Question

Baci is a well-known lollipops maker in Western Australia and produces lollipops in two size, i.e., regular and large. The company sells their products to convenience stores, fairs, schools for fundraisers and in bulk on the internet. 2018 summer is approaching and Baci is preparing its budget for the December. All Baci’s lollipops are hand-made, mostly out of sugar, and attached to wooden sticks. Expected sales are based on past experience.

Other information for December 2018 is as follows:

Input prices :

Direct materials:

Sugar $0.50 per kg

Sticks $0.30 each

Direct manufacturing labour $8 per direct manufacturing labour hour (DMLH)

Input quantities per unit of output

Regular Large

Direct materials:

Sugar 0.25 kg 0.5 kg

Sticks 1 1

Direct manufacturing labour hour (DMLH) 0.2 hour 0.25 hour

Set-up hours per batch 0.08 hour 0.09 hour

Inventory data for direct materials1

Sugar Sticks

Beginning inventory 125 kg 350

Target ending inventory 240 kg 480

Cost of beginning inventory $64 $105

1: Baci accounts for direct materials using a FIFO cost flow assumption.

Sales and inventory data for finished goods2

Regular Large

Expected sales in units 3,000 1,800

Selling price $3 $4

Target ending inventory in units 300 180

Beginning inventory in units 200 150

Beginning inventory in dollars $500 $474

2: Baci uses a FIFO cost flow assumption for finished goods inventory.

All the lollipops are made in batches of 10. Baci incurs manufacturing overhead cost, and marketing and general administration costs, but customers pay for shipping. Other 3 than manufacturing labour costs, monthly processing costs are very small. Baci uses activity-based costing (ABC) and has classified all overhead costs for December 2018 as follows:

Cost type Denominator activity Rate

Manufacturing:

Set-up Set-up hours $20 per set-up hour

Processing Direct manufacturing labour hour (DMLH) $1.70 per DMLH

Non-manufacturing:

Marketing & general admin Sales revenue 10%

Required 1. Prepare each of the following for December 2018:

(e) Manufacturing overhead cost budgets for processing and set-up activities

(f) Budgeted unit cost of ending finished goods inventory and ending inventories budget

(g) Cost of goods sold budget

(h) Marketing and general administration costs budget

Answer 1

A) Calculatio of set up cost

Particulars . Small. Large

Expected sales . 3000 . 1800

+ Closing inventory . 300 . 180  

(-) beginning inventory. 200 . 150

Total production . 3100 . 1830

÷. Batch size . 10 . 10

Total number of batches . 310. 183

Hours per batch. 0.08 . 0.09

Total set up hours . 24.8 16.47

Set up cost per set up hr. 20 . 20

Set up cost. 496. 329.4

Total set up cost 496+329.4 = 825.4

B) Calculation of processing cost

Particulars . Small. Large

Labour hrs per unit of ouput. 0.2 . 0.25

Total production . 3100 . 1830

Total processing hours . 620 . 457.5

Rate per hour . 1.70 . 1.70

processing cost 1054 . 777.75

Total processing cost = 1054+777.75= 1831.75

e. Manufacturing overhead cost budget for processing and set up activities

Particulars	amount
Set up cost ( from above)	825.4
Processing cost ( from above)	1831.75

f. Budgeted unit cost of ending finished goods

Partculars	small	large
Direct material : sugar	0.125 (0.5x0.25)	0.25 (0.5x0.5)
Direct material : sticks	0.3 (0.3x1)	0.3 (0.3x1)
Direct manufacturing labour hours	1.6 (0.2x8)	2 (0.25x8)
Set up cost	0.16 ((0.08x20)/10)	0.18 ((0.09x20)/10)
Processing cost	0.34 (0.2x1.7)	0.425 (0.25x1.7)
Total finished goods cost	2.525	3.155
x Ending inventories (units)	300	180
Total ending inventoried (AMT.)	757.5	567.9

g. Cost of goods sold

Particulars	small	large
Total unit cost of inventory	2.525	3.155
Total sales	3000	1800
Cost of goods sold	7575	5679

Marketing and general administration cost budget

Particulars	small	large
Sales unit (a)	3000	1800
Selling price (b)	3	4
C Total sales (a x b)	9000	7200
Marketing and general adm. Exp. 10% of C	900	720