Question

Snowbird Inc. (Snowbird) manufactures and sells one model of sleds. Snowbird’s accountant gathered the following information to prepare the budget for 2020:

	1st quarter	2nd quarter	3rd quarter	4th quarter
Projected sales	2,000 units	1,800 units	1,000 units	3,500 units

Snowbird has a policy of maintaining finished goods inventory at the end of each quarter equal to 5% of the following quarter’s projected sales. There were 150 sleds in finished goods inventory at the start of 2020, with a total cost of $45,000. Materials and labour requirements for the sleds are:

Direct materials	Four board-metres per sled
Direct labour hours	Three hours per sled
Machine hours	Two hours per sled

Direct materials inventory on the first day of 2020 was 1,000 board-metres. Direct materials were originally purchased at $33 per board-metre. Prices have now risen to

$34 per board-metre. The desired ending materials inventory is 10% of the following quarter’s projected production needs.

Snowbird’s direct labourers are paid $16 per hour. Variable manufacturing overhead is allocated at the rate of $15 per direct labour hour. Fixed manufacturing overhead costs are budgeted at $186,240 for 2020. Snowbird uses first-in, first-out to account for its inventory flow.

Required:

Prepare the following budgets and schedules as part of the master budget for the first quarter of 2020:

1. Production budget
2. Direct materials purchase budget
3. Direct labour budget (
4. Manufacturing overhead budget
5. Ending finished goods inventory budget

Answer 1

Part a -

Production Budget for Quarter 1
	Quarter 1
Budget Unit Sales	2,000
Plus: Desired Finished Goods Ending Inventory (5% of next quarter sales 1,800 Units))	90
Total Needs	2,090
Less: Estimated Finished Goods Beginning Inventory	150
Budgeted Production Units	1,940

Part b-  

Direct Material Purchases Budget
	Quarter 1
Budgeted Production Units (Refer Note 1)	1,940
Requires Raw material per finished unit (metres)	4.00
Materials needed for production (pounds)	7760
Add: Desired Ending Inventory (10% of next month's expected need of production 1,760*4 board) (Refer Note 1)	704
Total materials requirements (in metres)	8464
Less: Beginning Direct materials inventory	1000
Materials to be purchased (in pounds)	7464
Material price per unit	$34.00
Total cost of direct materials purchases	$253,776

Note 1 - Production Units for Quarter 2 to find out direct materials needs and ending inventory of direct materials in quarter 1

	Quarter 1	Quarter 2	Quarter 3
Budget Unit Sales	2,000	1,800	1,000
Plus: Desired Finished Goods Ending Inventory (5% of next quarter sales 1,800 Units))	90	50
Total Needs	2,090	1,850
Less: Estimated Finished Goods Beginning Inventory	150	90
Budgeted Production Units	1,940	1,760

Part c -

Direct labor budget
	Quarter 1
Budgeted Production Units (Refer Note 1)	1,940
Direct labor time per unit	3
Total required direct labor time	5820
Direct labor rate per hour	$16.00
Budgeted direct labor in dollars	$93,120

Part d -

Manufacturing Overhead Budget
	Quarter 1
Budgeted Total Direct Labor Hours	5820
Variable Manufacturing Overhead (@ $15 per hour)	$87,300
Fixed Manufacturing Overhead ($186,240 / 4)	$46,560
Budgeted Manufacturing Overhead	$133,860

Part e - Ending finished goods inventory budget

Ending Finished Goods Inventory Quarter 1	90
Unit Product Cost
Direct materials (4 board meter * $34)	$136.00
Direct labor (3 hours *$16)	$48.00
Applied Manufacturing Overheads (3 hours * $15 + $186,240 / (Total Budget Units 2000+1800+1000+3500)	$67.44
Unit Product Cost	$251.44
Value of Ending Finished Goods Inventory	$22,629.60