Question

The East Division of K Company manufactures a component that is vital to the health care Industry. This Division has been experiencing some problems in coordinating activities between various departments which resulted in acute and embarrassing shortages in the industry in the past. The division‘s Manager in an effort to avoid future shortages has decided to reinforce the decision to have monthly budgets prepared to aid in the production process. To assist in preparing the second Quarter’s budgets, the Financial Controller has provided the following actual and budgeted information.

January (actual)	6,000
February (actual)	10,000
March (actual)	14,000
April (Budget)	20,000
May (budget)	35,000
June(budget)	50,000
July (budget)	45,000
August (budget)	30,000

Direct Material

Two different materials are used in the production of the component. Data related to these materials are given below:

Direct material	Units of Material	Cost per	Inventory at
	per finished	unit	march 31
	component
No. 210	4 pounds	$ 5.00	46,000 pounds
No. 312	9 feet	$ 2.00	69,000 feet

Material No.210 is sometimes in short supply therefore the East Division requires enough of this material on hand to provide for 50% of the following month’s production needs. Material No. 312 is easier to get therefore only one thirds of the following month’s production need is required to be kept at the end of each month.

Direct Labour

The East Division has three departments through which the component must past before they are completed. Information relating to direct labour in these departments is listed in the table below. Direct labour is adjust each month as required.

Department	Direct labour	Cost per
	hours per	direct
	component	labour hour
Shaping	0.25	$ 18.00
Assembly	0.70	16.00
Finishing	0.10	20.00

Manufacturing Overhead

East Division manufactured 32,000 components during the first quarter of the current year. The actual variable cost incurred in producing the components for the first quarter is given below. The financial Controller believes that the variable cost per unit will remain unchanged for the remaining nine month of the year.

Utilities	$ 57,000
Indirect labour	31,000
Supplies	16,000
Other variable cost	8,000
Total variable cost	$112,000

The actual fixed manufacturing overhead cost incurred during the first quarter amounted to $1,170,000. The East Division has budgeted fixed manufacturing overhead cost for the year as follows:

	Year budget		Actual for
			first quarter
Supervision	$	872,000	$ 224,000
Property taxes		143,000	37,750
Depreciation		2,910,000	727,500
Insurance		631,000	157,750
Other		72,000	23,000
Total fixed manufacturing	$	4,628,000	$ 1,170,000
overheads

Finished Goods Inventory

The desired ending inventory in completed components is 20% of the next’s month’s estimated sales. The

East Division has 4,000 components in finished goods inventory at March 31.

Required

Prepare the production budget for East Division for the second quarter ending June 30 showing computations by month and in total for the quarter.

Prepare the direct materials purchase budget in units and dollars for each type of material for the second quarter ending June 30 also showing computations by month and in total for the quarter.

Prepare the direct labour budget in hours and in dollars for the second quarter ending June 30 showing only the quarter totals.

Assuming that the total fixed cost for the year will not change from the original estimates, prepare the variable and fixed overheard budgets for the second quarter by line item.

Answer 1

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The East Division of K Company
Production Budget	April	May	June	April- June	July	August	Note
Budgeted Sales units	20,000.00	35,000.00	50,000.00	105,000.00	45,000.00	30,000.00	See A
Add: Closing	7,000.00	10,000.00	9,000.00	9,000.00	6,000.00		B= 20% of A of next month.
Less: Opening	4,000.00	7,000.00	10,000.00	4,000.00	9,000.00		C= 20% of A of same month. For April its closing stock of March.
Production Budget	23,000.00	38,000.00	49,000.00	110,000.00	42,000.00		D=A+B-G

Material Purchase Budget- No. 210	April	May	June	April- June	July
Production Budget	23,000.00	38,000.00	49,000.00	110,000.00	42,000.00	See D
Material required per unit	4.00	4.00	4.00		4.00	E
Material required	92,000.00	152,000.00	196,000.00	440,000.00	168,000.00	F=D*E
Add: Closing	76,000.00	98,000.00	84,000.00	84,000.00		G= 50% of F of next month.
Less: Opening	46,000.00	76,000.00	98,000.00	46,000.00		H= 50% of F of same month. For April its closing stock of March.
Material Purchase Budget- No. 210	122,000.00	174,000.00	182,000.00	478,000.00		I=F+G-H
Cost per pound	5.00	5.00	5.00			J
Direct Material cost- No. 210	610,000.00	870,000.00	910,000.00	2,390,000.00		K=I*J
Material Purchase Budget- No. 312	April	May	June	April- June	July
Production Budget	23,000.00	38,000.00	49,000.00	110,000.00	42,000.00	See D
Material required per unit	9.00	9.00	9.00		9.00	L
Material required	207,000.00	342,000.00	441,000.00	990,000.00	378,000.00	M=D*L
Add: Closing	114,000.00	147,000.00	126,000.00	126,000.00		N= 1/3 of M of next month.
Less: Opening	69,000.00	114,000.00	147,000.00	69,000.00		O= 1/3 of R of same month. For April its closing stock of March.
Material Purchase Budget- No. 312	252,000.00	375,000.00	420,000.00	1,047,000.00		P=M+N-O
Cost per pound	2.00	2.00	2.00			Q
Direct Material cost- No. 312	504,000.00	750,000.00	840,000.00	2,094,000.00		R=P*Q
Total Direct Material cost	1,114,000.00	1,620,000.00	1,750,000.00	4,484,000.00		S=K+R

Direct Labor Budget- Shaping	April- June	Note
Production Budget	110,000.00	See D
Labor Hour required per unit	0.25	T
Labor Hour required	27,500.00	U=D*T
Cost per Hour	18.00	V
Direct Labor Budget- Shaping	495,000.00	W=U*V
Direct Labor Budget- Assembly	Total
Production Budget	110,000.00	See D
Labor Hour required per unit	0.70	X
Labor Hour required	77,000.00	Y=D*X
Cost per Hour	16.00	Z
Direct Labor Budget- Shaping	1,232,000.00	AA=Y*Z
Direct Labor Budget- Finishing	Total
Production Budget	110,000.00	See D
Labor Hour required per unit	0.10	AB
Labor Hour required	11,000.00	AC=D*AB
Cost per Hour	20.00	AE
Direct Labor Budget- Finishing	220,000.00	AF=AE*AC
Direct Labor Budget	1,947,000.00	AG=W+AA+AF

	AH	AI=AH/32000	AJ=AI*110000
			April- June
Variable Overhead Budget	Costs of 32000 units	Costs of 1 unit	Costs of 110,000 units
Utilities	57,000.00	1.78	195,937.50
Indirect labor	31,000.00	0.97	106,562.50
Supplies	16,000.00	0.50	55,000.00
Other variable cost	8,000.00	0.25	27,500.00
Total variable costs	112,000.00	3.50	385,000.00
	AK	AL=AK/4	Same as AL
Fixed Overhead Budget	For 1 year	For 1 qtr.	April- June
Supervision	872,000.00	218,000.00	218,000.00
Property taxes	143,000.00	35,750.00	35,750.00
Depreciation	2,910,000.00	727,500.00	727,500.00
Insurance	631,000.00	157,750.00	157,750.00
Other	72,000.00	18,000.00	18,000.00
Total fixed manufacturing overhead	4,628,000.00	1,157,000.00	1,157,000.00