QUESTION III - Master budget (11 marks)

Note to students as this is now an open-book assignment, (as opposed to a Final exam), students will need to develop the budgets template is not provided.

U Balance Corporation manufactures balance bikes for toddlers.

Each bike requires 2 tires at a cost of $4.00 per tire, 0.5 direct labor hours and 3 machine hours. Production line works are paid $13.00 per hour. The company has estimated total manufacturing overhead of $400,000 for the year and allocates overhead on the basis of machine hours. Estimated machine hours total 80,000 for the period. The company records $5,000 in depreciation expense each month.

Production peaks in November as the company prepares for the gift giving season that occurs in December. The company has planned to produce the following units for the last four months of the year and January of the next year:

September 1,300

October 1,500

November 3,000

December 2,000

January 500

Desired ending inventory of the tires used on the balance bikes is 25% of the next month's production needs.

1. Create a direct materials budget for the last quarter of the year for tires used on the balance bikes. At the bottom of the budget, indicate the total cost to purchase the tires.

2. Create a direct labor budget for the last quarter of the year.

3. Calculate the predetermined overhead rate for manufacturing overhead.

4. Prepare a manufacturing overhead budget for the last quarter of the year.

QUESTION IV Variance Analysis (8 Marks)

The Litton Company has established standards as follows:

Direct materials: 3 kg @ $4/kg = $12 per unit

Direct labour: 2 hours @ $8 per hour = $16 per unit

Variable mfg overhead: 2 hours @ $5 per hour = $10 per unit

Actual production figures for the past year are given below. The company records the materials price variance when materials are purchased.

Units produced 600

Direct material used 2,000

Direct material purchased (3,000 kg) $11,400

Direct labour cost (1,100 hrs) $9,240

Variable MOH cost incurrecc $5,720

The company applies variable manufacturing overhead to products on the basis of direct labour hours.

REQUIRED:

1. Compute and name the relevant variances for direct material, direct labour, and variable manufacturing overhead.

2. Which two variances (be specific) would you bring to the attention of management? Explain the impact on profitability. What could have possibly caused these variances?

QUESTION V (5 Marks)

Tony Hawk Inc. (Hawk) is a wholesale distributor supplying moderately priced sporting equipment to large chain stores. Hawk manufacturers and sells 20,000 tackle boxes annually, making full use of its direct labour capacity at available workstations. Following are the selling price and costs associated with Hawks tackle boxes:

Selling price per box $86.00

Costs per box:

Direct material $17.00

Direct labour 18.75

Fixed manufacturing overhead:

Depreciation on equipment ($65,000 / 20,000) 3.25

Production supervisors salary ($185,000 / 20,000) 9.25

Selling and administrative costs 17.00 65.25

Profit per box $20.75

The company has looked into the possibility of outsourcing the tackle boxes. A supplier of high quality products has approached Hawk and would be able to provide up to 20,000 tackle boxes per year at a price of $54 per box delivered to Hawks facility.

The selling and administrative costs include $120,000 fixed cost for distribution of the product. Every unit of product that Hawk sells, whether outsourced or manufactured is allocated $6 of this fixed distribution cost. The remainder of the selling and administrative cost would be saved if the tackle boxes were outsourced.

REQUIRED:

Determine whether Tony Hawk Inc. should accept the suppliers offer to provide 20,000 tackle boxes at $54 per box.

QUESTION VI (7 Marks)

Holt Company makes three products in a single facility. Data concerning these products follow:

Products

A B C

Selling price per unit $67.90 $57.70 $43.90

Direct materials 12.10 10.30 8.60

Direct labour 14.10 8.00 6.80

Variable manufacturing overhead 2.60 2.20 1.80

Variable selling cost per unit 2.50 2.20 2.50

Mixing minutes per unit 2.70 3.30 4.70

Monthly demand in units 1,000 3,000 3,000

The mixing machines are potentially the constraint in the production facility. A total of 25,800 minutes are available per month on these machines. Direct labour is a variable cost in this company.

Required:

1. How many minutes of mixing machine time would be required to satisfy demand for all four products?

2. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.)

QUESTION VII (4 Marks)

Jimbob Co. is considering replacing its existing fleet of trucks with new trucks. Estimates for the next three years are as follows:

Old trucks New trucks

Average annual sales $500,000 $520,000

Annual operating costs 100,000 75,000

Original costs of old trucks 100,000 --

Remaining book value of old trucks 10,000 --

List price of new trucks -- 120,000

Remaining life 3 years --

Expected life -- 3 years

Disposal value now $10,000 ---

Disposal value in 3 years $ nil $ nil

Required:

Based strictly on the financial information presented above, should the

company replace the old trucks now? (Ignore time value of money).