Xin Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. One rug is budgeted to use 43 skeins of wool at a cost of $6 per skein and 0.8 gallons of dye at a cost of $5 per gallon. All other materials are indirect. At the beginning of the year Xin has an inventory of 454,000 skeins of wool at a cost of $998,800 and 3,500 gallons of dye at a cost of $22,050. Target ending inventory of wool and dye is zero. Xin uses the FIFO inventory cost flow method. (Click the icon to view the additional information.) There is no direct manufacturing labor cost for dyeing. Xin budgets 40 direct manufacturing labor-hours to weave a rug at a budgeted rate of $16 per hour. It budgets 0.2 machine-hours to dye each skein in the dyeing process. (Click the icon to view the budgeted overhead costs.) Read the requirements. Requirement 1. Prepare a direct material usage budget in both units and dollars. Begin with the physical units portion, then prepare the cost budget portion of the direct material usage budget. Direct Material Usage Budget in Quantity and Dollars Material Wool Dye Total Physical Units Budget Direct materials required for Blue rugs skeins gal More info Xin blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 255,000 blue rugs per year. The budgeted selling price is $2,300 each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero. Xin makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are accumulated in two cost poolsone for weaving and the other for dyeing. Weaving overhead is allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead is allocated to products based on machine-hours (MH). Print Done Data table The following table presents the budgeted overhead costs for the dyeing and weaving cost pools: Dyeing Weaving (based on 2,193,000 MH) (based on 10,200,000 DMLH) Variable costs Indirect materials $ 0 $ 15,480,000 Maintenance 5,535,000 6,580,000 7,585,000 Utilities 2,710,000 Fixed costs Indirect labor 382,000 1,750,000 Depreciation 2,249,000 748,000 280,000 5,865,000 Other $ 17,544,000 $ 31,620,000 Total budgeted costs Print Done Requirements 1. 2. 3. 4. 5. Prepare a direct material usage budget in both units and dollars. Calculate the budgeted overhead allocation rates for weaving and dyeing. Calculate the budgeted unit cost of a blue rug for the year. Prepare a revenues budget for blue rugs for the year, assuming Xin sells (a) 255,000 or (b) 240,000 blue rugs (that is, at two different sales levels). Calculate the budgeted cost of goods sold for blue rugs under each sales assumption. Find the budgeted gross margin for blue rugs under each sales assumption. What actions might you take as a manager to improve profitability if sales drop to 240,000 blue rugs? How might top management at Xin use the budget developed in requirements 1-6 to better manage the company? 6. 7. 8
