Peterson Company makes and sells artistic picture frames for special events such as weddings and graduations. Bob Anderson, the controller, is responsible for preparing Peterson’s master budget and has accumulated the following information for 2013:

In addition to wages, direct manufacturing labor- related costs include pension contributions of $ 0.40 per hour, worker’s compensation insurance of $ 0.10 per hour, employee medical insurance of $ 0.30 per hour, and Social Security taxes. Assume that as of January 1, 2013, the Social Security tax rates are 7.5% for employers and 7.5% for employees. The cost of employee benefits paid by Peterson on its employees is treated as a direct manufacturing labor cost. Peterson has a labor contract that calls for a wage increase to $ 14 per hour on April 1, 2013. The company will install new labor- saving machinery by March 1, 2013. Peterson expects to have 19,500 frames on hand at December 31, 2012, and it has a policy of carrying an end- of- month inventory of 100% of the following month’s sales plus 50% of the second following month’s sales.

Required
1. Prepare a production budget and a direct manufacturing labor budget for Peterson Company by month and for the first quarter of 2013. You may combine both budgets in one schedule. The direct manufacturing labor budget should include labor- hours and show the details for each labor cost category.
2. What actions has the budget process prompted Peterson’s management to take?
3. How might Peterson’s managers use the budget developed in requirement 1 to better manage thecompany?

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2013 Estimated sales in units Selling price Direct manufacturing labor-hours per unit January February March AprilMay 14,000 15.000 9.000 10.000 10,000 $55.00$52.50 $52.50 $52.50$52.50 1.0 Wage per direct manufacturing labor-hour $12.00 12.00 $12.00 $14.00 $14.00 2.5 2.5 1.0 1.0