Problem -
The East Division of K Company manufactures a component that is vital to the health care Industry. This Division has been experiencing some problems in coordinating activities between various departments which resulted in acute and embarrassing shortages in the industry in the past. The division's Manager in an effort to avoid future shortages has decided to reinforce the decision to have monthly budgets prepared to aid in the production process. To assist in preparing the second Quarter's budgets, the Financial Controller has provided the following actual and budgeted information.
|
January (actual)
|
6,000
|
|
February (actual)
|
10,000
|
|
March (actual)
|
14,000
|
|
April (Budget)
|
20,000
|
|
May (budget)
|
35,000
|
|
June(budget)
|
50,000
|
|
July (budget)
|
45,000
|
|
August (budget)
|
30,000
|
Direct Material
Two different materials are used in the production of the component. Data related to these materials are given below:
|
Direct material
|
Units of Material per finished component
|
Cost per
unit
|
Inventory at march 31
|
|
No. 210
|
4 pounds
|
$ 5.00
|
46,000 pounds
|
|
No. 312
|
9 feet
|
$ 2.00
|
69,000 feet
|
Material No.210 is sometimes in short supply therefore the East Division requires enough of this material on hand to provide for 50% of the following month's production needs. Material No. 312 is easier to get therefore only one thirds of the following month's production need is required to be kept at the end of each month.
Direct Labour
The East Division has three departments through which the component must past before they are completed. Information relating to direct labour in these departments is listed in the table below. Direct labour is adjust each month as required.
|
Department
|
Direct labour hours per component
|
Cost per direct labour
hour
|
|
Shaping
|
0.25
|
$ 18.00
|
|
Assembly
|
0.70
|
16.00
|
|
Finishing
|
0.10
|
20.00
|
Manufacturing Overhead
East Division manufactured 32,000 components during the first quarter of the current year. The actual variable cost incurred in producing the components for the first quarter is given below. The financial Controller believes that the variable cost per unit will remain unchanged for the remaining nine month of the year.
|
Utilities
|
$ 57,000
|
|
Indirect labour
|
31,000
|
|
Supplies
|
16,000
|
|
Other variable cost
|
8,000
|
|
Total variable
|
$112,000
|
The actual fixed manufacturing overhead cost incurred during the first quarter amounted to $1,170,000. The East Division has budgeted fixed manufacturing overhead cost for the year as follows:
|
|
Year budget
|
Actual for
first
quarter
|
|
Supervision
|
$
|
$ 224,000
|
|
|
872,000
|
|
|
Property taxes
|
143,000
|
37,750
|
|
Depreciation
|
2,910,000
|
727,500
|
|
Insurance
|
631,000
|
157,750
|
|
Other
|
72,000
|
23,000
|
|
Total fixed
|
$
|
$
|
|
manufacturing overheads
|
4,628,000
|
1,170,000
|
Finished Goods Inventory
The desired ending inventory in completed components is 20% of the next's month's estimated sales. The East Division has 4,000 components in finished goods inventory at March 31.
Required -
1. Prepare the production budget foe East Division for the second quarter ending June 30 showing computations by month and in total for the quarter.
2. Prepare the direct materials purchase budget in units and dollars for each type of material for the second quarter ending June 30 also showing computations by month and in total for the quarter.
3. Prepare the direct labour budget in hours and in dollars for the second quarter ending June 30 showing only the quarter totals.
4. Assuming that the total fixed cost for the year will not change from the original estimates, prepare the variable and fixed overheard budgets for the second quarter by line item.