

Depreciation (Working Note -3)                                                             = $ 6000

Other Fixed Exp. (Working Note -3)                                                      = $ 1000

Total                                                             $ 42250

i.e Total budgeted production cost for May 2008 on 25000 jars will be $ 42250           

Working Note -1

Ingredients cost (variable) per unit = $16000/20000 units (as per April actual figures)

                                                           = $ 0.80 per unit

ingredients cost for May on budgeted units of 25000 Jars = 25000*0.80 = $ 20000

Working Note -2

Labour cost (variable) per unit = $9000/20000 units (as per April actual figures)

                                                           = $ 0.45 per unit

Labour cost for May on budgeted units of 25000 Jars = 25000*0.45 = $ 11250

Working Note -3

Fixed nature of expenses remain unchanged irrespective of number of units to be produced. On the Other hand, variable expenses changes in the porportion of change in number of units to be produced.

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