Chapter 7, Problem 2P

Sales, production, direct materials, direct labor, and factory overhead budgets

King Tire Co.’s budgeted unit sales for the year 2016 were:

The budgeted selling price for truck tires was $200 per tire, and for passenger car tires it was $65 per tire. The beginning finished goods inventories were expected to be 2,000 truck tires and 5,000 passenger tires, for a total cost of $326,478, with desired ending inventories at 2,500 and 6,000, respectively, with a total cost of $400,510. There was no anticipated beginning or ending work-in- process inventory for either type of tire. The standard materials quantities for each type of tire were as follows:

The purchase prices of rubber and steel were $2 and $3 per pound, respectively. The desired ending inventories for rubber and steel were 60,000 and 6,000 lb, respectively. The estimated beginning inventories for rubber and steel were 75,000 and 7,000 lb, respectively. The direct labor hours required for each type of tire were as follows:

The direct labor rate for each department is as follows:

Budgeted factory overhead costs for 2016 were as follows:

Required:

Prepare each of the following budgets for King for the year ended December 31, 2016:

1. 1. Sales budget.
2. 2. Production budget.
3. 3. Direct material budget.
4. 4. Direct labor budget.
5. 5. Factory overhead budget.
6. 6. Cost of goods sold budget.

To determine

Prepare the sales budget for the year ended December 31, 2016.

Explanation of Solution

Prepare the sales budget for the year ended December 31, 2016.

KT Company
Sales budget
For the year ended December 31, 2016
Product	Sales volume (Unit)	Selling price (Unit)	Total sales
Passenger car entries	120,000	$65	$7,800,000
Truck tires	25,000	$200	$5,000,000
Total	145,000		$12,800,000

Table (1)

To determine

Prepare the production budget for the year ended December 31, 2016.

Explanation of Solution

Prepare the production budget for the year ended December 31, 2016.

KT Company
Production budget
For the year ended December 31, 2016
Particulars	Units
	Passenger car tires	Truck tires
Sales (From sales budget)	120,000	25,000
Add: desired ending inventory, December 31	6,000	2,500
Total	126,000	27,500
Less: Estimated beginning inventory, January 1	5,000	2,000
Total production	131,000	29,500

Table (2)

To determine

Prepare the direct material budget for the year ended December 31, 2016.

Explanation of Solution

Prepare the direct material budget for the year ended December 31, 2016.

KT Company
Direct materials budget
For the year ended December 31, 2016
Particulars	Direct materials		Total
	Rubber	Steel Belts
Quantities required for production:
Passenger car tires:
$\left(121,000\times 10\text{lbs}\text{.}\right)$	1,210,000
$\left(121,000\times 1.5\text{lbs}\text{.}\right)$		181,500
Truck tires:
$\left(25,500\times 30\text{lbs}\text{.}\right)$	765,000
$\left(25,500\times 4\text{lbs}\text{.}\right)$		102,000
Add: Desired ending inventory, December 31	60,000	6,000
Total	2,035,000	289,500
Less: Estimated beginning inventory, January 1	75,000	7,000
Total quantity to be purchased (A)	1,960,000	282,500
Unit price (B)	$2	$3
Total direct materials purchases $\left(\text{A}\times \text{B}\right)$	$3,920,000	$847,500	$4,767,500

Table (3)

To determine

Prepare the direct labor budget for the year ended December 31, 2016.

Explanation of Solution

Prepare the direct labor budget for the year ended December 31, 2016.

KT Company
Direct labor budget
For the year ended December 31, 2016
Particulars	Department		Total
	Molding	Finishing
Hours required for production:
Passenger car tires:
$\left(121,000\times 0.10\right)$	12,100
$\left(121,000\times 0.05\right)$		6,050
Truck tires:
$\left(25,500\times 0.25\right)$	6,375
$\left(25,500\times 0.15\right)$		3,825
Total (A)	18,475	9,875
Hourly rate (B)	$15	$13
Total direct labor cost $\left(\text{A}\times \text{B}\right)$	$277,125	$128,375	$405,500

Table (4)

To determine

Prepare the factory overhead budget for the year ended December 31, 2016.

Explanation of Solution

Prepare the factory overhead budget for the year ended December 31, 2016.

KT Company
Factory overhead budget
For the year ended December 31, 2016
Particulars	Amount ($)	Amount ($)
Indirect materials	198,500
Indirect labor	213,200
Depreciation of building and equipment	157,500
Power and light	122,900
Total factory overhead cost		$692,100

Table (5)

To determine

Prepare the cost of goods sold budget for the year ended December 31, 2016.

Explanation of Solution

Prepare the cost of goods sold budget for the year ended December 31, 2016.

KT Company
Cost of goods sold budget
For the year ended December 31, 2016
Particulars	Amount ($)	Amount ($)
Finished goods inventory, January 1		326,478
Direct materials inventory, January 1 (1)	171,000
Direct materials purchases	4,767,500
Total direct materials available	4,938,500
Less: Direct materials inventory, December 31 (2)	138,000
Cost of direct materials used	4,800,500
Direct labor	405,500
Factory overhead	692,100
Cost of goods manufactured		5,898,100
Cost of goods available for sale		6,224,578
Less: Finished goods inventory, December 31		400,510
Cost of goods sold		5,824,068

Table (6)

Working note (1):

Calculate the amount of direct materials inventory as on January 1:

Particulars	Calculation	Amount ($)
Rubber	$\left(75,000\times \$2\right)$	150,000
Steel belts	$\left(75,000\times \$3\right)$	21,000
Total		171,000

Table (7)

Working note (2):

Calculate the amount of direct materials inventory as on December 31:

Particulars	Calculation	Amount ($)
Rubber	$\left(60,000\times \$2\right)$	120,000
Steel belts	$\left(60,000\times \$3\right)$	18,000
Total		171,000

Table (8)