Page 82 - Budgeting for Managers

Creating a Production Budget
goods for a particular quantity of items in physical inventory
will be different. If prices are going up, then a FIFO inventory
value of a particular quantity of a certain physical item will cost
more than a LIFO inventory of the same quantity of the same
item because the parts and labor come from a later date. With 65
JIT, inventory is minimized, so inventory costs may be less, but
there may be costs for managing the flow from suppliers and to
customers.
LIFO, FIFO, and JIT matter to our manufacturing plan for a
number of reasons. We’ll mention just two of these reasons.
When we assemble the computers, we have to test the com-
patibility of the components. Sometimes, our suppliers send a
new keyboard that won’t work with the old CPU. We’ll have less
trouble if we use FIFO, because each computer is more likely to
be made of parts purchased at the same time. If we use LIFO,
we could end up stuck with a bunch of old parts that don’t work
with a new version of another component.
JIT takes a lot of careful management and very reliable sup-
pliers. If we miscalculate our needs or our suppliers slip up, we
might have to hold up production waiting for parts or raw mate-
rials. If we miscalculate our production or delivery or a problem
arises, we might not provide products when our customers
expect them.
Calculating the Direct Materials Budget
Once we know how much we’ll produce, we need to calculate
how many of each part and how much of each raw material we
need to buy and how much each will cost. Table 4-2, the direct
materials budget, illustrates how we calculate these items.
On the top line, we enter the quantity of a given part we’ll
need for each finished item. In our simple example, we need
one CPU, one monitor, and one keyboard for each computer.
The next three lines of this table are taken from Table 4-1,
except that we multiply by the figure in “materials needed per
unit.” Then, for each item, we subtract the inventory we expect
to have on hand at the beginning of the year. (This is a parts