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Barker Company produces and sells a single product with budgeted or standard costs as follows:
Inputs
Standards
Direct materials
10 lbs at $10.00 per pound
Direct labor
8 hours at $12.50 per hour
Variable factory overhead
8 hours at $20.00 per hour
Fixed factory overhead
8 hours at $40.00 per hour
Overhead rates are based on 8,000 standard direct labor hours per month, i.e., this is the master budget denominator activity level.
Desired ending inventories of materials are based on 10% of the next months materials needed. Desired ending finished goods are based on 5% of next periods budgeted unit sales.
Unit Sales are budgeted as follows:
January
February
March
April
1,000
1,200
1,600
1,400
The budgeted sales price is $1000 per unit. Sales are budgeted as 80% credit sales and 20% cash sales. Past experience indicates that 60% of credit sales are collected during the month of sale, 38% are collected in the following month, and 2% are uncollectible. A 1% cash discount is allowed to all customers (cash or credit) who pay within the month the sale takes place. Selling and administrative expenses are: Variable = 20% of sales dollars, Fixed = $250,000 per month.
The budget assumption concerning cash payment proportions is that all current purchases of direct material, direct labor, factory overhead and selling and administrative items will be paid for during the current period. The beginning cash balance for February is $10,000. Depreciation and other non-cash fixed costs are: manufacturing = $100,000, selling and administrative = $75,000.
Required:
A Partial Master Budget for February as follows.
Sales budget for February, including net sales dollars.
Production Budget, i.e., units to be produced for February.
Direct Material quantity needed for production for February.
Direct Material quantity to be purchased for February.
Budgeted cost of direct material purchases for February.
Budgeted cost of direct material used for February.
Direct labor needed for production for February.
Budgeted cost of direct labor used for February.
Budgeted factory overhead costs for February.
Prepare a cash budget for February (including the cash collections and cash disbursements supporting schedules).
Comment
Inputs
Standards
Direct materials
10 lbs at $10.00 per pound
Direct labor
8 hours at $12.50 per hour
Variable factory overhead
8 hours at $20.00 per hour
Fixed factory overhead
8 hours at $40.00 per hour
Explanation / Answer
1. Sales budget for February: 1,200 units. Net dollar sales = units*revenue per unit = 1,200 *$1,000 = $1,200,000
2. Production budget for February: Ending units for January = 5% of February's sales = 5% of 1200 = 60.
Ending units for February = 5% of March's sales = 5% of 1600 = 80.
Units to be produced for February = Unit sales of february - opeing inventory of Feb + closing inventory of Feb
= 1200 -60 + 80 = 1,220 units will have to be produced in February.
3. Direct materials quantity needed = production * 10 lbs = 1,220 * 10 = 12,220 lbs.
4. Materials needed in January = 1,000 units*10 = 10,000 lbs.
Ending inventory for Jan = 10% of Feb's material requirement = 10% of 12,220 = 1,222 lbs.
Ending inventory for Feb = 10% of March's material requirement: Production in March = 1600 - opening inventory + closing inventory = 1600 - 80 + (5% of 1400) = 1600-80+70 = 1590 units is March's production.
Thus ending inventory of materials for Feb = 10% of (1590*10 lbs) = 1,590 lbs.
Direct materials required for Feb = 12,220 lbs+1590 (required ending inventory) - 1,222 lbs (opening inventory of Feb) = 12,588 lbs
5. cost of direct material purchases = quantity*$10 per pound (rate) = 12,588*10 = $125,880
6. cost of direct materials used = quantity used*$10
quantity used for Feb = 12,220 lbs. cost = 12,220*$10 = $122,220
7. Direct labor needed = February's production * 8 hours = 1220 units * 8 = 9,760 hours
8. cost of direct labor = 9760 hours*rate = 9760*12.5 = $122,000
9. Budgeted factory overhead cost = variable factory overhead+fixed factory overhead
= 1220*8*$20 + (1220*8*$40)
= $585,600
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