Prod Budget OAKBROOK FARM SUPPLY--PART II In the first part of Oakbrook, we constructed a sales budget, a production budget and a direct materials budget for quarters 1 and 2. In this lab, we will construct a direct labor budget and a factory overhead budget. DM budget DL budget FO budget Review: sales for Q1=35,000 bags of Snare, 01 sales budgeted at 50,000. The desired inventory levels of Snare are: 1 - Jan 1- Apr Desired Inventories: 8,000 12,000 1 - Jul 18,000 01 Q2 PRODUCTION BUDGET (Review) Sales of Snare Budgeted + Desired Ending Inventory Subtotal - Beginning Inventory Units of Snare to Produce 0 0 Once you have your production budget, you should be able to prepare a direct materials budget, a direct labor budget and a factory overhead budget. We created the direct materials budget last week. DIRECT LABOR BUDGET Each bag of Snare requires 15 minutes of direct labor time, and the workers earn $24 per hour. Think of 15 minutes as 1/4 hour. Q1 Q2 Two-Quarter Total Units of Snare to Produce Time Required Per Bag (Hours) Total Direct Labor Hours Required 0 Total DLH Hourly Labor Rate Total Direct Labor Cost SO $0 $0 FACTORY OVERHEAD BUDGET The factory overhead budget consists of two categories of factory overhead--variable factory overhead and fixed factory overhead. In Q1,variable factory overhead consists of indirect materials of $6,500, indirect labor of $8,500, factory utilities of $2,400, and maintenance costs of $1,200. In Q2, indirect materials = $12,000, indirect labor = $15,000, factory utilities = $4,000 and maintenance = $2,500. Fixed factory overhead consists of supervisory salaries of $25,000 per quarter, depreciation of $8,000 per quarter, factory property taxes and insurance of $10,000 per quarter, and maintenance costs of $5,000 per quarter. Note: Oakbrook uses Direct Labor Hours as the denominator in the Predetermined Overhead Rate calculation. POR= Budgeted FO/Budgeted DLH Q1 Q2 Two-Quarter Total or VARIABLE OVERHEAD COSTS POR=Budgeted FO/Budgeted DL Cost Indirect Materials POR=Budgeted FO/Budgeted DL Cost VARIABLE OVERHEAD COSTS Indirect Materials Indirect Labor Factory Utilities Maintenance Costs Total Variable Overhead $0 FIXED OVERHEAD COSTS Supervisory Salaries Depreciation of Plant and Equipment Factory Property Taxes and Insurance Maintenance Costs Total Fixed Overhead Total Factory Overhead Budgeted SO $O $0 $0 Direct Labor Hours Budgeted 0 Total DLH Predetermined Overhead Rate #DIV/0! POR = Total Budgeted FO/Total Budgeted DLH Questions/Thoughts 1. Note that the Factory Overhead Budget consists of both fixed costs and variable costs. Yet, the the overhead is applied at about $6.00 per direct labor hour--making the applied overhead a variable cost. 2. Look at the fixed overhead. Suppose a company wanted to produce some extra units. Would those extra units make the fixed overhead costs go up? 3. Janet, the factory supervisor, remarked that the factory wasn't producing very many units in Q1, due to declining sales. "Right now, if we produce extra units, those extra units produced don't affect supervisory costs or depreciation or property taxes or insurance or maintenance--they are all fixed costs." "And if we produce fewer units, those fixed overhead costs don't decline." "It seems to me that the only relevant costs in producing units are the DM, DL and the variable overhead costs. "Maybe we should consider the fixed overhead costs to be PERIOD COSTS!" What do you think of this idea? In the text, this is called "VARIABLE COSTING
