Question
Warsaw Ltd operates at capacity and makes glass-topped dining tables and wooden chairs, which are then typically sold as sets of four chairs with one
Warsaw Ltd operates at capacity and makes glass-topped dining tables and wooden chairs, which are then typically sold as sets of four chairs with one table. However, some customers purchase replacement or extra chairs, and others buy some chairs or a table only, so the sales mix is not exactly 4:1. Warsaw Ltd is planning its annual budget for the financial year 2020. Information for 2020 is as follows:
Input prices
Direct materials
Wood
$5.30 per board metre
Glass
$11.5 per sheet
$14 per direct manufacturing labour-
Direct manufacturing labour
hour
Input quantities per unit of output
Chairs
Tables
Direct materials
Wood
1.2 board metres
1.7 board metres
Glass
2 sheets
Direct manufacturing
labour
3 hours
6 hours
Machine-hours (MH)
2 MH
5 MH
Inventory information, direct materials
Wood
Glass
Beginning inventory
27 200 board metres
8 700 sheets
Target ending inventory
29 360 board metres
9 500 sheets
Sales and inventory information, finished goods
Chairs
Tables
Expected sales in units
172 000
45 000
Selling price
$70
$900
Target ending inventory in
units
8 400
2 050
Beginning inventory in units
7 500
2 150
Chairs are manufactured in batches of 500 and tables are manufactured in batches of 50. It takes three hours to set up for a batch of chairs and two hours to set up for a batch of tables. Warsaw Ltd uses activity-based costing and has classified all overhead costs as shown in the table below:
Budgeted
Budgeted
Cost type
variable
fixed
Cost driver/allocation base
Manufacturing:
Materials
handling
$342 840
$600 000
Number of board metres used
Set-up
97 000
300 740
Set-up hours
Processing
789 250
5 900 000
Machine-hours
Non-
manufacturing:
Marketing
2 011 200
4 500 000
Sales revenue
Distribution
54 000
380 000
Number of deliveries
Delivery trucks transport units sold in delivery sizes of 500 chairs or 500 tables.
Required
For the year 2020:
- Prepare the revenues budget.
- Use the revenues budget to:
- find the budgeted allocation rate for marketing costs
- find the budgeted number of deliveries and allocation rate for distribution costs.
- Prepare the production budget in units.
- Use the production budget to:
- find the budgeted number of set-ups, set-up hours and the allocation rate for set-up costs
- find the budgeted total machine-hours and the allocation rate for processing costs.
- Prepare the direct materials usage budget and the direct materials purchases budget.
- Use the direct materials usage budget to find the budgeted allocation rate for materials-handling costs.
- Prepare the direct manufacturing labour cost budget.
- Prepare the manufacturing overhead cost budget for materials handling, set-up and processing.
- Prepare the budgeted unit cost of finished good (16.5 marks) and ending inventories budget.
- Prepare the cost of goods sold budget.
- Prepare the non-manufacturing overhead costs budget for marketing and distribution.
- Prepare a budgeted income statement (ignore income taxes).
- Compare the budgeted unit cost of a chair to its budgeted selling price. Why might Warsaw Ltd continue to sell the chairs for only $70?
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