SOLUTION
(30 min.) Revenues and production budget.
1.
Selling
Price
Units
Sold
Total
Revenues
12-ounce bottles $0.30 6,000,000a$1,800,000
2. Budgeted unit sales (12-ounce bottles) 6,000,000
Add target ending finished goods inventory 660,000
Deduct beginning finished goods inventory 980,000
3.
Beginning Budgeted Target Budgeted
= +
inventory sales ending inventory production
–
6-27 Budgeting; direct material usage, manufacturing cost, and gross margin. Xander
Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. One
rug is budgeted to use 36 skeins of wool at a cost of $2 per skein and 0.8 gallons of dye at a cost
of $6 per gallon. All other materials are indirect. At the beginning of the year Xander has an
inventory of 458,000 skeins of wool at a cost of $961,800 and 4,000 gallons of dye at a cost of
$23,680. Target ending inventory of wool and dye is zero. Xander uses the FIFO inventory
cost-flow method.
Xander blue rugs are very popular and demand is high, but because of capacity constraints
the firm will produce only 200,000 blue rugs per year. The budgeted selling price is $2,000 each.
There are no rugs in beginning inventory. Target ending inventory of rugs is also zero.
Xander makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are
accumulated in two cost pools—one for weaving and the other for dyeing. Weaving overhead is
allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead is
allocated to products based on machine-hours (MH).
There is no direct manufacturing labor cost for dyeing. Xander budgets 62 direct
manufacturing labor-hours to weave a rug at a budgeted rate of $13 per hour. It budgets 0.2
machine-hours to dye each skein in the dyeing process.
6-1
The following table presents the budgeted overhead costs for the dyeing and weaving cost
pools:
Required:
1. Prepare a direct materials usage budget in both units and dollars.
2. Calculate the budgeted overhead allocation rates for weaving and dyeing.
3. Calculate the budgeted unit cost of a blue rug for the year.
4. Prepare a revenues budget for blue rugs for the year, assuming Xander sells (a) 200,000 or
(b) 185,000 blue rugs (that is, at two different sales levels).
5. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
6. Find the budgeted gross margin for blue rugs under each sales assumption.
7. What actions might you take as a manager to improve profitability if sales drop to 185,000
blue rugs?
8. How might top management at Xander use the budget developed in requirements 1–6 to
better manage the company?
SOLUTION
(30 min.) Budgeting: direct material usage, manufacturing cost, and gross margin.
1.
Direct Material Usage Budget in Quantity and Dollars
Material
Wool Dye Total
Physical Units Budget
Direct materials required for
Cost Budget
Available from beginning direct materials inventory:
(a)
To be purchased this period: (b)
6-2
Wool: (7,200,000 – 458,000) skeins × $2 per skein 13,484,000
Dye: (160,000 – 4,000) gal. × $6 per gal. 936 ,000
2.
Weaving budgeted
overhead rate
=
$31,620,000
12,400,000 DMLH
= $2.55 per DMLH
Dyeing budgeted
overhead rate
=
$17, 280, 000
1, 440,000 MH
= $12 per MH
3.
Budgeted Unit Cost of Blue Rug
Cost per
Unit of Input
Input per
Unit of
Output Total
Wool $ 2 36 skeins $ 72.00
Dye 6 0.8 gal. 4.80
Direct manufacturing labor 13 62 hrs. 806.00
10.2 machine hour per skein
´
4.
Revenue Budget
Units
Selling
Price Total Revenues
5a.
Sales = 200,000 rugs
Cost of Goods Sold Budget
From Schedule Total
Beginning finished goods inventory $ 0
Direct materials used $ 15,405,480
6-3
5b.
Sales = 185,000 rugs
Production = 200,000 rugs
Cost of Goods Sold Budget
From Schedule Total
Beginning finished goods inventory $ 0
Direct materials used $ 15,405,480
Deduct ending finished goods inventory
Some students assume that Xander will produce only 185,000 rugs to match 185,000 rugs that ar
expected to be sold and carry no finished good inventory of the rugs. In this case the Cost of
Sales = 185,000 rugs
Cost of Goods Sold Budget for Producing 185,000 rugs
From Schedule Total
Beginning finished goods inventory $ 0
Direct materials useda$ 14,253,480
Direct manufacturing labor ($806 × 185,000) 149,110,000
Variable dyeing overhead ($70.55b × 185,000) 13,051,750
Fixed dyeing overheadc 3,170,000
6-4
6.
200,000 rugs sold
185,000 rugs sold
200,000 rugs produced
185,000 rugs sold
185,000 rugs produced
Revenue $400,000,000 $370,000,000 $370,000,000
7. If sales drop to 185,000 blue rugs, Xander should look to reduce fixed costs and produce
8. Top management can look for ways to increase (stretch) sales and improve quality,
efficiency, and input prices to reduce costs in each cost category such as direct materials, direct
6-28 Budgeting, service company. Ever Clean Company provides gutter cleaning services to
residential clients. The company has enjoyed considerable growth in recent years due to a
successful marketing campaign and favorable reviews on service-rating Web sites. Ever Clean
owner Joanne Clark makes sales calls herself and quotes on jobs based on length of gutter
surface. Ever Clean hires college students to drive the company vans to jobs and clean the
gutters. A part-time bookkeeper takes care of billing customers and other office tasks. Overhead
is allocated based on direct labor-hours (DLH).
Joanne Clark estimates that her gutter cleaners will work a total of 1,000 jobs during the year.
Each job averages 600 feet of gutter surface and requires 12 direct labor-hours. Clark pays her
gutter cleaners $15 per hour, inclusive of taxes and benefits. The following table presents the
budgeted overhead costs for 2018:
Required:
1. Prepare a direct labor budget in both hours and dollars.
2. Calculate the budgeted overhead allocation rate based on the budgeted quantity of the cost
drivers.
3. Calculate the budgeted total cost of all jobs for the year and the budgeted cost of an average
600-foot gutter-cleaning job.
4. Prepare a revenues budget for the year, assuming that Ever Clean charges customers $0.60 per
square foot.
6-5
5. Calculate the budgeted operating income.
6. What actions can Clark take if sales should decline to 900 jobs annually?
SOLUTION
(20 min.) Budgeting: service company.
1.
Direct Labor Budget in Hours and Dollars
Total
Hours Budget
Direct labor hours required
Cost Budget
2.
Budgeted overhead rate =
$60,000
25,000 miles
$144,000
12,000 DLH
= $12 per DLH
3.
Budgeted Total Cost and Average Cost of 600-Foot Gutter-Cleaning Job
Direct labor costs $180,000
Overhead costs 144,000
Total costs of 1,000 jobs $324,000
4.
Revenue Budget
Feet of Gutter Surface Price per Foot Total Revenues
5. Operating Income Budget
1,000 jobs
Revenue $360,000
6. The following table shows Ever Clean’s profitability if sales decline to 900 jobs.
6-6
Revenue (900 jobs 600 sq. ft. 0.60/sq. ft. $324,000
$ 25 ,800
If revenue should fall to 900 jobs, Clark should examine the company’s fixed overhead costs to
6-29 Budgets for production and direct manufacturing labor. (CMA, adapted) DeWitt
Company makes and sells artistic frames for pictures of weddings, graduations, and other special
events. Ron Bahar, the controller, is responsible for preparing DeWitt’s master budget and has
accumulated the following information for 2018:
In addition to wages, direct manufacturing labor-related costs include pension contributions of
$0.40 per hour, worker’s compensation insurance of $0.10 per hour, employee medical insurance
of $0.50 per hour, and Social Security taxes. Assume that as of January 1, 2018, the Social
Security tax rates are 7.5% for employers and 7.5% for employees. The cost of employee
benefits paid by DeWitt on its direct manufacturing employees is treated as a direct
manufacturing labor cost.
DeWitt has a labor contract that calls for a wage increase to $12 per hour on April 1, 2018.
New labor-saving machinery has been installed and will be fully operational by March 1, 2018.
DeWitt expects to have 16,000 frames on hand at December 31, 2017, and it has a policy of
carrying an end-of-month inventory of 100% of the following month’s sales plus 50% of the
second following month’s sales.
Required:
1. Prepare a production budget and a direct manufacturing labor cost budget for DeWitt Company
by month and for the first quarter of 2018. You may combine both budgets in one schedule.
The direct manufacturing labor cost budget should include labor-hours and show the details for
each labor cost category.
2. What actions has the budget process prompted DeWitt’s management to take?
6-7
3. How might DeWitt’s managers use the budget developed in requirement 1 to better manage the
company?
SOLUTION
(15-25 min.) Budgets for production and direct manufacturing labor.
DeWitt Company
Budget for Production and Direct Manufacturing Labor
for the Quarter Ended March 31, 2018
January February March Quarter
Budgeted sales (units) 12,000 13,000 6,000 31,000
Add target ending finished goods
Deduct beginning finished goods
inventory (units) 16,000 16,000 11,500 16,000
Direct manufacturing labor-hours
Total hours of direct manufacturing
Direct manufacturing labor costs:
Pension contributions
Workers’ compensation insurance
Employee medical insurance
Social Security tax (employer’s share)
2. The budget process would prompt DeWitt’s management to look for ways to reduce finished
goods inventories, the manufacturing labor hours needed to produce each unit both before and
6-8
3. We already see one example of a decision that DeWitt’s management took based on the
6-30 Activity-based budgeting. The Jerico store of Jiffy Mart, a chain of small neighborhood
convenience stores, is preparing its activity-based budget for January 2018. Jiffy Mart has three
product categories: soft drinks (35% of cost of goods sold [COGS]), fresh produce (25% of
COGS), and packaged food (40% of COGS). The following table shows the four activities that
consume indirect resources at the Jerico store, the cost drivers and their rates, and the cost-driver
amount budgeted to be consumed by each activity in January 2018.
Required:
1. What is the total budgeted indirect cost at the Jerico store in January 2018? What is the total
budgeted cost of each activity at the Jerico store for January 2018? What is the budgeted
indirect cost of each product category for January 2018?
2. Which product category has the largest fraction of total budgeted indirect costs?
3. Given your answer in requirement 2, what advantage does Jiffy Mart gain by using an
activity-based approach to budgeting over, say, allocating indirect costs to products based on
cost of goods sold?
SOLUTION
(20–30 min.) Activity-based budgeting.
1.
Activity
Cost
Hierarchy
Soft
Drinks
Fresh
Snacks
Packaged
Food Total
Ordering
$45 14; 24; 14
Delivery
Batch-level
$ 630
$1,080
$ 630
$ 2,340
6-9
2. Refer to the last row of the table in requirement 1. Fresh snacks, which represents the
smallest portion of COGS (25%), is the product category that consumes the largest share (62.7%)
3. An ABB approach recognizes how different products require different mixes of support
activities. The relative percentage of how each product area uses the cost driver at each activity
area is:
Activity
Cost
Hierarchy
Soft
Drinks
Fresh
Snacks
Packaged
Food Total
By recognizing these differences, Jiffy Mart’s managers are better able to budget for different
unit sales levels and different mixes of individual product-line items sold. Using a single cost
driver (such as COGS) assumes homogeneity in the use of indirect costs (support activities)
6-31 Kaizen approach to activity-based budgeting (continuation of 6-30). Jiffy Mart has a
Kaizen (continuous improvement) approach to budgeting monthly activity costs for each month of
2018. Each successive month, the budgeted cost-driver rate decreases by 0.4% relative to the
preceding month. So, for example, February’s budgeted cost-driver rate is 0.996 times January’s
budgeted cost-driver rate, and March’s budgeted cost-driver rate is 0.996 times the budgeted
February rate. Jiffy Mart assumes that the budgeted amount of cost-driver usage remains the same
each month.
Required:
1. What are the total budgeted cost for each activity and the total budgeted indirect cost for
March 2018?
2. What are the benefits of using a Kaizen approach to budgeting? What are the limitations of
this approach, and how might Jiffy Mart management overcome them?
6-10