Question

Camarillo Manufacturing Company was established to manufacture two types of pipe fittings, XL1 and XL2. The manufacturing process involves molding the fittings and then smoothing them.
The firm was initially capitalized with $500,000 as an S Corporation. The firm purchased equipment for $450,000 with cash of $125,000 and a note payable of $325,000. It also acquired furniture for $120,000 with cash of $60,000 and a note payable of $60,000. Management is now preparing the master budget for the first year of operations.

Sales Budget
Management expects to meet established market prices for its pipe fittings of $50 for XL1 and $40 for XL2. Sales representatives have estimated that total sales of XL1 fittings will be 4,500 units and sales of XL2 will be 12,000 units.

Production Budget
Management has expressed a desire to have 1,000 units of XL1 and 3,000 units of XL2 in ending inventory.

Material Acquisition Budget
The firm’s industrial engineer has prepared standards that call for 0.6 pounds of material per XL1 casting and 0.4 pounds per XL2 casting. Both products require the same material. Management also desires to end the period with 2,000 pounds of material in raw materials inventory. The purchasing agent anticipates that the metal can be purchased at an average cost of $4 per pound.

Direct Labor Budget
The standards for a unit of XL1 call for 0.5 hours of direct labor in Molding and 0.3 hours in Smoothing. The standards for a unit of XL2 call for 0.4 hours in Molding and 0.2 hours in Smoothing. Management’s anticipated average cost for labor is $15 per hour.

Factory Overhead Budget
Service Department 1 handles personnel matters. The firm anticipates having 12 factory employees and expects the variable costs to operate the personnel department to average $1,000 per employee. The cost of this department is allocated to other departments on the assumption that there will be three employees in the maintenance department, five employees in the molding department, and four employees in the smoothing department. The personnel department’s fixed costs are estimated to be $15,000 and will be allocated on a lump sum basis at $3,000 to maintenance, $6,000 to molding and $6,000 to smoothing.

The maintenance department is budgeted to make 100 service calls during the period, 60 calls for the molding department and 40 calls for the smoothing department. The maintenance manager estimates that it will cost an average of $150 in variable costs per service call. The fixed costs of $14,000 are thought to benefit the two production departments equally.

The molding department is expected to incur $29,000 in variable overhead and $42,000 in fixed overhead. The smoothing department is expected to have $32,000 in variable overhead and $8,000 in fixed overhead.

Management has decided to allocated 60% of the fixed overhead cost of molding to XL1 and 40% to XL2 and split the fixed smoothing costs evenly between the two products. Variable costs will be allocated based on direct labor hours.

Selling and Administration Expenses Budget
Budgeted selling and administration expenses are $126,400. This includes sales commissions at 10% of sales or $56,400; administration salaries of $30,000; advertising of $6,000; supplies of $2,000 and interest of $32,000.

Budgeting Cash Receipts and Disbursements
Sales are presumed to be $100,000 in the first quarter; $160,000 in the second quarter; $220,000 in the third quarter and $225,000 in the fourth quarter. Seventy percent of sales will be paid for in the quarter in which they are made and thirty percent will be paid in the quarter following the sale. Production will be spread uniformly over the year. The firm will pay for materials, supplies, and labor in the quarter the cost is incurred. Utilities will be paid one month after incurred. Half the property tax is aid in the first and third quarters. The first payment for a new company is not made until the third quarter. Sales commissions are paid in the quarter a sale is made. Other selling and administration costs are incurred and paid uniformly. Finally, the firm makes note payments of $30,000 per quarter which consists of $22,000 of principal repayment and $8,000 of interest. Total Costs include depreciation of $27,000; $21,000 for equipment and $6,000 for the furniture.

Additional Information

Factory Overhead Budget	Personnel	Maintenance	Molding	Smoothing
Variable Overhead Items
Indirect Labor	$6,000	$8,000	$9,000	$18,000
Supplies	4,000	3,000	19,000	8,000
Utilities	2,000	1,000	1,000	6,000
Fixed Overhead Items
Property Taxes	2,000	3,000	19,000	2,000
Utilities	5,000	2,000	11,000	5,000
Depreciation	8,000	6,000	12,000	1,000

Sales by Quarter:
1st $100,000
2nd 160,000
3rd 220,000
4th 225,000

Budgeted Selling & Administration Expenses:

Sales Commissions	$70,500
Administrative Salaries	30,000
Advertising	6,000
Supplies	2,000
Interest	32,000

Required
Prepare the following budgets:
  Factory overhead budget

Answer 1

The factory overhead budget shows all the planned manufacturing costs which are needed to produce the budgeted production level of a period, other than direct costs which are already covered under direct material budget and direct labor budget. The overhead budget is an operational budget contained in the master budget of a business. It has two sections, one for variable overhead costs and other for fixed overhead costs.

Total variable overhead may be calculated as the product of estimated variable cost per unit (also called variable overhead rate) and the budgeted production units (obtained from production budget). However most businesses will prefer to prepare a detailed overhead budget showing individual variable costs such as electricity, fuel, supplies etc.. The fixed overhead costs are calculated as the sum of individual fixed overhead costs for example rent, depreciation, etc. which are planned for the period.

It is also useful to calculate the expected cash disbursements for factory overhead costs at the end of overhead budget.