Covered Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. All other materials are indirect. At the beginning of the year Covered has an inventory of 349,000 skeins of wool at a cost of $715,450 and 5,000 litres of dye at a cost of $24,850. Target ending inventory of wool and dye is zero. Covered uses the FIFO inventory cost flow method.

One blue rug is budgeted to use 30 skeins of wool at a cost of $2 per skein and 0.5 litres of dye at a cost of $5 per litre.

Covered blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 100,000 blue rugs per year. The budgeted selling price is $2,000 each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero.

Covered makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are accumulated in two cost pools-one for weaving and the other for dyeing. Weaving overhead is allocated to product based on direct manufacturing labour-hours (DMLH). Dyeing overhead is allocated to product based on machine-hours (MH).

There is no direct manufacturing labour cost for dyeing Covered budgets 56 direct manufacturing labour-hours to weave a rug at a budgeted rate of $15 per hour. It budgets 0.15 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:

Required
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 revenue budget for blue rugs for the year, assuming Covered sells (a) 100,000 or (b) 95,000 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.

Transcribed Image Text:

Dyeing (based on 450,000 MH) Weaving (based on 5,600,000 DMLH) Variable costs Indirect materials Maintenance Utilities 4,950,000 5,400,000 $11,200,000 2,240,000 1,680,000 Fixed costs Indirect labour Depreciation Other 239,000 1,900,000 320,000 $12,809,000 1,300,000 52,000 2,380,000 $18,852,000 Total budgeted costs