Management Accounting Budgeting: Skyella Product Financial Analysis

This assignment presents a comprehensive management accounting budgeting exercise for a company selling the Skyella shampoo product. The solution details the preparation of various budgets including the sales budget, direct materials budget, direct labor budget, and operating expenses budget. The sales budget forecasts sales units and revenue for three months. The direct materials budget calculates material purchases based on production needs and inventory levels. The direct labor budget determines labor costs based on labor hours and hourly rates. The operating expenses budget outlines both variable and fixed operating expenses. Finally, an income statement is prepared, summarizing the company's financial performance over the three-month period, including the calculation of the cost of goods sold, gross profit, operating expenses, and net income. The solution incorporates relevant assumptions and references to support the budgeting process.

RUNNING HEAD: MANAGEMENT ACCOUNTING
Budgeting

Management accounting 2
Requirement 1
The company purchases shampoo in bulk and then sell it to the motels by repackaging it into
smaller quantities. The company pack them into smaller sized bottles and name the product
as SKYELLA. The product is been used by the customers on daily basis and is for both males
and females. Skyella gives various benefits and is used for several hair problems such as hair
fall, dry hair, anti-dandruff and also work as a conditioner for hairs. The benefits gained by
applying the product are that it make hairs bouncy and shining. It gives proper nourishment to
the hairs and make them stronger. Also it has a long lasting fragrance. The company operates
in United States and the product is sold and is made available across the country.
The cost incurred for purchasing the product is $50.00 and the selling price of the same is
$300.00 per unit. Following is the forecasted units that are to be sold in upcoming three
months:
Forecasted sales units
Months Units
May 200
June 250
July 300
Requirement 2
In order to repackage the shampoos in small sized bottle, direct labour required by the
company is 2 per unit. As a result of which, hours spend for purchasing, the packaging, and
selling of the product in May is 400 hours. Similarly in month of June and July, labour hours
required are 500 hours and 600 hours. The labour cost or the wages rate charged is $7.00 per

Management accounting 3
hour which is used for calculating total labour cost. The total labour cost for upcoming
months are:
Total Direct labour cost
Months Cost
May $2,800.00
June $3,500.00
July $4,200.00
Requirement 3
Sales budget for upcoming three months
Sales Budget
May June July
Budgeted sales units 200 250 300
Selling Price per unit $ 300.00 $ 300.00 $ 300.00
Budgeted sales $60,000.00 $75,000.00 $90,000.00
(Stouffer, 2012).
Requirement 4
To prepare a direct material budget, following assumptions are been made and given
information is been used.
 It is assumed that production units are equal to the forecasted sales units.
 Material required per units is 3 units.
 It is given that 10% of the direct materials are to be kept at the end of each month.

Management accounting 4
 Opening inventory for May is assumed at $45.00.
Direct Material Budget
May June July
Production 200 250 300
Material Per unit 3 3 3
Production needed 600 750 900
Add: closing inventory 60 75 90
Total needed 660 825 990
Less: opening inventory 45 60 75
Material to be purchased 615 765 915
Cost per unit 50 50 50
Budgeted purchases $30,750.00 $38,250.00 $45,750.00
(Hart, Wilson & Fergus, 2012).
Requirement 5
Direct Labour Budget
May June July
Production units 200 250 300
Direct Labour per unit 2 2 2
Labour hours required 400 500 600
Hourly labour cost $ 7.00 $ 7.00 $ 7.00
Total direct labour cost $ 2,800.00 $ 3,500.00 $ 4,200.00
(Swain & Reed, 2014).

Management accounting 5
Requirement 6
Operating expenses Budget
May June July
Variable operating expense
Sales commission (5% of sales) $ 3,000.00 $ 3,750.00 $ 4,500.00
Delivery costs $ 800.00 $ 1,000.00 $ 1,100.00
Selling expenses $ 2,500.00 $ 3,000.00 $ 3,200.00
Total variable expenses $ 6,300.00 $ 7,750.00 $ 8,800.00
Fixed operating expense
Insurance $ 400.00 $ 400.00 $ 400.00
Salary $ 2,000.00 $ 2,000.00 $ 2,000.00
Electricity expenses $ 200.00 $ 200.00 $ 200.00
Packaging and maintenance $ 1,000.00 $ 1,000.00 $ 1,000.00
Total fixed expenses $ 3,600.00 $ 3,600.00 $ 3,600.00
Total operating expenses $ 9,900.00 $ 11,350.00 $ 12,400.00
(Marsh, 2013).
Requirement 7
Income statement
Particulars May June July Total
Sales $ 60,000.00
$
75,000.00 $ 90,000.00 $ 225,000.00
Less: cost of goods
sold $ 34,800.00
$
43,500.00 $ 52,200.00 $ 130,500.00

Management accounting 6
Gross profit $ 25,200.00
$
31,500.00 $ 37,800.00 $ 94,500.00
Operating expenses $ 9,900.00
$
11,350.00 $ 12,400.00 $ 33,650.00
Net income $ 15,300.00
$
20,150.00 $ 25,400.00 $ 60,850.00
Calculation for COGS is done as follows:
Cost of goods sold per unit
Quantity Cost (£) Total
Direct Material 3 $50.00 150
Direct labour 2 $7.00 14
Overhead 2 $5.00 10
Total unit cost $ 174.00
Note: Overhead rate and units are been assumed.