Question

CVD Sdn Bhd (CVDSB) is a company located at Kedah. The company produces picture frames. Traditionally, all frames are hand-made, which require one hour of direct labor to finish producing one frame. With the increasing demand on their products, the company plans to switch their manufacturing layout to the automated production facility by installing a new automated production machine which will save the direct labor hour used by 25% per frame. The company plans to install a new machine on 1 March 2021.

In preparing the proposal for approval from top management regarding to the plan, the company is now preparing budget for the first quarter of year 2021. The following information are collected by the manager:

i. The labor related costs are as followings: a. Pension contributions of RM0.50 per hour b. Workers compensation insurance of RM0.20 per hour c. Employee medical insurance of RM0.80 per hour d. EPF contribution of 7% of direct labor wages.

ii. The cost of employee benefits paid by the company is treated as a direct labor cost.

iii. The company has a labor contract that calls for wage increase from RM16 to RM18 per hour in April 2021.

iv. The company is expecting to have 8,000 frames on hand on December 2020. The company policy is to have ending inventory equal to 100% of the following month’s sales plus 50% of the second month following sales.

v. The estimated unit sales are as follows:

January February March April May 5,000 6,000 4,000 4,500 4,500

vi. The selling price is expected to reduce from RM50 in January 2021 to RM47.50 for the remaining month in year 2021.


REQUIRED:

(a) Prepare the production budget for CVDSB for the first quarter of 2021.

(b) Prepare the direct labor budget for CVDSB for the first quarter of 2021. The budget must show the detail of each category of direct labor cost.

(c) Discuss ONE (1) reason why it is important for CVDSB to prepare a flexible budget apart of preparing a master budget. .

Answer 1

Given information

Direct labor to finish producing one frame = 1 hour = 60 minutes

The company plans to install a new machine on 1 March 2021 which will save the direct labor hour used by 25% per frame.

From March 1, 2021 direct labor to finish producing one frame = 60 x 75% = 45 minutes = 0.75 hours

(a) Statement showing the production budget for CVDSB for the first quarter of 2021:

	January	February	March	April	May
a. Budgeted unit sales	5,000	6,000	4,000	4,500	4,500
b. Desired Ending Finished Good Inventory	8,000	6,250	6,750
(100% of next month sales + 50% of second month sales)	(6,000 + (4,000 x 50%))	(4,000 + (4,500 x 50%))	(4,500 + (4,500 x 50%))
c. Total Needs (a + b)	13,000	12,250	10,750
d. Beginning Finished Good Inventory	8,000	8,000	6,250
e. Required Production in units (c - d)	5,000	4,250	4,500

(b) Statement showing the direct labor budget for CVDSB for the first quarter of 2021:

	January	February	March
a. Budgeted Production (units)	5,000	4,250	4,500
b. Direct labour hours per frame (Hr.)	1 Hour	1 Hour	0.75 Hour
c. Total Direct Labour Hours (Hr.) (a x b)	5,000 hours	4,250 hours	3,375 hours
d. Pension Contributions (RM0.50 per hour)	2,500 (5,000 x RM0.50)	2,125 (4,250 x RM0.50)	1,688 (3,375 x RM0.50)
e. Workers compensation insurance (RM0.20 per hour)	1,000 (5,000 x RM0.20)	850 (4,250 x RM0.20)	675 (3,375 x RM0.20)
f. Employee medical insurance (RM0.80 per hour)	4,000 (5,000 x RM0.80)	3,400 (4,250 x RM0.80)	2,700 (3,375 x RM0.80)
g. Direct labor wage (RM16 per hour)	80,000 (5,000 x RM16)	68,000 (4,250 x RM16)	54,000 (3,375 x RM16)
h. EPF contribution (7% of direct labor wages)	5,600 (RM80,000 x 7%)	4,760 (RM68,000 x 7%)	3,780 (RM54,000 x 7%)
i. Total Direct labor costs (d+e+f+g+h)	RM93,100	RM79,135	RM62,843

Note: Wage rate increase from RM16 to RM18 is from April 2021, hence it is not considered.

(c) Importance of preparing flexible budget apart from master budget:

Master budget is prepared before the start of the production period while the flexible budget is prepared in accordance with the costs that are incurred during the production period which will considered all the relevant factors like inflation in costs, price hike of labor and usage of materials in production. Master budget will not considered the costs that are resulted in cost increase, that will not be used to compare the actual results. So, the flexible budget will be used to compare the actual results to know that exact results.