Question

Spring Manufacturing Company makes two components identified as C12 and D57. Selected budgetary data for 2019 follow: Finished Components C12 D57 Requirements for each finished component: RM 1 10 pounds 8 pounds RM 2 0 4 pounds RM 3 2 pounds 1 pound Direct labor 2 hours 3 hours Product information: Sales price $ 160 $ 180 Sales (units) 12,000 10,000 Estimated beginning inventory (units) 410 110 Desired ending inventory (units) 300 200 Direct Materials Information RM1 RM2 RM3 Cost per pound $ 2 $ 2.50 $ 0.50 Estimated beginning inventory in pounds 2,900 1,400 700 Desired ending inventory in pounds 3,900 1,500 1,800 The firm expects the average wage rate to be $30 per hour in 2019. Spring Manufacturing uses direct labor hours to apply overhead. Each year the firm determines the overhead application rate for the year based on budgeted direct labor hours for the year. The firm maintains negligible Work-in-Process Inventory and expects the cost per unit for both beginning and ending inventories of finished products to be identical. Factory Overhead Information Indirect materials—variable $ 10,000 Miscellaneous supplies and tools—variable 4,500 Indirect labor—variable 45,000 Supervision—fixed 170,000 Payroll taxes and fringe benefits—variable 200,000 Maintenance costs—fixed 25,000 Maintenance costs—variable 10,130 Depreciation—fixed 71,330 Heat, light, and power—fixed 43,470 Heat, light, and power—variable 10,000 Total $ 589,430 Selling and Administrative Expense Information Advertising $ 63,000 Sales salaries 160,000 Travel and entertainment 63,000 Depreciation—warehouse 5,000 Office salaries 61,000 Executive salaries 260,000 Supplies 4,000 Depreciation—office 5,900 Total $ 621,900 The effective income tax rate for the company is 50%. Spring Manufacturing Company has had a continuous improvement (kaizen) program for the last two years. According to the kaizen program, the firm is expected to manufacture C12 and D57 with the following specifications: Cost Element C12 D57 Raw material 1 9 lbs. 7 lbs. Raw material 2 0 3.6 lbs. Raw material 3 1.8 lbs. 0.8 lb. Direct labor 1.5 hrs. 2.0 hrs. The company specifies that the variable factory overhead is to decrease by 10% while the fixed factory overhead is to decrease by 5%, except for depreciation expenses. The company does not expect the price of the raw materials to change. However, the hourly wage rate is likely to be $30. Required: Assume the firm can attain the expected operating level as prescribed by the kaizen program: 1-a. Prepare the Sales budget for 2019. 1-b. Prepare the Production budget for 2019. 1-c. Prepare the Direct materials purchases budget (units and dollars) for 2019. 1-d. Prepare the Direct labor budget for 2019. 1-e. Prepare the Factory overhead budget for 2019. 1-f. Prepare the Cost of goods sold and ending finished goods inventory budgets for 2019. 1-g. Prepare the Selling and administrative expense budget for 2019. 1-h. Prepare the income statement, the last item of which is labeled After-tax Operating Income for 2019.

Answer 1

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1. Sales Budget
		C12	D57	Total
Sales in Units		12000	10000	22000
Selling Price per Unit		$                      160	$                   180
Total Budgeted Sales		$          1,920,000	$       1,800,000	$       3,720,000
2. Production Budget
		C12	D57
Budgetes Sales in Units		12000	10000
Add: Desired Ending Inventory		300	200
Total units Needed		12300	10200
Less: Beginning Inventory		-410	-110
Budgeted Production in Units		11890	10090
3. Direct Material Purchase Budget:
RM 1:
		C12	D57	Total
Budgeted Production in Units		11890	10090
Pound per unit		9	7
RM1 Needed for Production		107010	70630	177640
Add: Desired Ending Inventory				3900
Total RM1 Needed				181540
Less: Beginning Inventory				-2900
Required Purchase of RM1 in Units				178640
Cost per Pound				$                        2
Budgeted Purchase of RM 1				$           357,280
RM2:
		C12	D57	Total
Budgeted Production in Units		11890	10090
Pound per unit		0	3
RM2 Needed for Production		0	30270	30270
Add: Desired Ending Inventory				1500
Total RM2 Needed				31770
Less: Beginning Inventory				-1400
Required Purchase of RM2 in Units				30370
Cost per Pound				$                    2.5
Budgeted Purchase of RM2				$             75,925
RM3:
		C12	D57	Total
Budgeted Production in Units		11890	10090
Pound per unit		1.8	0.8
RM3 Needed for Production		21402	8072	29474
Add: Desired Ending Inventory				1800
Total RM3 Needed				31274
Less: Beginning Inventory				-700
Required Purchase of RM3 in Units				30574
Cost per Pound				$                    0.5
Budgeted Purchase of RM3				$             15,287
4. Direct Manufacturing Labor Budget
		C12	D57	Total
Budgeted Production in Units		11890	10090
Direct Labor Hours Per Unit		1.5	2
Total Direct Labor Hours Needed		17835	20180	38015
Hourly Wage Rate				$                      30
Budgeted Direct Labor Cost				$       1,140,450
5. Factory Overhead Budget
Variable Factory Overhead:	10% decrease
Indirect materials		$                   9,000
Miscellaneous supplies and tools		$                   4,050
Indirect Labor		$                40,500
Payroll taxes and fringe benefits		$              180,000
Maintenance Cost		$                   9,117
Heat Light and Power		$                   9,000	$           251,667
Fixed Factory Overhead:	5% decrease
Supervision		$              161,500
Maintenance Cost		$                23,750
Heat Light and Power		$                41,297
Total Cash Fixed Factory Overhead		$              226,547
Depreciation		$                71,330	$           297,877
Total Budgeted Factory Overhead			$           549,544
6. Budgeted Cost of Goods Sold
		C12	D57	Total
Sales Volume		12,000	10,000	22,000
Cost per Unit (see below)		$                     85.6	$                112.3
Cost of Goods Sold		$          1,027,007	$       1,123,119	$       2,150,127
Finished Goods Inventory		300	200
Cost per Unit (see below)		$                     85.6	$                112.3
Budgeted Ending Inventory		$                25,675	$             22,462	$             48,138
Schedule 1: Cost per Unit--Product C12:
Cost Element		Unit input cost	Quantity	Cost per Unit
RM-1		$                           2	9.00	$                18.00
RM-3		$                     0.50	1.80	$                  0.90
Direct Labor		$                         30	1.50	$                45.00
Variable Overhead	251667/38015	$                     6.62	1.50	$                  9.93
Fixed Overhead	297876.5/38015	$                     7.84	1.50	$                11.75
Manufacturing Cost per unit				$                85.58
Schedule 2: Cost per Unit--Product D57:
Cost Element		Unit input cost	Quantity	Cost per Unit
RM-1		$                           2	7.00	$                14.00
RM-2		$                       2.5	3.60	$                  9.00
RM-3		$                     0.50	0.80	$                  0.40
Direct Labor		$                         30	2.00	$                60.00
Variable Overhead	251667/38015	$                     6.62	2.00	$                13.24
Fixed Overhead	297876.5/38015	$                     7.84	2.00	$                15.67
Manufacturing Cost per unit				$             112.31
7. Budgeted selling and administrative expenses:
Selling Expenses:
Advertising	$               63,000
Sales Salaries	$            160,000
Travel and entertainment	$               63,000
Depreciation	$                 5,000	$              291,000
Administrative expenses:
Office Salaries	$               61,000
Executive Salaries	$            260,000
Supplies	$                 4,000
Depreciation	$                 5,900	$              330,900
Total Selling and Administrative Expenses		$              621,900
8. Budgeted Income Statement:
Sales	$         3,720,000
Less Cost of Goods Sold	$         2,150,127
Gross Margin	$         1,569,873
Selling and Administrative Expenses	$            621,900
Pre tax Operating Income	$            947,973
Income Tax 50%	$            473,987
After Tax Operating Income	$            473,987