Production – Jars of salsa 25,000
Ingredient cost (variable) $20,000
Labor cost (variable) 12,000
Rent (fixed) 5,000
Depreciation (fixed) 6,000
Other (fixed) 1,000
Total $44,000
Required
a. Using this information, prepare a budget for May. Assume that production will increase to
30,000 jars of salsa, reflecting an anticipated sales increase related to a new marketing
campaign.
Ingredient cost per unit:
÷ =
Labor cost per unit:
÷ =
Production – Jars of salsa
Ingredient cost (variable)
Labor cost (variable)
Rent (fixed)
Depreciation (fixed)
Other (fixed)
Total
b.
Suppose the wage rate is
$20.00 per hour. How many additional labor hours are
needed in May?
Labor hours used in April
Labor hours to be used in May
Additional labor hours needed
Does the budget suggest that additional workers are needed?
Production Costs
Problem 1-1 Budgets in Managerial Accounting
Santiago‘s Salsa is in the process of preparing a production cost budget for May. Actual costs in
April were:
Santiago‘s Salsa
April 2017
Santiago‘s Salsa
Production Costs
May 2017
What would happen if management did not anticipate the need for additional labor in May?
c. Calculate the actual cost per unit in April and the budgeted cost per unit in May.
April Actual
May
Budgeted
Total cost
Jars of salsa 25,000 30,000
Cost per jar of salsa
Explain why the cost per unit is expected to decrease.
What-if?
Consider the following after you have completed the requirements of P1-1.
Production – Jars of salsa
Ingredient cost (variable)
Labor cost (variable)
Rent (fixed)
Depreciation (fixed)
Other (fixed)
Total
Increase in cost
2. How does the cost per unit differ for May and June? What caused the cost per unit to decline?
Unit cost in May
1. Assume that production will increase to 32,000 jars of salsa during June. By how much will the
production cost increase compared to the May budget?
Santiago‘s Salsa
Production Costs
June 2017
Unit cost in June
Production – Jars of salsa 25,000
Ingredient cost (variable) $20,000
Labor cost (variable) 12,000
Rent (fixed) 5,000
Depreciation (fixed) 6,000
Other (fixed) 1,000
Total $44,000
Required
a. Using this information, prepare a budget for May. Assume that production will increase to
30,000 jars of salsa, reflecting an anticipated sales increase related to a new marketing
campaign.
Production – Jars of salsa 30,000
b.
Suppose the wage rate is
$20.00 per hour. How many additional labor hours are
needed in May?
What would happen if management did not anticipate the need for additional labor in May?
Santiago‘s Salsa
Production Costs
April 2017
Solution: Problem 1-1 Budgets in Managerial Accounting
Problem data are:
Santiago‘s Salsa
Production Costs
May 2017
c. Calculate the actual cost per unit in April and the budgeted cost per unit in May.
April Actual
May
Budgeted
What-if?
Production – Jars of salsa 32,000
2. How does the cost per unit differ for May and June? What caused the cost per unit to decline?
Santiago‘s Salsa
Production Costs
June 2017
Consider the production cost information for Santiago’s Salsa given below.
Production – Jars of salsa 25,000
Ingredient cost (variable) $20,000
Labor cost (variable) 12,000
Rent (fixed) 5,000
Depreciation (fixed) 6,000
Other (fixed) 1,000
Total $44,000
The company is currently producing and selling 325,000 jars of salsa annually. The salsa sells
for 5.00$ each. The company is considering lowering the price to 4.60$ . Suppose
the action will increase sales to 375,000 jars of salsa.
Required
a. What is the incremental cost associated with producing an extra 50,000 jars of salsa?
Variable costs per jar:
Ingredient cost
Labor cost
Total variable cost at current production
Number of jars of salsa
Variable cost per jar at current production
Incremental number of jars
Incremental cost associated with price change
b. What is the incremental revenue associated with the price reduction of
0.40$ per jar?
Original revenue
Revenue with price change
Incremental revenue associated with price change
c. Should Santiago’s lower the price of its salsa?
Production Costs
April 2017
Problem 1-2 Incremental Analysis
Santiago’s Salsa
Consider the production cost information for Santiago’s Salsa given below.
Production – Jars of salsa 25,000
Ingredient cost (variable) $20,000
Labor cost (variable) 12,000
Rent (fixed) 5,000
Depreciation (fixed) 6,000
Other (fixed) 1,000
Total $44,000
The company is currently producing and selling 325,000 jars of salsa annually. The salsa sells
for 5.00$ each. The company is considering lowering the price to 4.60$ . Suppose
the action will increase sales to 375,000 jars of salsa.
Required
a. What is the incremental cost associated with producing an extra 50,000 jars of salsa?
Variable costs per jar:
b. What is the incremental revenue associated with the price reduction of
0.40$ per jar?
c. Should Santiago’s lower the price of its salsa?
Santiago’s Salsa
Production Costs
April 2017
Solution: Problem 1-2 Incremental Analysis