Question

The La Casa division of Peters Ltd produces an intricate component used in Peter’s major product line. Recently, the divisional manager has been concerned by a lack of coordination between purchasing and production personnel and believes that a monthly budgeting system should be introduced to manage these interdependencies.

As an experiment, La Casa’s divisional manager has decided to develop budget information for the third quarter of the current year to test the system, before the full budget system is implemented for the following year. In response to the divisional manager’s request, the divisional accountant has accumulated the following data:

Sales:

Sales to 30 June, the first six months of the current year, are 24 000 units. Actual sales in units for May and June, and estimated unit sales for the next four months, are as follows:

May (actual)	4 000
June (actual)	4 000
July (estimated)	5 000
August (estimated)	6 000
September (estimated)	7 000
October (estimated)	7 000

The La Casa division expects to sell 60 000 units during the year ending 31 December.

Direct material:

Data regarding the materials used in the component are shown in the following schedule. The desired monthly ending inventory for all direct materials is an amount sufficient to produce the next month’s estimated sales.

Direct material	Units of direct material per finished component	Cost per unit	Inventory level 30 June (units)
No. 101	6	$2.40	35 000
No. 211	4	3.60	30 000
No. 242	2	1.20	14 000

Direct labour:

Each component must pass through three different processes to be completed. Data regarding direct labour follows:

Process	Direct labour hours per finished component	Cost per direct labour hour
Forming	0.400	$40.00
Assembly	1.000	32.00
Finishing	0.125	36.00

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Manufacturing overhead:

The division produced 27 000 components during the six-month period ending 30 June. The actual variable overhead costs incurred during this six-month period are given in the following schedule. The divisional accountant believes that the variable overhead costs will be incurred at the same rate per unit of output during the last six months of the year:

Supplies	$59 400
Electricity	27 000
Indirect labour	54 000
Other	8 100
Total variable overhead	$148 500

The fixed overhead costs incurred during the first six months amounted to $93 500. Fixed overhead costs are budgeted for the full year as follows:

Supervision	$60 000
Taxes	7 200
Depreciation	86 400
Other	32 400
Total fixed overhead	$186 000

Finished goods:

The desired monthly ending inventory of completed components is 80 per cent of the next month’s estimated sales. There are 5 000 finished units in inventory on 30 June.

Required:

1. Prepare a production budget in units for the La Casa division for the third quarter, ending 30 September.
2. Independent of your answer to requirement 1, assume that the La Casa division plans to produce 18 000 units during the third quarter, ending 30 September, and 60 000 units for the year ending 31 December.
   1. (a)Prepare a direct material purchases budget, in units and dollars, for the third quarter.
   2. (b)Prepare a direct labour budget, in hours and dollars, for the third quarter.
   3. (c)Prepare a manufacturing overhead budget for the six-month period ending 31 December.

Answer 1

Answer :

1.         Production budget:

          Estimated sales for third quarter                                                                   18 000   units

                   Less: Beginning inventory    (5 000)

Plus:  Ending inventory (80% × 7000)   5 600

          Production requirements for third quarter                                                    18 600   units

2.          Material, labour, and overhead budgets:

(a) Material purchases	Direct material
#101	#211	#242
Usage	108 000	72 000	36 000
Less:	Beginning inventory	(35 000)	(30 000)	(14 000)
Plus:	Ending inventory	42 000	28 000	14 000
Purchase in units	115 000	70 000	36 000
Price per unit	× $2.40	× $3.60	× $1.20
Cost of purchases	$276 000	$252 000	$43 200

(b) Direct labour budget

	Units produced	DLH per unit	Total DLH	Cost per DLH	Total cost
Forming	18 000	.4	7 200	$40	$288 000
Assembly	18 000	1.0	18 000	32	576 000
Finishing	18 000	.125	2 250	36	81 000
			27 450	DHL	$945 000

         

          (c)     Expected annual production*    60 000   units

                   Actual production 6 months to June 30 27 000

                   Expected production during last six months   33 000   units

Variable overhead rate per unit ($148 500 ÷ 27 000 units) x $5.50

                   Budgeted variable overhead   $181 500

                   Budgeted fixed overhead**   93 000

Total budgeted overhead   $274 500

* It is assumed that production is planned to equal expected sales.

**50% of the budgeted annual cost of $186 000.

        This assumes that management believes the annual budget for fixed overhead is still valid, and fixed overhead will be incurred at the same budgeted rate (i.e., $93 000 every six months).

Two alternative amounts are also reasonable, depending on the assumptions one makes: (1) $92 500 (original annual budget of $186 000 minus the $93 500 incurred in the first six months), or (2) $93 500, the actual fixed overhead incurred in the first six months.