Question

Spiffy Shades Corporation manufactures artistic frames for sunglasses. Talia Demarest, controller, is responsible for preparing the company’s master budget. In compiling the budget data for 20x1, Demarest has learned that new automated production equipment will be installed on March 1. This will reduce the direct labor per frame from 4.0 hours to 3.75 hours.

Labor-related costs include pension contributions of $1.05 per hour, workers’ compensation insurance of $0.75 per hour, employee medical insurance of $3 per hour, and employer contributions to Social Security equal to 6.00 percent of direct-labor wages. The cost of employee benefits paid by the company on its employees is treated as a direct-labor cost. Spiffy Shades Corporation has a labor contract that calls for a wage increase to $22.00 per hour on April 1, 20x1. Management expects to have 19,000 frames on hand at December 31, 20x0, and has a policy of carrying an end-of-month inventory of 100 percent of the following month’s sales plus 40 percent of the second following month’s sales.

	January		February		March		April		May
Direct-labor hours per unit	4.0		4.0		3.75		3.75		3.75
Wage per direct-labor hour	$ 20.00		$ 20.00		$ 20.00		$ 22.00		$ 22.00
Estimated unit sales	13,000		15,000		11,000		12,000		12,000
Sales price per unit	$ 58.00		$ 55.50		$ 55.50		$ 55.50		$ 55.50
Production overhead:
Shipping and handling (per unit sold)	$      1.00		$      1.00		$      1.00		$      1.00		$      1.00
Purchasing, material handling, and inspection (per unit produced)	$      2.00		$      2.00		$      2.00		$      2.00		$      2.00
Other production overhead (per direct-labor hour)	$      6.00		$      6.00		$      6.00		$      6.00		$      6.00

      Required:

1. Prepare a production budget and a direct-labor budget for Spiffy Shades Corporation by month and for the first quarter of 2001. (Round "Direct-labor hours per unit" to 2 decimal places.)

Answer 1

1.)
a.)	Production Budget
		January	February	March	Quarter
	Estimated unit sales	13,000	15,000	11,000	39,000
	Add: Desired Ending Inventory	19,400	15,800	16,800	16,800
	(100% of Next month + 40% Second month sales)
	Total Need	32,400	30,800	27,800	55,800
	Less: Beginning Inventory	19,000	19,400	15,800	19,000
	Budgeted Production	13,400	11,400	12,000	36,800

Workings:
	January	February	March	Quarter
Estimated unit sales	13,000	15,000	11,000	39,000
Add: Desired Ending Inventory	=(15000*100%)+(11000*40%)	=(11000*100%)+(12000*40%)	=(12000*100%)+(12000*40%)	16,800
(100% of Next month + 40% Second month sales)
Total Need	32,400	30,800	27,800	55,800
Less: Beginning Inventory	19,000	=(15000*100%)+(11000*40%)	=(11000*100%)+(12000*40%)	19,000
Budgeted Production	13,400	11,400	12,000	36,800

b.)	Direct labor Budget
		January	February	March	Quarter
	Budgeted Production	13,400	11,400	12,000	36,800
	x Direct labor hour per unit	4	4	3.75
	Total Direct labour hours required	53,600	45,600	45,000	144,200
	x direct labor wage per hour	20	20	20	20
	Budgeted Direct labor Cost $	1,072,000	912,000	900,000	2,884,000