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.

These and other data compiled by Demarest are summarized in the following table.

	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

2. For each item used in the firm’s production budget and direct-labor budget, select the other components of the master budget (except for financial statement budgets) that also, directly or indirectly, would use these data.

1. Sales data:

Selling and administrative expense budget

Production-overhead budget

Direct-material budget

Cash budget

Cost-of-goods-sold budget

Sales budget

Cash disbursements budget

2. Production data:

Selling and administrative expense budget

Direct-material budget

Cost-of-goods-sold budget

Production-overhead budget

Cash budget

Cash disbursements budget

Sales budget

3. Direct-labor-hour data:

Selling and administrative expense budget

Production-overhead budget

Direct-material budget

Cash budget

Cost-of-goods-sold budget

Sales budget

Cash disbursements budget

4. Direct-labor cost data:

Selling and administrative expense budget

Production-overhead budget

Direct-material budget

Cash budget

Sales budget

Cost-of-goods-sold budget

Cash disbursements budget

Answer 1

2.         Use of data throughout the master budget:

Components of the master budget, other than the production budget and the direct-labor budget, that would also use the sales data include the following:

            •           Sales budget

            •           Cost-of-goods-sold budget

            •           Selling and administrative expense budget

Components of the master budget, other than the production budget and the direct-labor budget, that would also use the production data include the following:

            •           Direct-material budget

            •           Manufacturing-overhead budget

            •           Cost-of-goods-sold budget

Components of the master budget, other than the production budget and the direct-labor budget, that would also use the direct-labor-hour data include the following:

•           Manufacturing-overhead budget (for determining the overhead application rate)

Components of the master budget, other than the production budget and the direct-labor budget that would also use the direct labor cost data include the following:

            •           Manufacturing-overhead budget (for determining the overhead application rate)

            •           Cost-of-goods-sold budget

            •           Cash budget

            •           Budgeted income statement