Phoenix Company’s 2019 master budget included the following fixed budget report. It is based on an expected production and sales volume of 15,000 units. PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2019 Sales $ 3,000,000 Cost of goods sold Direct materials $ 975,000 Direct labor 225,000 Machinery repairs (variable cost) 60,000 Depreciation—Plant equipment (straight-line) 300,000 Utilities ($45,000 is variable) 195,000 Plant management salaries 200,000 1,955,000 Gross profit 1,045,000 Selling expenses Packaging 75,000 Shipping 105,000 Sales salary (fixed annual amount) 250,000 430,000 General and administrative expenses Advertising expense 125,000 Salaries 241,000 Entertainment expense 90,000 456,000 Income from operations $ 159,000 Required: 1&2. Prepare flexible budgets for the company at sales volumes of 14,000 and 16,000 units and classify all items listed in the fixed budget as variable or fixed.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Phoenix Company’s 2019
| PHOENIX COMPANY Fixed Budget Report For Year Ended December 31, 2019 |
|||||
| Sales | $ | 3,000,000 | |||
| Cost of goods sold | |||||
| Direct materials | $ | 975,000 | |||
| Direct labor | 225,000 | ||||
| Machinery repairs (variable cost) | 60,000 | ||||
| 300,000 | |||||
| Utilities ($45,000 is variable) | 195,000 | ||||
| Plant management salaries | 200,000 | 1,955,000 | |||
| Gross profit | 1,045,000 | ||||
| Selling expenses | |||||
| Packaging | 75,000 | ||||
| Shipping | 105,000 | ||||
| Sales salary (fixed annual amount) | 250,000 | 430,000 | |||
| General and administrative expenses | |||||
| Advertising expense | 125,000 | ||||
| Salaries | 241,000 | ||||
| Entertainment expense | 90,000 | 456,000 | |||
| Income from operations | $ | 159,000 | |||
Required:
1&2. Prepare flexible budgets for the company at sales volumes of 14,000 and 16,000 units and classify all items listed in the fixed budget as variable or fixed.
Variable cost changes with the number of units of output.
Fixed Cost remains the same irrespective of the number of output.
So to prepare budget, it is important to categorise the expenses into variable cost and fixed cost to ascertain the costs for the period.
Variable cost per unit remains the same.
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