Question

Problem 9-23 Integrated Operating Budgets [LO2]

The Western Division of Keltic Company manufactures a vital component that is used in one of Keltic’s major product lines. The Western Division has been experiencing some difficulty in coordinating activities among its various departments, which has resulted in some shortages of the component at critical times. To overcome the shortages, the manager of the Western Division has decided to initiate a monthly budgeting system that is integrated among departments.

     The first budget is to be for the second quarter of the current year. To assist in creating the budget, the divisional controller has accumulated the following information:

Sales. Sales through the first three months of the current year were 48,000 units. Actual sales in units for January, February, and March, and planned sales in units over the next five months, are given below:

January (actual)		9,000
February (actual)		15,000
March (actual)		24,000
April (planned)		30,000
May (planned)		53,000
June (planned)		75,000
July (planned)		68,000
August (planned)		45,000

In total, the Western Division expects to produce and sell 380,000 units during the current year.

Direct Materials. Two different materials are used in the production of the component. Data regarding these materials are given below:

Direct Materials	Units of Direct Materials per Finished Component						Inventory at March 31
No. 226		2	kilograms	$	4.00	per kilogram		23,000	kilograms
No. 301		5	metres	$	1.50	per meter		35,000	metres

     Material No. 226 is sometimes in short supply. Therefore, the Western Division requires that enough of the material be on hand at the end of each month to provide for 60% of the following month’s production needs. Material No. 301 is easier to obtain, so only 30% of the following month’s production needs must be on hand at the end of each month.

Direct Labour. The Western Division has three departments through which the components must pass before they are completed. Information relating to direct labour in these departments is given below:

Department	Direct Labour-Hours per Finished Component			Cost Per Direct Labour-Hour
Cutting		0.15		$	16.00
Assembly		0.60		$	14.00
Finishing		0.10		$	18.00

Direct labour is adjusted to the workload each month.

Manufacturing Overhead. The Western Division manufactured 48,000 components during the first three months of the current year. The actual variable overhead costs incurred during this three month period are shown below. The Western Division’s controller believes that the variable overhead costs incurred during the last nine months of the year will be at the same rate per component as experienced during the first three months.

Utilities	$	63,000
Indirect labour		34,000
Supplies		18,000
Other		9,800
Total variable overhead	$	124,800

     The actual fixed manufacturing overhead costs incurred during the first three months totalled $1,287,000. The Western Division has budgeted fixed manufacturing overhead costs for the entire year as follows:

Supervision	$	785,000
Property taxes		129,000
Depreciation		2,619,000
Insurance		568,000
Other		65,000
Total fixed manufacturing overhead	$	4,166,000

Finished Goods Inventory. The desired monthly ending finished goods inventory is 20% of the next month’s estimated sales. The Western Division has 6,000 units in finished goods inventory on March 31.

Required:
1. Prepare a production budget for the Western Division for the second quarter ending June 30. Show computations by month and in total for the quarter.

   2. Prepare a direct materials purchases budget for each type of material for the second quarter ending June 30. Again show computations by month and in total for the quarter.

3. Prepare a direct labour budget for the second quarter ending June 30. This time it is not necessary to show monthly figures; show quarterly totals only. Assume that the workforce is adjusted as work requirements change. (Round "Per Unit" answers to 2 decimal places.)

   4. Assume that the company plans to produce a total of 380,000 units for the year. Prepare a manufacturing overhead budget for the nine-month period ending December 31. (Do not compute a predetermined overhead rate.) Again, it is not necessary to show monthly figures. (Round Variable manufacturing overhead rate per unit to 2 decimal places.)

Answer 1

Q1)

Production = Sales + Desired closing stock - Opening stock

PARTICULARS	APRIL	MAY	JUNE		TOTAL
SALES	30000	53000	75000		158000
DESIRED CLOSING STOCK	10600	15000	13600		13600
OPENING STOCK	6000	10600	15000		6000
PRODUCTION	34600	57400	73600		165600

Q2)

Direct material purchase budget (No.226)

PARTICULARS	APRIL	MAY	JUNE
PRODUCTION	69200	114800	147200
ENDING INVENTORY	68880	88320	76080
OPENING INVENTORY	23000	68880	88320
PURCHASE	115080	134240	13496

AMOUNT FOR APRIL = 460320 MAY= 536960 JUNE=539840

TOTAL AMOUNT FOR QUARTER ENDING JUNE 30TH

PRODUCTION = 331200

ENDING INVENTORY =76080

OPENING INVENTORY = 23000

= 384280 UNITS

TOTAML AMOUNT = $1537120

DIRECT MATERIAL PURCHASE BUDGET FOR NO.301

PARTICULARS	APRIL	MAY	JUNE	TOTAL
PRODUCTION	173000	287000	368000	828000
ENDING INVENTORY	86100	110400	95100	95100
OPENING INVENTORY	35000	86100	110400	35000
PURCHASE	224100	311300	352700	888100
TOTAL PURCHASE AMOUNT	336150	466950	529050	1332150

Q3)

PARTICULARS	CUTTING	ASSEMBLY	FINISHING
TOTAL PRODUCTION	165600	165600	165600
LABOUR PER FINISHED PRODUCT	.15	.60	.10
TOTAL LABOUR	24840	99360	16560
LABOUR RATE	16	14	18
LABOUR AMOUNT	397440	1391040	298080

TOTAL LABOUR AMOUNT FOR THE QUARTER = $2086560

Q4)

BUDGETED TOTAL PRODUCTION FOR THE YEAR = 380000

PRODUCTION FOR 1ST QUARTER = 48000

BUDGETED TOTAL PRODUCTION FOR 9 MONTHS = 332000

VARIABLE OVERHEAD RATE NFOR 48000 =$124800

THEREFORE VARIABLE OVERHEAD COST FOR 332000 = $863200

FIXED OVERHEAD COST FOR 9 MONTHS = $2879000 ( 4166000-1287000)

TOTAL MANUFACTURING OVERHEAD COST = $3742200