Chapter 20, Problem 1PSB

To determine

Material Budget:

This budget shows the quantity of material required to be purchased for meeting the production needs. It also shows the price of the material required to be purchased.

$\text{Direct material budget}=\left(\begin{array}{l}\text{Raw material for production}\\ +\text{Ending raw material}\\ -\text{Opening}\text{raw material}\end{array}\right)$

Labor Budget:

This budget shows the direct labor hours required to produce the desired production quantity and the number of hours needed. It is helpful for the management in planning its labor force requirements.

Production Budget:

It is the budget which provides the details regarding the amount of units to be produced by the entity in order to meet the requisite demand. Formula to calculate production budget,

$\text{Production}\text{budget}=\text{Sales}+\text{Ending inventory}-\text{Opening}\text{inventory}$

Factory Overhead Budget:

It is the budget which contains every cost other than labor and raw material which are incurred by an entity during manufacturing.

1.

To prepare: Production budget for the second quarter.

Explanation of Solution

Given,
Second quarter,
Sale is 250,000 units.
Opening inventory is 8,000 units.
Ending inventory is 6,000 units.

Production Budget
Particulars	Second quarter (units)
Sales	250,000
Add: Ending inventory	6,000
Less: Opening inventory	8,000
Production	248,000
Table(1)

Hence, budgeted production is 248,000 units.

2.

To determine

To prepare: Direct material budget the second quarter.

Explanation of Solution

Second quarter,
Production units are 248,000. (From part 1)
Raw material required per unit 3 pounds. (Given)
Opening raw material is 15,000 units. (Given)
Ending raw material is 12,000 pounds. (Given)
Purchase cost is $4.

Direct Material Budget
Particulars	Second quarter
Production (units)	248,000
Raw material required (pounds) (working note)	744,000
Add: Ending raw material (given)	12,000
Less: Opening raw material(given)	15,000
Total material required (pounds) [A]	741,000
Purchase cost ($) [B]	4
Total purchase cost ($)$\left[\text{A}\times \text{B}\right]$	2,964,000
Table(2)

Working notes:

Formula to compute raw material required,

$\text{Raw material required}=\text{Production}\times \text{Raw material required per unit}$

For Second quarter,

Substitute 248,000 units for production and 3 pounds for raw material required per unit.

$\begin{array}{c}\text{Raw material required}=248,000\text{units}\times 3\text{pounds}\\ =744,000\text{ pounds}\end{array}$

(3)

To determine

To prepare: Direct labor budget for the second quarter.

Explanation of Solution

Second quarter,
Production units are 248,000. (From part 1)
Labor rate per hour is $18. (Given)
Labor hours per unit are 0.5. (Given)

Direct Labor Budget
Particulars	Second quarter
Production (units) $\left[\text{A}\right]$	248,000
Hours required per unit $\left[\text{B}\right]$	0.5
Total hours required $\left[\text{A}\times \text{B}\right]$	124,000
Labor rate per hour	18
Total labor cost ($) [working note]	2,232,000
Table(3)

Working note:

Formula to compute total labor cost,

$\text{Total labor cost}=\text{Total hours required}\times \text{Labor rate per hour}$

For Second quarter,

Substitute 124,000 units for total hours required and 18 for labor rate per hour.

$\begin{array}{c}\text{Total labor cost}=12\text{4,000 hours}\times \$18\\ =\text{\$2,232,000}\end{array}$

4.

To determine

To prepare: Factory overhead budget for second quarter.

Explanation of Solution

Factory Overhead Budget
Particulars	Second quarter
Total labor hours required (From part 3)$\left[\text{A}\right]$	124,000
Application rate of variable overheads per labor hour ($)$\left[\text{B}\right]$	12
Variable overheads ($) $\left[\text{A}\times \text{B}\right]$	1,488,000
Add: Fixed overheads	1,776,000
Total factory overheads	3,264,000
Table(4)

Hence, production budget of second quarter is 248,000 units, direct labor budget of second quarter is $1,485,000. direct material budget of second quarter is $4,425,000. factory overhead budget of second quarter is $3,264,000.