Question

Self-Study Problem 10-1 Master Budget

Hansell Company’s management wants to prepare budgets for one of its products, Duraflex, for July 2019. The firm sells the product for $91 per unit and has the following expected sales (in units) for these months in 2019:

April	May	June	July	August	September
3,900	6,500	6,600	8,200	9,200	5,800

The production process requires 4 pounds of Dura-1000 and 2 pounds of Flexplas. The firm’s policy is to maintain an ending inventory each month equal to 10% of the following month’s budgeted sales, but in no case less than 500 units. All materials inventories are to be maintained at 5% of the production needs for the next month, but not to exceed 1,000 pounds. The firm expects all inventories at the end of June to be within the guidelines. The purchases department expects the materials to cost $1.25 per pound and $5.00 per pound for Dura-1000 and Flexplas, respectively.

The production process requires direct labor at two skill levels. The rate for labor at the K102 level is $50 per hour and $20 per hour for the K175 level. The K102 level can process one batch of duraflex per hour; each batch consists of 100 units. The manufacturing of Duraflex also requires one-tenth of an hour of K175 workers’ time for each unit manufactured.

Required:

On the basis of the preceding data and projections, prepare the following budgets:

a. Sales budget for July (in dollars).

b. Production budget for July (in units).

c. Production budget for August (in units).

d. Direct materials purchases budget for July (in pounds).

e. Direct materials purchases budget for July (in dollars).

f. Direct manufacturing labor budget for July (in dollars).

Answer 1

a. Sales budget for July (in dollars).

	Amount ($)
Sales Units for July	8200
Sale Price per unit	$ 91
Sales in dollars	$ 746200

b. Production budget for July (in units).

	Units
Sales Units for July	8200
Add: Closing Units for July (9200 units x 10 % or 500 units whichever is higher)i.e 920 units	920
Less: Beginning  Units for July (8200 units x 10 % or 500 units whichever is higher)i.e 820 units	(820)
Production in units	8300

c. Production budget for August (in units).

	Units
Sales Units for August	9200
Add: Closing Units for August (5800 units x 10 % or 500 units whichever is higher)i.e 580 units	580
Less: Beginning Units for August (9200 units x 10 % or 500 units whichever is higher)i.e 920 units	(920)
Production in units	8860

d. Direct materials purchase budget for July (in pounds).

	Dura-1000	Flexplas
Production units for July (A)	8300	8300
Requirement (B)	4 pounds	2 pounds
Material Consumption (A x B)	33200 pounds	16600 pounds
Add: Closing Inventory for July	[(8860 units x 4 pounds) x 5% or 1000 pounds whichever is lower i.e 1000	[(8860 units x 2 pounds) x 5% or 1000 pounds whichever is lower i.e 886
Less: Beginning Inventory for July	[(8300 units x 4 pounds) x 5% or 1000 pounds whichever is lower i.e 1000	[(8300 units x 2 pounds) x 5% or 1000 pounds whichever is lower i.e 830
Material Purchase for July in pounds	33200 pounds	16656 pounds

e. Direct materials purchases budget for July (in dollars).

	Dura-1000	Flexplas
Material Purchase for July in pounds (A)	33200 pounds	16656 pounds
Material Cost (B)	$1.25 per pounds	$ 5 per pounds
Material Purchase Cost (A x B)	$ 41500	$ 83280

f. Direct manufacturing labor budget for July (in dollars).

	K102	K175
Production units for July (A)	8300	8300
Requirement (B)	1 hr per 100 units	1/10 of units
Total labor hours (A x B)	83 (8300 x 1 /100)	830 (8300 x 1/10)
Labor Rate	$ 50 per hour	$ 20 per hour
Manufacturing labour Cost	$ 4150	$ 16600