 Hello in this lecture, we're gonna continue on with the master budget that we started the master budget last time So if you haven't seen the first part of this You may want to look at that first and then move on to the second piece of it The second piece here is including direct labor factory overselling general and administrative parts of the master budget We will be able to first a word from our sponsor Well, actually these are just items that we picked from the YouTube shopping affiliate program But that's actually good for you because these aren't things that we're just given to us from some large corporation Which we don't even use in exchange for us selling them to you These are things that we actually researched purchase and use ourselves Acer 27 inch monitor. I've been using an Acer monitor as my primary monitor for a few years now This is the first Acer monitor that I have used after having used a series of different brands of monitors in the past The Acer monitor has been performing well, and I'm trusting the Acer brand more and more as I use the monitor I have a 27 inch monitor, which I think is ideal for what I do which is of course the screen recording and the editing if you would like a commercial free Experience consider subscribing to our website at accounting instruction calm or accounting instruction dot think of it Calm where we have many different courses You can purchase one at a time or have a subscription model given you access to all the courses courses which are well organized have other resources like Excel files and PDF files to download and no commercials List the components of the master budget create direct labor budget create factory overhead budget Create the selling expense budget and create the general and administrative budget Alright, so let's go through the process first We won't go in detail of here But we do want to keep in mind the fact that all these budgets are going to tie together and we're going to do it in This order in order to get to our master financial statements budgets of the income statement to balance you at the cash flow budget So we're gonna start off with the sales budget Then we need to do the production budget in order to get the units that we need to produce Then once we have that we can figure out how much the direct materials will need how much direct labor will need How much overhead will need we can also have the capital expenditure budget at this point as well as the selling and Administrative budget then we can have the total cash budget that we will need and then we can create the balance sheet and The budgeted income statement and the budgeted statement of cash flows This is the order we need to go through in order to Have everything flow in the proper format because many of these steps need to happen Prior to another thing happening. So here we go for now. Remember that last time we talked We already did the sales budget So we did that last time here's just a recap of what it looked like We use that sales budget in order to create the production budget how much units we're going to produce We needed to produce and then we use that for step three to have the raw materials budget That's where we left off last time now. We're moving forward this time. We'll move forward to the direct labor budget. So No, we're jumping back to part two here. I'm going to use the production budget to help with part four Which is the direct labor budget. That's the order that we're doing this end So we have the units that we're going to produce. These are how many units we're going to produce We're talking we're looking at like guitars of this how many guitars we need to produce We're they're gonna think about how much labor will we need in order to produce that then, okay? Well in July, we're gonna say the budgeted production We're gonna have the production is just being pulled down for this calculation. So there it is for July There it is for August coming straight down and there it is for September So that's how these two budgets are related the production budget How much we're gonna produce and the direct labor budget? How much hours are we gonna have to need and how much money we're gonna have to spend for the labor? We're gonna take that we're gonna take that multiply times the labor required per unit now We're gonna say it takes a half an hour half, you know point five hours We usually think about labor when we think about paying people hourly obviously But when we start to measure things it could get very precise You might see something broken out of course in terms of minutes How many minutes does it take to get something done and just be aware that you'll need a conversion if that happens? Because there's 60 minutes and the conversion can be a little bit tricky So you just got to make sure that when you're thinking about The units of time the conversion between minutes to hours here. We're just saying it takes Half an hour. I'm not putting 30 minutes We're putting half an hour and that of course lines up nicely to when we have to multiply times The hourly rate. That's what we're gonna need. So you also may be thinking well What if we pay someone salary in this type of thing? We're thinking about hourly wages in this case when we're thinking about producing the item if people get paid differently We might have to have some kind of estimate in order to do a calculation like this We're gonna need some estimates in the budget in order to figure this out This is the type of area where you can probably picture someone with a stopwatch trying to figure out how long it takes To do a particular process and trying to figure these things out and refine our estimate down But it will need to be some type of estimate. All right So then we're gonna say that the total hours needed then is going to be the in this case the 19586 times the point five half an hour is the 9,793 hours the 20,000 times point five is the 10 the 25 times the point five is the 10 to 50 that's how many hours we are projecting out We will then have the hourly rate which we're saying is $14 an hour Again, some people might make more some people might make less we could get into a very complicated projection on how many you know How much hours it would be in different pay levels? But we need some estimate and this would be the type of estimate that we would have them and then of course if we Multiply that out if we have the hours times The rates per hour then we can get the dollar amounts. We got the hours times the rate per hour We get the dollar amount the hours times the rate the dollar amount This would be the total that we're gonna extend in Dollars again make sure that if you see something that's in minutes Make sure that you make that conversion two hours in order to multiply then times What's probably gonna be the hourly rate is how it's game We don't usually think about the minute rate in terms of pay So be careful on that now. We're gonna take the direct labor budget and help us to Create the factory overhead budget or we're gonna create the factory overhead budget now when we think about factory overhead budget The thing that we need to keep in mind is the fact that usually there's two components to factory overhead We have some costs that are going to be variable and some that are fixed We may have some mixed costs even but we need to break out those two We need to figure out how are we gonna break these things out? How are we gonna deal with the variable portion the fixed portion very? I mean the fixed portion is usually pretty easy because that's just gonna be the same We can like take last year's numbers usually and just you know project them forward They're not gonna change they're fixed kind of like the rent variable will change in some way and this example to reflect this in this example we're gonna take the Direct labor hours which are being pulled down from the direct labor budget here direct labor hours direct labor budget We're gonna multiply that times the variable factory overhead rate So that's gonna be in this case 2.6 So that's gonna be the givens for this particular problem again in real life We'd have to be I mean in a book problem We'd have to be given this type of information to calculate the variable portion in some way in real life We would have to figure out some kind of estimate to accurately figure out what the best estimate would be for the variable portion This is what we're using here that gives us the budgeted variable overhead So the budgeted variable overhead the 9 7 9 3 times 2.6 gives us the 25 for 61 the 10,000 times 2.6 gives us the 26,000 and so on and then we come up with the fixed portion Fixed portions pretty straightforward. It's pretty easy. It's kind of like the rent You we just say well, we know what the rent is it's gonna be the same going forward. It's always the same So when we think about the fixed cost we can think about what we traditionally often think about when we think about a budget And that's just well, what was it last year? It's gonna be the same next year That's not the case for everything we've seen But that's that is the case for many pieces and the fixed portion piece is usually in that type of area So then the total then would be the variable portion plus the fixed portion For example the 25 461 plus 21 gives us the 46461 the 26,000 plus 21,000 gives us the 47,000 And so on and so forth until we have the total In terms of the overhead for dollars of the 141 111 All right, now we're gonna look at the selling expense budget We have the same kind of thing when they think about the selling when we think about production of Inventory someone that a company that produces inventory We usually think about the selling and administrative are often the period costs and they're often like overhead in that They have the fixed portion the fixed portion is gonna be easy because the fixed portion is fixed when we think about the selling costs We might think about salespeople salary or the or the cost of the Store that we sell in terms of rent or in terms of depreciation. Those things are usually fixed pretty straightforward We may have the variable portion. However, for example, we could have the budgeted sales Times the sales commission. So if we pay commission, that is something that's basically Variable in nature and we'll have to figure out. Well, okay. Well, that's gonna change. That's not gonna be something That's gonna be straightforward We're gonna need the sales number then if and if all sales are gonna be commissioned sales Then we can take total sales and multiply times the commission if only portion of the sales or commissioned sales We're going to figure out what that portion will be multiply times the commission and if we did that then we're gonna take the sales 494 400 times 9% is the 44 496 and so on and so forth for July, August and September Then we're gonna have the fixed portion. So we have the fixed salaried individuals There's this pretty straightforward We know that we you know, we're gonna take the yearly salary and divide it by 12 and we'll get the yearly So the fixed portion is easy if we add those two up We get the totals for example the 44 496 plus the 3500 gives us the 47996 the 42 336 plus the 3005 gives us the 45 836 and so on Then we have the general administrative area again, usually fairly straightforward We're talking about the office in this case and the office usually have salaried People work in there include in the accountants who usually get paid salary. So that's gonna be pretty much the same It's a fixed cost going forward the the rent on the office or the depreciation on the office Usually these are fixed things usually This is a pretty easier portion of the budget because it doesn't vary in terms of changes with production So in this case, we're just gonna say that the salaries is Salaries so they're fixed in this case 11,000 per month. We just take the total salary divided by 12 That's what people are gonna get paid. We do have to watch out Of course for increases and fluctuations in salaries, but pretty straightforward then we have the interest We're gonna include interest in this case in this case We have a loan out and we are currently paying apparently 5,000 of interest This is interest rates are usually pretty fixed as well. So as long as if the if the interest I mean if the loan amount doesn't vary like if we're paying we're not paying off principle Then the interest should be fairly constant on that as well for paying off principle Then we just look at the amortization table and figure out what it's gonna be month to month And that's all we're gonna have in terms of the general admit and administrative So that's what we're at at this point and we will move on forward it to cash In calculating cash and then the cash budget next time