Question

Exercise 8-16 Direct Materials and Direct Labor Budgets [LO8-4, LO8-5]

The production department of Zan Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year:

	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Units to be produced	12,000	15,000	14,000	13,000

In addition, 15,000 grams of raw materials inventory is on hand at the start of the 1st Quarter and the beginning accounts payable for the 1st Quarter is $6,200.

Each unit requires 5 grams of raw material that costs $1.80 per gram. Management desires to end each quarter with an inventory of raw materials equal to 25% of the following quarter’s production needs. The desired ending inventory for the 4th Quarter is 5,000 grams. Management plans to pay for 60% of raw material purchases in the quarter acquired and 40% in the following quarter. Each unit requires 0.40 direct labor-hours and direct laborers are paid $13.50 per hour.

Required:

1.&2. Calculate the estimated grams of raw material that need to be purchased and the cost of raw material purchases for each quarter and for the year as a whole.

3. Calculate the expected cash disbursements for purchases of materials for each quarter and for the year as a whole.

4. Calculate the estimated direct labor cost for each quarter and for the year as a whole. Assume that the direct labor workforce is adjusted each quarter to match the number of hours required to produce the estimated number of units produced.

Answer 1

	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Units to be produced	12,000	15,000	14,000	13,000
Raw Material Purchase & Cost Budget:	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Total
Units to be produced	12000	15000	14000	13000	54000
Raw Material Required PU	5	5	5	5	5
Raw Material Required for Production	60000	75000	70000	65000	270000
Add: Desired Closing Inventory	18750	17500	16250	5000	5000	(25% of Next Quarter Need)
Total Needs	78750	92500	86250	70000	275000
Less: Opening Inventory	15000	18750	17500	16250	15000
Purchases	63750	73750	68750	53750	260000
Rate PU	1.80	1.80	1.80	1.80	1.80
Cost of Purchase	114750	132750	123750	96750	468000
Disbursement for RM	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Total
In the Quarter(60%)	68850	79650	74250	58050	280800	(60% of Purchase Cost of the Quarter)
In the Following Quarter(40%)	6200	45900	53100	49500	154700	(40% of Purchase Cost of Previous Quarter)
Total Disbursement	75050	125550	127350	107550	435500
Direct Labor Budget	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Total
Units to be produced	12000	15000	14000	13000	54000
DLH PU	0.40	0.40	0.40	0.40	0.40
Direct Labor Hours	4800	6000	5600	5200	21600
Per Hour Cost	13.50	13.50	13.50	13.50	13.50
Direct Labor Costs	64800	81000	75600	70200	291600