Question

XueXue

Manufacturing Company manufactures blue? rugs, using wool and dye as direct materials. One rug is budgeted to use

4040

skeins of wool at a cost of

$ 5$5

per skein and

0.70.7

gallons of dye at a cost of

$ 9$9

per gallon. All other materials are indirect. At the beginning of the year

XueXue

has an inventory of

464 comma 000464,000

skeins of wool at a cost of

$ 1 comma 113 comma 600$1,113,600

and

4 comma 3004,300

gallons of dye at a cost of

$ 26 comma 230$26,230.

Target ending inventory of wool and dye is zero.

XueXue

uses the FIFO inventory cost flow method.

blue rugs are very popular and demand is? high, but because of capacity constraints the firm will produce only

230 comma 000230,000

blue rugs per year. The budgeted selling price is

$ 2 comma 300$2,300

each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero.

XueXue

makes rugs by? hand, but uses a machine to dye the wool.? Thus, overhead costs are accumulated in two cost

poolslong dash—one

for weaving and the other for dyeing. Weaving overhead is allocated to products based on direct manufacturing? labor-hours (DMLH). Dyeing overhead is allocated to products based on?machine-hours (MH).

There is no direct manufacturing labor cost for dyeing.

XueXue

budgets

6060

direct manufacturing? labor-hours to weave a rug at a budgeted rate of

$ 16$16

per hour. It budgets

0.30.3

?machine-hours to dye each skein in the dyeing process.

There is no direct manufacturing labor cost for dyeing.

XueXue

budgets

6060

direct manufacturing? labor-hours to weave a rug at a budgeted rate of

$ 16$16

per hour. It budgets

0.30.3

?machine-hours to dye each skein in the dyeing process.

The following table presents the budgeted overhead costs for the dyeing and weaving cost pools:
	Dyeing	Weaving
	(based on 2,760,000 MH)	(based on 13,800,000 DMLH)
Variable costs
Indirect materials	$0	$15,550,000
Maintenance	6,590,000	5,570,000
Utilities	7,580,000	1,255,000
Fixed costs
Indirect labor	380,000	1,865,000
Depreciation	2,226,000	285,000
Other	750,000	5,835,000
Total budgeted costs	$17,526,000	$30,360,000

1.	Prepare a direct material usage budget in both units and dollars.
2.	Calculate the budgeted overhead allocation rates for weaving and dyeing.
3.	Calculate the budgeted unit cost of a blue rug for the year.
4.	Prepare a revenues budget for blue rugs for the? year, assuming XueXue sells? (a) 230 comma 000230,000 or? (b) 200 comma 000200,000 blue rugs? (that is, at two different sales? levels).
5.	Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
6.	Find the budgeted gross margin for blue rugs under each sales assumption.
7.	What actions might you take as a manager to improve profitability if sales drop to 200 comma 000200,000 blue? rugs?
8.	How might top management at XueXue use the budget developed in requirements? 1-6 to better manage the? company?

Answer 1

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1. Direct Material usage
			Wool	Dye	Total
Blue Rugs being Produced 230000
For One Blue Rug, Material Needed			40	0.7
Total Direct Material Usage	230000*40	230000*0.7	9200000	161000
In Dollars:			Wool $	DYE $	Total
Beginning Inventory A:
464000 Skiens			1113600
4300 Gallons				26230
To be purchased B:
(9200000-464000)*5			43680000
(161000-4300)*9				1410300
Direct Material usage ($) A+B			44793600	1436530	46230130
2. Budgeted Overhead Allocation Rates:
		Weaving	Dying
Budgeted Overhead		30360000	17526000
Machine Hours			2760000
Labor Hours		13800000
Budgeted Overhead Allocation Rates	Ovh/Hour	2.2	6.35
3. Budgeted Unit cost of Rug:
	Cost per unit of Input	Input per unit of Output	Total
Wool	5	40	200
Dye	9	0.7	6.3
Direct Manu Labor	16	60	960
Dyeing Overhead*	6.35	12	76.2
Weaving Overhead	2.2	60	132
Total			1374.5
Dyeing Overhead: 0.3 Machine Hour per skein*40 Skein
4. Revenue Budget
Units	Selling Price	Total Revenue Budget
230000	2300	529000000
200000	2300	460000000
5. COGS
	Sale 230000	Sale 200000
Beginning Finished Goods	0	0
Direct Material (From -1)	46230130	46230130
Direct Manufacturing (230000*960)	220800000	220800000
Dying Overhead (230000*76.2)	17526000	17526000
Weaving Overhead (230000*132)	30360000	30360000
Cost of Goods Availabel for Sale	314916130	314916130
Less: Ending Finished Goods (30000*1374.5)		40935000
Cost of Goods Sold	314916130	273981130
6. Gross Margin
	Sale 230000	Sale 200000
Revenue	529000000	460000000
Less: COGS	314916130	273981130
Gross Margin	214083870	186018870
7. Should attempt to reduce Fixed cost and to produce less to reduce variable cost and hence inventory cost
8. Should attempt to find out ways to increase sale and imporve quality.