Problem 9-32 Production and Direct-Labor Budgets; Activity-Based Overhead Budget (LO 9-3, 9-4, 9-5, 9-6)

Shady Shades, Inc., manufactures artistic frames for sunglasses. Talia Demarest, controller, is responsible for preparing the companys master budget. In compiling the budget data for 20x1, Demarest has learned that new automated production equipment will be installed on March 1. This will reduce the direct labor per frame from 1.0 hour to .75 hours.

Labor-related costs include pension contributions of $1.05 per hour, workers' compensation insurance of $.75 per hour, employee medical insurance of $3 per hour, and employer contributions to Social Security equal to 4.00 percent of direct-labor wages. The cost of employee benefits paid by the company on its employees is treated as a direct-labor cost. Shady Shades, Inc., has a labor contract that calls for a wage increase to $14.00 per hour on April 1, 20x1. Management expects to have 19,000 frames on hand at December 31, 20x0, and has a policy of carrying an end-of-month inventory of 100 percent of the following months sales plus 40 percent of the second following months sales.

These and other data compiled by Demarest are summarized in the following table.

January

February

March

April

May

Direct-labor hours per unit

1.0

1.0

.75

.75

.75

Wage per direct-labor hour

$

12.00

$

12.00

$

12.00

$

14.00

$

14.00

Estimated unit sales

13,000

15,000

11,000

12,000

12,000

Sales price per unit

$

54.00

$

51.50

$

51.50

$

51.50

$

51.50

Production overhead:

Shipping and handling (per unit sold)

$

4.00

$

4.00

$

4.00

$

4.00

$

4.00

Purchasing, material handling,

and inspection (per unit produced)

$

5.00

$

5.00

$

5.00

$

5.00

$

5.00

Other production overhead

(per direct-labor hour)

$

7.00

$

7.00

$

7.00

$

7.00

$

7.00

Required:

1.

Prepare a production budget and a direct-labor budget for Shady Shades, Inc., by month and in total for the first quarter of 20x1.

SHASY SHADES, INC.
BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1
	MONTH
	JANURARY	FEBURARY	MARCH	QUARTER
SALES (UNITS)
ADD: ENDING INVENTORY
TOTAL NEEDS
LESS: BEGINNING INVENTORY
UNITS TO BE PRODUCED
DIRECT-LABOR HOURS PER UNIT
TOTAL HOURS OF DIRECT LABOR TIME NEEDED
DIRECT-LABOR COSTS:
WAGES
PENSION CONTRIBUTIONS
WORKERS COMPENSATION INSURANCE
EMPLOYEE MEDICAL INSURANCE
EMPLOYERS SOCIAL SECURITY
TOTAL DIRECT-LABOR COST

2.

Prepare a production-overhead budget for each month and for the first quarter.

SHADY SHADES, INC
PRODUCTION OVERHEAD BUDGET
FOR THE FIRST QUARTER OF 20X1
	MONTH
	JANURARY	FEBURARY	MARCH	QUARTER
SHIPPING AND HANDLING
PURCHASING, MATERIAL HANDLING, AND INSPECTION
OTHER OVERHEAD
TOTAL PRODUCTION OVEHEAD