Spiffy Shades Corporation 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
labor per frame from 5.0 hours to 4.75 hours.
Labor-related costs include pension contributions of $0.55 per
hour, workers’ compensation insurance of $0.25 per hour, employee
medical insurance of $1 per hour, and employer contributions to
Social Security equal to 7.00 percent of direct-labor wages. The
cost of employee benefits paid by the company on its employees is
treated as a direct-labor cost. Spiffy Shades Corporation has a
labor contract that calls for a wage increase to $19.00 per hour on
April 1, 20x1. Management expects to have 29,500 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.
| January | February | March | April | May | |||||||||||
| Direct-labor hours per unit | 5.0 | 5.0 | 4.75 | 4.75 | 4.75 | ||||||||||
| Wage per direct-labor hour | $ | 17.00 | $ | 17.00 | $ | 17.00 | $ | 19.00 | $ | 19.00 | |||||
| Estimated unit sales | 19,000 | 21,000 | 17,000 | 18,000 | 18,000 | ||||||||||
| Sales price per unit | $ | 52.00 | $ | 49.50 | $ | 49.50 | $ | 49.50 | $ | 49.50 | |||||
| Production overhead: | |||||||||||||||
| Shipping and handling (per unit sold) | $ | 5.00 | $ | 5.00 | $ | 5.00 | $ | 5.00 | $ | 5.00 | |||||
| Purchasing, material handling, and inspection (per unit produced) | $ | 6.00 | $ | 6.00 | $ | 6.00 | $ | 6.00 | $ | 6.00 | |||||
| Other production overhead (per direct-labor hour) | $ | 7.00 | $ | 7.00 | $ | 7.00 | $ | 7.00 | $ | 7.00 | |||||
3. Prepare a production overhead budget for each month and for the first quarter.
3. i.
| Production Budget | ||||
| January | February | March | April | |
| Budgeted Unit Sales | 19,000 | 21,000 | 17,000 | 18,000 |
| Add: Desired Ending Inventory | 29,500 | 26,000 | 27,000 | |
| Total inventory needed | 48,500 | 47,000 | 44,000 | |
| Less: Beginning Inventory | (29,500) | (29,500) | (26,000) | |
| Budgeted Production in Units | 19,000 | 17,500 | 18,000 |
ii.
| Production Overhead Budget | |||
| January | February | March | |
| Shipping and Handling | $ 95,000 | $105,000 | $ 85,000 |
| Purchasing, Material Handling & Inspection | 114,000 | 105,000 | 108,000 |
| Other Production Overhead | 665,000 | 612,500 | 598,500 |
| Budgeted Production Overhead | 874,000 | 822.500 | 791,500 |
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