Question

Exercise 7-15 Manufacturing: Direct materials, direct labor, and overhead budgets LO P1

MCO Leather Goods manufactures leather purses. Each purse requires 3 pounds of direct materials at a cost of $4 per pound and 0.7 direct labor hours at a rate of $10 per hour. Variable manufacturing overhead is charged at a rate of $2 per direct labor hour. Fixed manufacturing overhead is $11,000 per month. The company’s policy is to end each month with direct materials inventory equal to 20% of the next month’s materials requirement. At the end of August the company had 4,580 pounds of direct materials in inventory. The company’s production budget reports the following.

Production Budget	September		October		November
Units to be produced	4,800		7,200		6,500

(1) Prepare direct materials budgets for September and October.
(2) Prepare direct labor budgets for September and October.
(3) Prepare factory overhead budgets for September and October.

MCO LEATHER GOODS Direct Materials Budget For the Months of September and October September October Budgeted production (units) Materials requirements per unit (lbs.) Materials needed for production (lbs.) Budgeted ending inventory (lbs.) Total materials requirements (lbs.) Budgeted beginning inventory (lbs.) Materials to be purchased (lbs.) Direct material cost per lb. Total budgeted direct materials

MCO LEATHER GOODS Direct Labor Budget For the Months of September and October September October Budgeted production (units) DL hours required per unit Total direct labor hours needed Direct labor rate per hour Total budgeted direct labor

MCO LEATHER GOODS Factory Overhead Budget For the Months of September and October September October Total direct labor hours needed VOH rate per DL hour Budgeted variable overhead Budgeted fixed overhead Total budgeted factory overhead

Answer 1

Ans.   1	MCO LEATHER GOODS
	Direct Materials Budget
	For the Months of September and October
		September	October
	Budgeted production (units)	4,800	7,200
	(X) Materials requirement per unit	3	3
	Materials needed for production	14400	21600
	Add: budgeted ending inventory	4320	3900
	Total materials requirements	18720	25500
	Less: Budgeted beginning inventory	-4580	-4320
	Materials to be purchased	14140	21180
	(X) Direct materials per unit	$4	$4
	Total budgeted direct materials	$56,560	$84,720
	*Ending inventory for current month = Materials requirements of next quarter * 20%
	*Beginning inventory for Current month = Ending inventory of previous month
	*Calculations for Ending inventory:			*Calculations for Beginning inventory:
Months			Months
September	21,600 * 20%	4320	September	Ending inventory of August	4580
October	19,500 * 20%	3900	October	Ending inventory of September	4320
	Materials requirement for November = Units produced in November * materials requirement per unit
		6,500 * 3     =	19,500
Ans. 2	MCO LEATHER GOODS
	Direct Labor Budget
	For the Months of September and October
		September	October
	Budgeted production (units)	4,800	7,200
	(X) Direct labor hours	0.7	0.7
	Total labor hours needed	3360	5040
	(X) Wages rate per hour	$10	$10
	Budget direct labor cost	$33,600	$50,400
	*Total labor hours needed = units to be produced * direct labor hours
	*Budgeted direct labor cost = Total labor hours needed * Wages rate per hour
Ans. 3	MCO LEATHER GOODS
	Factory Overhead Budget
	For the Months of September and October
		September	October
	Budgeted production (units)	4,800	7,200
	(X) Variable overhead rate	$2.00	$2.00
	Budgeted variable overhead	$9,600	$14,400
	Budgeted fixed overhead	$11,000	$11,000
	Budgeted total overhead	$20,600	$25,400
	*Budgeted total overhead = Budgeted variable overhead + Budgeted fixed overhead
	*Budgeted variable overhead = Budgeted production * Variable overhead rate per unit