Question

Exercise 8-16 Direct Materials and Direct Labor Budgets [LO8-4, LO8-5]

The production department of Zan Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year:

	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Units to be produced	5,000	8,000	7,000	6,000

In addition, 6,000 grams of raw materials inventory is on hand at the start of the 1st Quarter and the beginning accounts payable for the 1st Quarter is $2,880.

Each unit requires 8 grams of raw material that costs $1.20 per gram. Management desires to end each quarter with an inventory of raw materials equal to 25% of the following quarter’s production needs. The desired ending inventory for the 4th Quarter is 8,000 grams. Management plans to pay for 60% of raw material purchases in the quarter acquired and 40% in the following quarter. Each unit requires 0.20 direct labor-hours and direct laborers are paid $11.50 per hour.

Required:

1.&2. Calculate the estimated grams of raw material that need to be purchased and the cost of raw material purchases for each quarter and for the year as a whole.

3. Calculate the expected cash disbursements for purchases of materials for each quarter and for the year as a whole.

4. Calculate the estimated direct labor cost for each quarter and for the year as a whole.

Answer 1

RAW MATERIAL PURCHASE BUDGET
			Q1	Q2	Q3	Q4	Year
Budgeted Production units	5,000	8,000	7,000	6,000	26,000
RM required per unit		8	8	8	8	8
Total RM requiremnt		40,000	64,000	56,000	48,000	2,08,000
Add: Desired Ending Inventory	16,000	14,000	12,000	8,000	8,000
Total needs		56,000	78,000	68,000	56,000	2,16,000
Less: Beginning Inventory	6,000	16,000	14,000	12,000	6,000
Purchase Units		50,000	62,000	54,000	44,000	2,10,000
Cost price per unit		1.20	1.20	1.20	1.20	1.20
Budgeted Purchase in $	60,000	74,400	64,800	52,800	2,52,000
EXPECTED CASH PAYMENTS
			Q1	Q2	Q3	Q4	Year
Beginning Accounts payable	2,880				2,880
Q1 Purchase		36,000	24000			60,000
Q2 Purchase			44640	29760		74,400
Q3 Purchase				38880	25,920	64,800
Q4 Purchase					31,680	31,680
Total Cash disbursement	38,880	68,640	68,640	57,600	2,33,760
LABOUR COST BUDGETS
			QUARTER-1	QUARTER-2	QUARTER-3	QUARTER-4	YEAR
Units to be produced		5,000	8,000	7,000	6,000	26,000
Labour required per unit	0.2	0.2	0.2	0.2	0.2
Labour hours		1000	1600	1400	1200	5200
Labuor Rate per hour	11.5	11.5	11.5	11.5	11.5
Budgeted Labour cost in $	11,500	18,400	16,100	13,800	59,800