Problem 9-23 Integrated Operating Budgets [LO2]

The Western Division of Keltic Company manufactures a vital component that is used in one of Keltics major product lines. The Western Division has been experiencing some difficulty in coordinating activities among its various departments, which has resulted in some shortages of the component at critical times. To overcome the shortages, the manager of the Western Division has decided to initiate a monthly budgeting system that is integrated among departments.

The first budget is to be for the second quarter of the current year. To assist in creating the budget, the divisional controller has accumulated the following information:

Sales. Sales through the first three months of the current year were 48,000 units. Actual sales in units for January, February, and March, and planned sales in units over the next five months, are given below:

January (actual)		9,000
February (actual)		15,000
March (actual)		24,000
April (planned)		30,000
May (planned)		53,000
June (planned)		75,000
July (planned)		68,000
August (planned)		45,000

In total, the Western Division expects to produce and sell 380,000 units during the current year.

Direct Materials. Two different materials are used in the production of the component. Data regarding these materials are given below:

Direct Materials	Units of Direct Materials per Finished Component						Inventory at March 31
No. 226		2	kilograms	$	4.00	per kilogram		23,000	kilograms
No. 301		5	metres	$	1.50	per meter		35,000	metres

Material No. 226 is sometimes in short supply. Therefore, the Western Division requires that enough of the material be on hand at the end of each month to provide for 60% of the following months production needs. Material No. 301 is easier to obtain, so only 30% of the following months production needs must be on hand at the end of each month.

Direct Labour. The Western Division has three departments through which the components must pass before they are completed. Information relating to direct labour in these departments is given below:

Department	Direct Labour-Hours per Finished Component			Cost Per Direct Labour-Hour
Cutting		0.15		$	16.00
Assembly		0.60		$	14.00
Finishing		0.10		$	18.00

Direct labour is adjusted to the workload each month.

Manufacturing Overhead. The Western Division manufactured 48,000 components during the first three months of the current year. The actual variable overhead costs incurred during this three month period are shown below. The Western Divisions controller believes that the variable overhead costs incurred during the last nine months of the year will be at the same rate per component as experienced during the first three months.

Utilities	$	63,000
Indirect labour		34,000
Supplies		18,000
Other		9,800
Total variable overhead	$	124,800

The actual fixed manufacturing overhead costs incurred during the first three months totalled $1,287,000. The Western Division has budgeted fixed manufacturing overhead costs for the entire year as follows:

Supervision	$	785,000
Property taxes		129,000
Depreciation		2,619,000
Insurance		568,000
Other		65,000
Total fixed manufacturing overhead	$	4,166,000

Finished Goods Inventory. The desired monthly ending finished goods inventory is 20% of the next months estimated sales. The Western Division has 6,000 units in finished goods inventory on March 31.

Required: 1. Prepare a production budget for the Western Division for the second quarter ending June 30. Show computations by month and in total for the quarter.

2. Prepare a direct materials purchases budget for each type of material for the second quarter ending June 30. Again show computations by month and in total for the quarter.

3. Prepare a direct labour budget for the second quarter ending June 30. This time it is not necessary to show monthly figures; show quarterly totals only. Assume that the workforce is adjusted as work requirements change. (Round "Per Unit" answers to 2 decimal places.)

4. Assume that the company plans to produce a total of 380,000 units for the year. Prepare a manufacturing overhead budget for the nine-month period ending December 31. (Do not compute a predetermined overhead rate.) Again, it is not necessary to show monthly figures. (Round Variable manufacturing overhead rate per unit to 2 decimal places.)