Xuereb Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. One rug is budgeted to use 40 skeins of wool at a cost of $3 per skein and 0.7 gallons of dye at a cost of $7 per gallon. All other materials are indirect. At the beginning of the year Xuereb has an inventory of 460,000 skeins of wool at a cost of $1,012,000 and 4,100 gallons of dye at a cost of $24,395. Target ending inventory of wool and dye is zero. Xuereb uses the FIFO inventory cost flow method.

There is no direct manufacturing labor cost for dyeing. Xuereb budgets 70 direct manufacturing labor-hours to weave a rug at a budgeted rate of $14 per hour. It budgets 0.3 machine-hours to dye each skein in the dyeing process.

Read the requirements3.

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

Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
Wool
Dye
To be purchased this period
Wool
Dye
Direct materials to be used this period

Requirement 2. Calculate the budgeted overhead allocation rates for weaving and dyeing.

Begin by determining the formula, then calculate the budgeted overhead allocation rate for weaving. (Round your answer to the nearest cent.)

(1)	/	(2)	=	Budgeted manufacturing overhead rate
	/		=

Begin by determining the formula, then calculate the budgeted overhead allocation rate for dyeing. (Round your answer to the nearest cent.)

(3)	/	(4)	=	Budgeted manufacturing overhead rate
	/		=

Requirement 3. Calculate the budgeted unit cost of a blue rug for the year. (Round your answers to two decimal places.)

	Cost per		Input per		Budgeted
	unit of input	x	unit of output	=	unit cost
Wool		x		=
Dye		x		=
Direct manufacturing labor		x		=
Dyeing overhead		x		=
Weaving overhead		x		=
Total

Requirement 4. Prepare a revenue budget for blue rugs for the year, assuming Xuerebsells (a) 210,000 or (b) 190,000 blue rugs (that is, at two different sales levels).

Revenue Budget
	Units	Selling price	Total revenues
(a) Blue rugs	210,000
(b) Blue rugs	190,000

Requirement 5. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption. (For amounts with a $0 balance, make sure to enter "0" in the appropriate cell.)

Begin by (a) completing the cost of goods sold budget assuming sales of 210,000 rugs, and then (b) complete a cost of goods sold budget assuming sales of 190,000 rugs.

Cost of Goods Sold Budget
	(a) 210,000	units
Beginning finished goods inventory
Direct materials used
Direct manufacturing labor
Manufacturing overhead
Cost of goods manufactured
Cost of goods available for sale
Deduct ending finished goods inventory
Cost of goods sold

(b) 190,000	units

Requirement 6. Find the budgeted gross margin for blue rugs under each sales assumption.

Begin by (a) finding the budgeted gross margin assuming sales of 210,000 rugs, and then (b) finding the budgeted gross margin assuming sales of 190,000 rugs.

Budgeted Income Statement
	(a) 210,000 units
Revenues
Cost of goods sold
Gross margin

(b) 190,000 units

Requirement 7. What actions might you take as a manager to improve profitability if sales drop to 190,000 blue rugs? If sales drop to 190,000 blue rugs, Xuereb should look to (5)

fixed costs and produce (6) to reduce variable costs and inventory costs.

Requirement 8. How might top management at Xuereb use the budget developed in requirements 1-6 to better manage the company? (Select all that apply.)

(7)

(8)

(9)

1: More Info

Xuereb blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 210,000 blue rugs per year. The budgeted selling price is $2,100

each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero.

Xuereb 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).

2: Data Table

The following table presents the budgeted overhead costs for the dyeing and weaving cost pools:
	Dyeing	Weaving
	(based on 2,520,000 MH)	(based on 14,700,000 DMLH)
Variable costs
Indirect materials	$0	$15,450,000
Maintenance	6,570,000	5,550,000
Utilities	7,560,000	4,960,000
Fixed costs
Indirect labor	355,000	1,755,000
Depreciation	2,168,000	275,000
Other	735,000	5,820,000
Total budgeted costs	$17,388,000	$33,810,000

3: Requirements

1.	Prepare a direct material usage budget in both units and dollars.
2.	Calculate the budgeted overhead allocation rates for weaving and dyeing.
3.	Calculate the budgeted unit cost of a blue rug for the year.
4.	Prepare a revenues budget for blue rugs for the year, assuming Xuereb sells (a) 210,000 or (b) 190,000 blue rugs (that is, at two different sales levels).
5.	Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
6.	Find the budgeted gross margin for blue rugs under each sales assumption.
7.	What actions might you take as a manager to improve profitability if sales drop to 190,000 blue rugs?
8	How might top management at Xuereb use the budget developed in requirements 1-6 to better manage the company?

All