Question

U Balance Corporation manufactures balance bikes for toddlers.  

Each bike requires 2 tires at a cost of $4.00 per tire, 0.5 direct labor hours and 3 machine hours. Production line works are paid $13.00 per hour. The company has estimated total manufacturing overhead of $400,000 for the year and allocates overhead on the basis of machine hours. Estimated machine hours total 80,000 for the period.  The company records $5,000 in depreciation expense each month.  

Production peaks in November as the company prepares for the gift giving season that occurs in December. The company has planned to produce the following units for the last four months of the year and January of the next year:

September	1,300
October	1,500
November	3,000
December	2,000
January	500

Desired ending inventory of the tires used on the balance bikes is 25% of the next month's production needs.

1. Create a direct materials budget for the third quarter of the year for tires used on the balance bikes. At the bottom of the budget, indicate the total cost to purchase the tires.

2. Create a direct labor budget for the third quarter of the year.

3. Calculate the predetermined overhead rate for manufacturing overhead.

4. Prepare a manufacturing overhead budget for the third quarter of the year.

Answer 1

1	Direct Material Budget
		October	November	December	Quarter
	Required production in units of finished goods	1,500	3,000	2,000	6,500
	Units of raw material needed per unit of finish goods	2	2	2	2
	Units of raw materials needed to meet production	3,000	6,000	4,000	13,000
	Plus: desired raw matetial Inventory	1,500	1,000	250	250
	Total units of raw material needed	4,500	7,000	4,250	13,250
	Less: Beginning raw matetial Inventory	750	1,500	1,000	750
	Units of raw materials to be purchased	3,750	5,500	3,250	12,500
	Unit cost of raw material	$4.00	$4.00	$4.00	$4.00
	Cost of raw materials to be purchased	$15,000	$22,000	$13,000	$50,000
2	Direct Labor Budget
		October	November	December	Total
	Units produced	1,500	3,000	2,000	6,500
	Direct labor time per unit (hours)	0.50	0.50	0.50	0.50
	Direct labor hours needed	750	1,500	1,000	3,250
	Cost per direct labor hour	$13.00	$13.00	$13.00	$13.00
	Total direct labor cost	$9,750	$19,500	$13,000	$42,250
3
	Production Overhead Budget
		October	November	December	Total
	Manufacturing overhead	$22,500	$45,000	$30,000	$97,500
	Depreciation	$5,000	$5,000	$5,000	$15,000
	Total production overhead	$27,500	$50,000	$35,000	$112,500
	Working
		October	November	December	Total
	Units produced	1,500	3,000	2,000	6,500
	Machine hours per unit (hours)	3	3	3	3
	Machine hours needed	4,500	9,000	6,000	19,500
	Predetermine overhead rate	$5.00
	($400,000/80,000)