Cost Accounting
scenario : A 5% increase in the price per board foot of red oak and a 5% increase in square foot of Granite.
Required:
Prepare the budgeted operating income including the required budgets for 2014.
Content of Each Product Unit Red Oak Granite Direct manufacturing labor Expected sales in units Selling price Target ending inventory in units Beginning inventory in units Beginning inventory in dollars Product Casual Granite Table Deluxe Granite Table 12 board feet 12 board feet 6 square feet 8 square feet 4 hours 6 hours Product Casual Granite Table Deluxe Granite Table 50,000 10,000 $ 600 $ 800 11,000 500 1,000 500 $384,000 $262,000 Direct Materials Red Oak Granite 70,000 b.f. 60,000 sq.ft. 80,000 b.f. 20,000 sq. ft. Beginning inventory Target ending inventory Schedule 1: Revenues Budget For the Year Ending December 31, 2012 Units Selling Price Total Revenues 50,000 $600 $30,000,000 10,000 8,000,000 $38,000,000 Casual Deluxe Total 800 Schedule 2: Production Budget (in Units) For the Year Ending December 31, 2012 Product Casual Deluxe Budgeted unit sales (Schedule 1) 50,000 10,000 Add target ending finished goods inventory 11,000 Total required units 61,000 10,500 Deduct beginning finished goods inventory 500 Units of finished goods to be produced 60,000 10,000 500 1,000 Total Schedule 3A: Direct Material Usage Budget in Quantity and Dollars For the Year Ending December 31, 2012 Material Red Oak Granite Physical Units Budget Direct materials required for Casual tables 720,000 b.f. 360,000 sq. ft. 160,000 units X 12 b.f. and 6 sq. ft.) Direct materials required for Deluxe tables 120,000 b.f. 80,000 sq. ft. (10,000 units X 12 b.f. and 8 sq. ft.) Total quantity of direct materials to be used 840,000 b.f. 440,000 sq. ft. Cost Budget Available from beginning direct materials inventory (under a FIFO cost-flow assumption) Red Oak: 70,000 b.f. X $7 per b.f. $ 490,000 Granite: 60,000 sq. ft. X $10 per sq. ft. $ 600,000 To be purchased this period Red Oak: (840,000 - 70,000) b.f. X $7 per b.f. 5,390,000 Granite: (440,000 - 60,000) sq. ft. X $10 per sq. ft. 3,800,000 Direct materials to be used this period $5,880,000 $4,400,000 $10,280,000 Total Schedule 3B: Direct Material Purchases Budget For the Year Ending December 31, 2012 Material Red Oak Granite Physical Units Budget To be used in production (from Schedule 3A) 840,000 b.f. 440,000 sq. ft. Add target ending inventory 80,000 b.f. 20,000 sq.ft. Total requirements 920,000 b.f. 460,000 sq. ft. Deduct beginning inventory 70,000 b.f. 60,000 sq. ft. Purchases to be made 850,000 b.f. 400,000 sq. ft. Cost Budget Red Oak: 850,000 b.f. x $7 per b.f. $5,950,000 Granite: 400,000 sq.ft. X $10 per sq. ft. $4,000,000 Purchases $5,950,000 $4,000,000 $9,950,000 Schedule 4: Direct Manufacturing Labor Costs Budget For the Year Ending December 31, 2012 Output Units Produced Direct Manufacturing Hourly (Schedule 2) Labor-Hours per Unit Total Hours Wage Rate 60,000 240,000 $20 10,000 60,000 300,000 Casual Deluxe Total $4,800,000 1,200,000 $6,000,000 Total $6,480,000 Schedule 5: Manufacturing Overhead Costs Budget For the Year Ending December 31, 2012 Manufacturing Operations Overhead Costs Variable costs Supplies $1,500,000 Indirect manufacturing labor 1,680,000 Power (support department costs) 2,100,000 Maintenance (support department costs) 1,200,000 Fixed costs (to support capacity of 300,000 direct manufacturing labor-hours) Depreciation 1,020,000 Supervision 390,000 Power (support department costs) 630,000 Maintenance (support department costs) 480,000 Total manufacturing operations overhead costs Machine Setup Overhead Costs Variable costs Supplies $ 390,000 Indirect manufacturing labor 840,000 Power (support department costs) 90,000 Fixed costs (to support capacity of 15,000 setup labor-hours) Depreciation 603,000 Supervision 1,050,000 Power (support department costs) 27,000 Total machine setup overhead costs Total manufacturing operations overhead costs 2,520,000 $9,000,000 $ 1,320,000 1,680,000 $ 3,000,000 $12,000,000 Schedule 6A: Unit Costs of Ending Finished Goods Inventory December 31, 2012 Product Casual Tables Deluxe Tables Cost per Unit Input per Unit Input per Unit of Input of Output Total of Output Total Red Oak $ 7 12 b.f. 12 b.f. $ 84 Granite 10 6 sq. ft. 60 8 sq.ft Direct manufacturing labor 20 4 hrs. 80 120 Manufacturing overhead 30 4 hrs. 120 6 hrs. 180 Machine setup overhead 200 0.2 hrs. 40 0.3 hrs. 60 Total $384 $524 $ 84 6 hrs. Under the FIFO method, this unit cost is used to calculate the cost of target ending inven- tories of finished goods in Schedule 6B. Total Schedule 6B: Ending Inventories Budget December 31, 2012 Quantity Cost per Unit Direct materials Red Oak 80,000* S 7 $ 560,000 Granite 20,000* 10 200,000 Finished goods Casual $4,224,000 Deluxe 262,000 Total ending inventory $760,000 11,000** 500** $384*** 524*** 4,486,000 $5,246,000 $ Total 646,000 Schedule 7: Cost of Goods Sold Budget For the Year Ending December 31, 2012 From Schedule Beginning finished goods inventory, January 1, 2012 Given* Direct materials used Direct manufacturing labor Manufacturing overhead Cost of goods manufactured Cost of goods available for sale Deduct ending finished goods inventory, December 31, 2012 Cost of goods sold $10,280,000 6,000,000 12,000,000 28,280,000 28,926,000 4,486,000 $24,440,000 Product design costs are fixed costs, determined on the basis of the product design work anticipated for 2012. The variable component of budgeted marketing costs is the commissions paid to sales people equal to 6.5% of revenues. The fixed component of budgeted marketing costs equal to $1,330,000 is tied to the marketing capacity for 2012. The cost driver of the variable component of budgeted distribution costs is cubic feet of tables moved (Casual: 18 cubic feet x 50,000 tables + Deluxe: 24 cubic feet x 10,000 tables = 1,140,000 cubic feet). Variable distribution costs equal $2 per cubic foot. The fixed component of budgeted distribution costs equals $1,596,000 and is tied to the dis- tribution capacity for 2012. Schedule 8 shows the product design, marketing, and distri- bution costs budget for 2012. Schedule 8: Nonmanufacturing Costs Budget For the Year Ending December 31, 2012 Business Function Variable Costs Fixed Costs Product design $1,024,000 Marketing (Variable cost $38,000,000 X 0.065) $2,470,000 1,330,000 Distribution (Variable cost: S2 X 1,140,000 cu.ft.) 2,280,000 1,596,000 $4,750,000 $3,950,000 Total Costs $1,024,000 3,800,000 3,876,000 $8,700,000 Home Insert Page Layout Formulas Data Review View $38,000,000 24,440,000 13,560,000 Budgeted Income Statement for Stylistic Furniture For the Year Ending December 31, 2012 3 Revenues Schedule 1 4 Cost of goods sold Schedule 7 5 Gross margin 6 Operating costs Product design costs Schedule 8 $1,024,000 Marketing costs Schedule 8 3 ,800,000 Distribution costs Schedule 8 3 ,876,000 10 Operating income 8,700,000 $ 4,860,000 Exhibit 6-4 Effect of Changes in Budget Assumptions on Budgeted Operating Income for Stylistic Fumi Home Insert Page Layout Formulas D ata C C D Key Assumptions Review E B View F G Units Sold Direct Material Cost Selling Price Budgeted Operating Income Change from Master Budge What.If 3 Scenario 4 Master budget 5 Scenario 1 6 Scenario 2 Casual 50,000 50,000 50,000 Deluxe 10,000 10,000 10,000 Casual $600 582 600 Red Oak $7.00 $7.00 $7.35 Granite $10.00 $10.00 $10.50 776 800 Dollars $4,860,000 3,794,100 4,418,000 22% decrea 9% decrea Stylistic's managers lut tables: Deluxe Sables Casual Tables Total 1. Quantity of tables to be produced 2 Number of tables to be produced per batch 3. Number of batches (1) = (2) 4. Setup time per batch 5. Total setup-hours (3) X (4) 6. Setup-hours per table (5) + (1) 60,000 tables 50 tables/batch 1,200 batches 10 hours/batch 12,000 hours 0.2 hour 10,000 tables 40 tables/batch 250 batches 12 hours/batch 3,000 hours 0.3 hour 15,000 hours labor-hours = $1 Using an approach similar to the one described for manufacturing operations overhead costs, Stylistic's managers estimate various line items of costs that comprise machine setup overhead costs (supplies, indirect manufacturing labor, power, depreciation, and supervision)--that is, all costs caused by the 15,000 setup labor-hours (the cost driver): The second half of Schedule 5 summarizes (1) total variable machine setup over- ad costs per setup labor-hour = $88($26 + $56 + $6) X the budgeted 15,000 setup 1,520,000 and (2) fixed machine setup overhead costs of $1,680,000 needed to support the 15,000 Setun labor-hours of capacity that Stylistic's managers ear. However, machine setup costs will still be $1.680,000.) The fixed machine setup cost is 13,000 = $112 per setup labor-hour (regardless of the budgeted setup labor- may be less than 15,000 in a particular year). That is, each setup labor-hour 08 of variable machine setup overhead cost plus $112 of fixed machine setup cost for a total of $200 of machine setup overhead cost per setup labor-hour. have planned. (Again, Stylistic may not ope s e $1,680,000 = 15,000 = $112 per setup labor-ho hours, which may be less than 15,000 in will absorb $88 of variable machi overhead cost for a total of $200 -uuge du Costs upplies, and powe os and power. Managing overhead costs is in quires managers to understand the various a d the cost drivers of those activities. As we dec e s needed to mananenging because ers identify two activities for manufacturing overhea. no manufacturing operations and machine setups. The folle NG AN OPE 15 Budget. Stylistic's managers next U Vosts such as supervision, depreciation, maintenance, head costs is important but also challenging because the various activities needed to manufacture products es. As we described earlier (page 225), Stylistic's man- acturing overhead costs in its activity-based costing hine setups. The following table presents the ystem: manufacturing activities and their cost drivers. Cost Driver of Variable Component of Overhead Costs Manufacturing Overhead Costs Manufacturing Operations Overhead Costs Machine Setup Overhead Costs Direct manufacturing labor-hours Cost Driver of Fixed Component of Overhead Manufacturing and Setu Costs Capacity in 2014 Manufacturing capacity 300,000 direct manufacturing labor-hours Setup capacity 15,000 setup labor-hou Setup labor-hours The use of activity-based cost drivers gives rise to activity-based budgeting (ABB), a enthod that focuses on the budgeted cost of the activities necessary to produc Direct materials Red oak Granite Direct manufacturing labor $ 7 per board foot (b.f.) (same as in 2013) $10 per square foot (sq. ft.) (same as in 2013) $20 per hour Content of Each Product Unit Red oak Granite Direct manufacturing labor Product Casual Granite Table Deluxe Granite Table 12 board feet 12 board feet 6 square feet 8 square feet 4 hours 6 hours Product Casual Granite Table Deluxe Granite Table 10,000 50,000 $ 600 $ 800 11,000 500 500 1,000 $262,000 $384,000 Expected sales in units Selling price Target ending inventory in units Beginning inventory in units Beginning inventory in dollars Direct Materials Red oak Granite 70,000 b.f. 60,000 sq. ft. 80,000 b.f. 20,000 sq. ft. Beginning inventory Target ending inventory nedicts it will incur to Content of Each Product Unit Red Oak Granite Direct manufacturing labor Expected sales in units Selling price Target ending inventory in units Beginning inventory in units Beginning inventory in dollars Product Casual Granite Table Deluxe Granite Table 12 board feet 12 board feet 6 square feet 8 square feet 4 hours 6 hours Product Casual Granite Table Deluxe Granite Table 50,000 10,000 $ 600 $ 800 11,000 500 1,000 500 $384,000 $262,000 Direct Materials Red Oak Granite 70,000 b.f. 60,000 sq.ft. 80,000 b.f. 20,000 sq. ft. Beginning inventory Target ending inventory Schedule 1: Revenues Budget For the Year Ending December 31, 2012 Units Selling Price Total Revenues 50,000 $600 $30,000,000 10,000 8,000,000 $38,000,000 Casual Deluxe Total 800 Schedule 2: Production Budget (in Units) For the Year Ending December 31, 2012 Product Casual Deluxe Budgeted unit sales (Schedule 1) 50,000 10,000 Add target ending finished goods inventory 11,000 Total required units 61,000 10,500 Deduct beginning finished goods inventory 500 Units of finished goods to be produced 60,000 10,000 500 1,000 Total Schedule 3A: Direct Material Usage Budget in Quantity and Dollars For the Year Ending December 31, 2012 Material Red Oak Granite Physical Units Budget Direct materials required for Casual tables 720,000 b.f. 360,000 sq. ft. 160,000 units X 12 b.f. and 6 sq. ft.) Direct materials required for Deluxe tables 120,000 b.f. 80,000 sq. ft. (10,000 units X 12 b.f. and 8 sq. ft.) Total quantity of direct materials to be used 840,000 b.f. 440,000 sq. ft. Cost Budget Available from beginning direct materials inventory (under a FIFO cost-flow assumption) Red Oak: 70,000 b.f. X $7 per b.f. $ 490,000 Granite: 60,000 sq. ft. X $10 per sq. ft. $ 600,000 To be purchased this period Red Oak: (840,000 - 70,000) b.f. X $7 per b.f. 5,390,000 Granite: (440,000 - 60,000) sq. ft. X $10 per sq. ft. 3,800,000 Direct materials to be used this period $5,880,000 $4,400,000 $10,280,000 Total Schedule 3B: Direct Material Purchases Budget For the Year Ending December 31, 2012 Material Red Oak Granite Physical Units Budget To be used in production (from Schedule 3A) 840,000 b.f. 440,000 sq. ft. Add target ending inventory 80,000 b.f. 20,000 sq.ft. Total requirements 920,000 b.f. 460,000 sq. ft. Deduct beginning inventory 70,000 b.f. 60,000 sq. ft. Purchases to be made 850,000 b.f. 400,000 sq. ft. Cost Budget Red Oak: 850,000 b.f. x $7 per b.f. $5,950,000 Granite: 400,000 sq.ft. X $10 per sq. ft. $4,000,000 Purchases $5,950,000 $4,000,000 $9,950,000 Schedule 4: Direct Manufacturing Labor Costs Budget For the Year Ending December 31, 2012 Output Units Produced Direct Manufacturing Hourly (Schedule 2) Labor-Hours per Unit Total Hours Wage Rate 60,000 240,000 $20 10,000 60,000 300,000 Casual Deluxe Total $4,800,000 1,200,000 $6,000,000 Total $6,480,000 Schedule 5: Manufacturing Overhead Costs Budget For the Year Ending December 31, 2012 Manufacturing Operations Overhead Costs Variable costs Supplies $1,500,000 Indirect manufacturing labor 1,680,000 Power (support department costs) 2,100,000 Maintenance (support department costs) 1,200,000 Fixed costs (to support capacity of 300,000 direct manufacturing labor-hours) Depreciation 1,020,000 Supervision 390,000 Power (support department costs) 630,000 Maintenance (support department costs) 480,000 Total manufacturing operations overhead costs Machine Setup Overhead Costs Variable costs Supplies $ 390,000 Indirect manufacturing labor 840,000 Power (support department costs) 90,000 Fixed costs (to support capacity of 15,000 setup labor-hours) Depreciation 603,000 Supervision 1,050,000 Power (support department costs) 27,000 Total machine setup overhead costs Total manufacturing operations overhead costs 2,520,000 $9,000,000 $ 1,320,000 1,680,000 $ 3,000,000 $12,000,000 Schedule 6A: Unit Costs of Ending Finished Goods Inventory December 31, 2012 Product Casual Tables Deluxe Tables Cost per Unit Input per Unit Input per Unit of Input of Output Total of Output Total Red Oak $ 7 12 b.f. 12 b.f. $ 84 Granite 10 6 sq. ft. 60 8 sq.ft Direct manufacturing labor 20 4 hrs. 80 120 Manufacturing overhead 30 4 hrs. 120 6 hrs. 180 Machine setup overhead 200 0.2 hrs. 40 0.3 hrs. 60 Total $384 $524 $ 84 6 hrs. Under the FIFO method, this unit cost is used to calculate the cost of target ending inven- tories of finished goods in Schedule 6B. Total Schedule 6B: Ending Inventories Budget December 31, 2012 Quantity Cost per Unit Direct materials Red Oak 80,000* S 7 $ 560,000 Granite 20,000* 10 200,000 Finished goods Casual $4,224,000 Deluxe 262,000 Total ending inventory $760,000 11,000** 500** $384*** 524*** 4,486,000 $5,246,000 $ Total 646,000 Schedule 7: Cost of Goods Sold Budget For the Year Ending December 31, 2012 From Schedule Beginning finished goods inventory, January 1, 2012 Given* Direct materials used Direct manufacturing labor Manufacturing overhead Cost of goods manufactured Cost of goods available for sale Deduct ending finished goods inventory, December 31, 2012 Cost of goods sold $10,280,000 6,000,000 12,000,000 28,280,000 28,926,000 4,486,000 $24,440,000 Product design costs are fixed costs, determined on the basis of the product design work anticipated for 2012. The variable component of budgeted marketing costs is the commissions paid to sales people equal to 6.5% of revenues. The fixed component of budgeted marketing costs equal to $1,330,000 is tied to the marketing capacity for 2012. The cost driver of the variable component of budgeted distribution costs is cubic feet of tables moved (Casual: 18 cubic feet x 50,000 tables + Deluxe: 24 cubic feet x 10,000 tables = 1,140,000 cubic feet). Variable distribution costs equal $2 per cubic foot. The fixed component of budgeted distribution costs equals $1,596,000 and is tied to the dis- tribution capacity for 2012. Schedule 8 shows the product design, marketing, and distri- bution costs budget for 2012. Schedule 8: Nonmanufacturing Costs Budget For the Year Ending December 31, 2012 Business Function Variable Costs Fixed Costs Product design $1,024,000 Marketing (Variable cost $38,000,000 X 0.065) $2,470,000 1,330,000 Distribution (Variable cost: S2 X 1,140,000 cu.ft.) 2,280,000 1,596,000 $4,750,000 $3,950,000 Total Costs $1,024,000 3,800,000 3,876,000 $8,700,000 Home Insert Page Layout Formulas Data Review View $38,000,000 24,440,000 13,560,000 Budgeted Income Statement for Stylistic Furniture For the Year Ending December 31, 2012 3 Revenues Schedule 1 4 Cost of goods sold Schedule 7 5 Gross margin 6 Operating costs Product design costs Schedule 8 $1,024,000 Marketing costs Schedule 8 3 ,800,000 Distribution costs Schedule 8 3 ,876,000 10 Operating income 8,700,000 $ 4,860,000 Exhibit 6-4 Effect of Changes in Budget Assumptions on Budgeted Operating Income for Stylistic Fumi Home Insert Page Layout Formulas D ata C C D Key Assumptions Review E B View F G Units Sold Direct Material Cost Selling Price Budgeted Operating Income Change from Master Budge What.If 3 Scenario 4 Master budget 5 Scenario 1 6 Scenario 2 Casual 50,000 50,000 50,000 Deluxe 10,000 10,000 10,000 Casual $600 582 600 Red Oak $7.00 $7.00 $7.35 Granite $10.00 $10.00 $10.50 776 800 Dollars $4,860,000 3,794,100 4,418,000 22% decrea 9% decrea Stylistic's managers lut tables: Deluxe Sables Casual Tables Total 1. Quantity of tables to be produced 2 Number of tables to be produced per batch 3. Number of batches (1) = (2) 4. Setup time per batch 5. Total setup-hours (3) X (4) 6. Setup-hours per table (5) + (1) 60,000 tables 50 tables/batch 1,200 batches 10 hours/batch 12,000 hours 0.2 hour 10,000 tables 40 tables/batch 250 batches 12 hours/batch 3,000 hours 0.3 hour 15,000 hours labor-hours = $1 Using an approach similar to the one described for manufacturing operations overhead costs, Stylistic's managers estimate various line items of costs that comprise machine setup overhead costs (supplies, indirect manufacturing labor, power, depreciation, and supervision)--that is, all costs caused by the 15,000 setup labor-hours (the cost driver): The second half of Schedule 5 summarizes (1) total variable machine setup over- ad costs per setup labor-hour = $88($26 + $56 + $6) X the budgeted 15,000 setup 1,520,000 and (2) fixed machine setup overhead costs of $1,680,000 needed to support the 15,000 Setun labor-hours of capacity that Stylistic's managers ear. However, machine setup costs will still be $1.680,000.) The fixed machine setup cost is 13,000 = $112 per setup labor-hour (regardless of the budgeted setup labor- may be less than 15,000 in a particular year). That is, each setup labor-hour 08 of variable machine setup overhead cost plus $112 of fixed machine setup cost for a total of $200 of machine setup overhead cost per setup labor-hour. have planned. (Again, Stylistic may not ope s e $1,680,000 = 15,000 = $112 per setup labor-ho hours, which may be less than 15,000 in will absorb $88 of variable machi overhead cost for a total of $200 -uuge du Costs upplies, and powe os and power. Managing overhead costs is in quires managers to understand the various a d the cost drivers of those activities. As we dec e s needed to mananenging because ers identify two activities for manufacturing overhea. no manufacturing operations and machine setups. The folle NG AN OPE 15 Budget. Stylistic's managers next U Vosts such as supervision, depreciation, maintenance, head costs is important but also challenging because the various activities needed to manufacture products es. As we described earlier (page 225), Stylistic's man- acturing overhead costs in its activity-based costing hine setups. The following table presents the ystem: manufacturing activities and their cost drivers. Cost Driver of Variable Component of Overhead Costs Manufacturing Overhead Costs Manufacturing Operations Overhead Costs Machine Setup Overhead Costs Direct manufacturing labor-hours Cost Driver of Fixed Component of Overhead Manufacturing and Setu Costs Capacity in 2014 Manufacturing capacity 300,000 direct manufacturing labor-hours Setup capacity 15,000 setup labor-hou Setup labor-hours The use of activity-based cost drivers gives rise to activity-based budgeting (ABB), a enthod that focuses on the budgeted cost of the activities necessary to produc Direct materials Red oak Granite Direct manufacturing labor $ 7 per board foot (b.f.) (same as in 2013) $10 per square foot (sq. ft.) (same as in 2013) $20 per hour Content of Each Product Unit Red oak Granite Direct manufacturing labor Product Casual Granite Table Deluxe Granite Table 12 board feet 12 board feet 6 square feet 8 square feet 4 hours 6 hours Product Casual Granite Table Deluxe Granite Table 10,000 50,000 $ 600 $ 800 11,000 500 500 1,000 $262,000 $384,000 Expected sales in units Selling price Target ending inventory in units Beginning inventory in units Beginning inventory in dollars Direct Materials Red oak Granite 70,000 b.f. 60,000 sq. ft. 80,000 b.f. 20,000 sq. ft. Beginning inventory Target ending inventory nedicts it will incur to
