Production Budget

Question 1) Shady Shades, Inc. manufactures artistic frames for sunglasses. Talia Demarest, controller, is responsible for preparing the company's 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 labour per frame from 1 hour to 0.75 hour.

Labour related costs include pension contributions of $0.50 per hour, workers' compensation insurance of $0.20 per hour, employee medical insurance of $0.80 per hour, and employer contributions to Social Security equal to 7 percent of direct-labour wages. The cost of employee benefits paid by the company on its employees is treated as a direct labour cost. Shady Shades Inc. has a labour contract that calls for a wage increase to $18 per hour on April 1, 20x1. Management expects to have 32,000 frames on hand at December 31, 20x0, and has a policy of carrying an end-of-month inventory of 100 percent of the following month's sales plus 50 percent of the second following month's sales.

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

Jan Feb Mar Apr May

Direct labour hours per unit 1.0 1.0 0.75 0.75 0.75

Wage per direct labour hour $16.00 $16.00 $16.00 $18.00 $18.00

Estimated unit sales 20,000 24,000 16,000 18,000 18,000

Sales price per unit $50.00 $47.50 $47.50 $47.50 $47.50

Production overhead:

Shipping and handling

(per unit sold) $3.00 $3.00 $3.00 $3.00 $3.00

Purchasing, material

handling, and inspection

(per unit produced) $4.50 $4.50 $4.50 $4.50 $4.50

Other production

overhead

(per direct labour hour) $10.50 $10.50 $10.50 $10.50 $10.50

Required:

(1) a production budget and a direct labour budget for Shady Shades Inc. by month and in total for the first quarter of 20x1. Both budgets may be combined in one schedule. The direct labour budget should include direct labour hours and show the detail for each direct labour cost category.

(2) For each item used in the firm's production budget and direct labour budget, identify the other components of the master budget (except for financial statement budgets) that also, directly or indirectly, would use these data.

(3) a production overhead budget for each month and for the first quarter.

Question 2) Niagra Chemical Company produces three products using three different continuous processes. The products are Yarex, Darol, and Norex. Projected sales in gallons for the three products for the years 20x2 and 20x3 are as follows:

20x2 20x3

Yarex ................................................... 120,000 130,000

Darol ................................................... 80,000 70,000

Norex ................................................... 50,000 60,000

Because of the continuous nature of Niagra's processes, work-in-process inventory for each of the products remains constant throughout the year.

Inventories are planned for each product so that the projected finished-goods inventory at the beginning of each year is equal to 8 percent of that year's projected sales.

The conversion requirements in hours per gallon for the three products are:

Yarex ............ 0.07 hour

Darol ............. 0.10 hour

Norex ............ 0.16 hour

The conversion cost of $20 per hour is considered 100 percent variable.

The raw material requirements of the three products are shown in the following chart.

Raw material Units Unit Price Yarex Darol Norex

Gamma pounds $8.00 0.2 0.4 0

Murad pounds 6.00 0.4 0 0.5

Islin gallons 5.00 1.0 0.7 0.5

Tarden gallons 10.00 0 0.3 0.5

Raw material inventories are planned so that each raw material's projected inventory at the beginning of a year is equal to 10 percent of the previous year's usage of that raw material.

Required:

(1) Determine Niagra Chemical Company's production budget (in gallons) for the three products for 20x2

(2) Determine Niagra Chemical Company's conversion cost budget for 20x2

(3) Assuming the 20x1 usage of Islin is 200,000 gallons, determine the company's raw material purchases budget (in dollars) for Islin for 20x2

(4) Assume that for 20x2 production, Niagra Chemical Company could replace the raw material Islin with the raw material Philin. The usage of Philin would be the same as the usage of Islin. However, Philin would cost 20 percent more than Islin and would cut production times on all three products by 10 percent. Determine whether management should use Philin or Islin for the 20x2 production, supporting your decision with appropriate calculations. For this requirement, ignore any impact of beginning and ending inventory balances.