Question

MCO Leather Goods manufactures leather purses. Each purse requires 3 pounds of direct materials at a cost of $4 per pound and 0.7 direct labor hours at a rate of $14 per hour. Variable manufacturing overhead is charged at a rate of $2 per direct labor hour. Fixed manufacturing overhead is $17,000 per month. The company’s policy is to end each month with direct materials inventory equal to 20% of the next month’s materials requirement. At the end of August the company had 4,180 pounds of direct materials in inventory. The company’s production budget reports the following.

Production Budget	September		October		November
Units to be produced	5,500		7,200		6,700

(1) Prepare direct materials budgets for September and October.
(2) Prepare direct labor budgets for September and October.
(3) Prepare factory overhead budgets for September and October.

Answer 1

MCO Leather Goods

1. Direct materials budget for September and October:

	September	October
units to be produced	5,500	7,200
pounds needed per unit	3	3
materials needed for production lbs	16,500	21,600
Desired ending direct materials	4,320	4,020
direct materials needed for production	20,820	25,620
less: beginning materials lbs	4,180	4,320
direct materials purchases	16,640	21,300
cost per pound	$4	$4
direct material purchases	$66,560	$85,200

1. Materials needed for production = units to be produced x pounds per unit

Sept – 5,500 x 3 = 16,500

Oct – 7,200 x 3 = 21,600

1. Ending direct materials = 20% of next month production requirement

Sept = 20% x (Oct. production requirements) 21,600 = 4,320 pounds

Oct = 20% x (November production requirements) (3 x 6,700) = 4,020

1. Previous month ending direct materials become current month’s beginning direct materials. Hence, beginning direct materials balance for Sept is 4,180 (Aug. ending balance) and for Oct is 4,320 (Sept ending balance).

1. Direct labor budget:

	September	October
Units to be produced	5,500	7,200
hours per unit	0.7	0.7
total hours needed	3,850	5,040
cost per direct labor hour	$14	$14
direct labor cost	$53,900	$70,560

1. Factory overhead budgets:

	September	October
Variable Overhead:
direct labor hours	3,850	5,040
variable overhead cost per unit	$2	$2
Variable overhead cost	$7,700	$10,080
Fixed overhead	$17,000	$17,000
Total overhead	$24,700	$27,080