Chapter 9, Problem 31P

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 1 hour to .75 hour.

Labor-related costs include pension contributions of $.50 per hour, workers’ compensation insurance of $.20 per hour, employee medical insurance of $.80 per hour, and employer contributions to Social Security equal to 7 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 $18.00 per hour on April 1, 20x1. Management expects to have 16,000 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.

Required:

1. 1. Prepare a production budget and a direct-labor budget for Spiffy Shades Corporation by month and for the first quarter of 20x1. Both budgets may be combined in one schedule. The direct-labor budget should include direct-labor hours and show the detail for each direct-labor cost category.
2. 2. For each item used in the firm’s production budget and direct-labor budget, identify the other components of the master budget (except for financial statement budgets) that also would, directly or indirectly, use these data.
3. 3. Prepare a production overhead budget for each month and for the first quarter.

To determine

Prepare a production budget and a direct-labor budget for S Corporation by month and for the first quarter of 20x1.

Explanation of Solution

Production Budget: The production budget refers to that budget which forecasts the production for the future accounting period. The budgeted production for any financial period is planned by combining the forecasted unit of sales and the finished goods inventory and deducting the beginning goods inventory.

Direct labor budget: Direct labor budget is an estimation of direct labor hours required for the budgeted units of production is known as direct labor budget.

Prepare a production budget and a direct-labor budget for S Corporation by month and for the first quarter of 20x1:

Table (1)

Working note 1:

Calculate the amount of ending inventory for January:

$\begin{array}{c}\text{Ending inventory for January= }\left(\begin{array}{l}\text{100\% of the first following month's sales + }\\ \text{50\% of the second following month's}\text{sales}\end{array}\right)\\ \text{= }\left(\begin{array}{l}\text{100\% of 12,000+ }\\ \text{50\% of 8,000}\end{array}\right)\\ =12,000+4,000\\ =16,000\end{array}$

Working note 2:

Calculate the amount of ending inventory for February:

$\begin{array}{c}\text{Ending inventory for January= }\left(\begin{array}{l}\text{100\% of the first following month's sales + }\\ \text{50\% of the second following month's}\text{sales}\end{array}\right)\\ \text{= }\left(\begin{array}{l}\text{100\% of 8,000+ }\\ \text{50\% of 9,000}\end{array}\right)\\ =8,000+4,500\\ =12,500\end{array}$

Working note 3:

Calculate the amount of ending inventory for March:

$\begin{array}{c}\text{Ending inventory for March = }\left(\begin{array}{l}\text{100\% of the first following month's sales + }\\ \text{50\% of the second following month's}\text{sales}\end{array}\right)\\ \text{= }\left(\begin{array}{l}\text{100\% of 9,000+ }\\ \text{50\% of 9,000}\end{array}\right)\\ =9,000+4,500\\ =13,500\end{array}$

Working note 4:

Calculate the amount of wages for January:

$\begin{array}{c}\text{Wages for January = }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{10,000}\times \$\text{16}\text{.00}\right)\\ =\$160,000\end{array}$

Working note 5:

Calculate the amount of wages for February:

$\begin{array}{c}\text{Wages for February = }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{8,500}\times \$\text{16}\text{.00}\right)\\ =\$136,000\end{array}$

Working note 6:

Calculate the amount of wages for March:

$\begin{array}{c}\text{Wages for March = }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{6,750}\times \$\text{16}\text{.00}\right)\\ =\$108,000\end{array}$

Working note 7:

Calculate the amount of pension contribution for January:

$\begin{array}{c}\text{Pension contribution}\text{for January = }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{10,000}\times \$\text{.50}\right)\\ =\$5,000\end{array}$

Working note 8:

Calculate the amount of pension contribution for February:

$\begin{array}{c}\text{Pension contribution}\text{for February = }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{8,500}\times \$\text{.50}\right)\\ =\$4,250\end{array}$

Working note 9:

Calculate the amount of pension contribution for March:

$\begin{array}{c}\text{Pension contribution}\text{for March = }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{6,750}\times \$\text{.50}\right)\\ =\$3,375\end{array}$

Working note 10:

Calculate the amount of workers’ compensation insurance for January:

$\begin{array}{c}\begin{array}{l}\text{Workers’ compensation }\\ \text{insurance for January}\end{array}\}\text{= }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{10,000}\times \$\text{.20}\right)\\ =\$2,000\end{array}$

Working note 11:

Calculate the amount of workers’ compensation insurance for February:

$\begin{array}{c}\begin{array}{l}\text{Workers’ compensation }\\ \text{insurance for February}\end{array}\}\text{= }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{8,500}\times \$\text{.20}\right)\\ =\$1,700\end{array}$

Working note 12:

Calculate the amount of workers’ compensation insurance for March:

$\begin{array}{c}\begin{array}{l}\text{Workers’ compensation }\\ \text{insurance for March}\end{array}\}\text{= }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{6,750}\times \$\text{.20}\right)\\ =\$1,350\end{array}$

Working note 13:

Calculate the amount of employee medical insurance for January:

$\begin{array}{c}\begin{array}{l}\text{Employee medical }\\ \text{insurance for January}\end{array}\}\text{= }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{10,000}\times \$\text{.80}\right)\\ =\$8,000\end{array}$

Working note 14:

Calculate the amount of employee medical insurance for February:

$\begin{array}{c}\begin{array}{l}\text{Employee medical }\\ \text{insurance for February}\end{array}\}\text{= }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{8,500}\times \$\text{.80}\right)\\ =\$6,800\end{array}$

Working note 15:

Calculate the amount of employee medical insurance for March:

$\begin{array}{c}\begin{array}{l}\text{Employee medical }\\ \text{insurance for March}\end{array}\}\text{= }\left(\begin{array}{l}\text{Total hours of direct labor time needed}\times \\ \text{Per direct labor hour}\end{array}\right)\\ \text{= }\left(\text{6,750}\times \$\text{.80}\right)\\ =\$5,400\end{array}$

Working note 16:

Calculate the amount of employee social security for January:

$\begin{array}{c}\begin{array}{l}\text{Employee social }\\ \text{security for January}\end{array}\}\text{= }\left(7\%\text{ of wages}\right)\\ \text{= }\left(\text{160,000}\times 7\%\right)\\ =\$11,200\end{array}$

Working note 17:

Calculate the amount of employee social security for February:

$\begin{array}{c}\begin{array}{l}\text{Employee social }\\ \text{security for February}\end{array}\}\text{= }\left(7\%\text{ of wages}\right)\\ \text{= }\left(\text{136,000}\times 7\%\right)\\ =\$9,520\end{array}$

Working note 18:

Calculate the amount of employee social security for March:

$\begin{array}{c}\begin{array}{l}\text{Employee social }\\ \text{security for March}\end{array}\}\text{= }\left(7\%\text{ of wages}\right)\\ \text{= }\left(\text{108,000}\times 7\%\right)\\ =\$7,560\end{array}$

To determine

Identify the other components of the master budget.

Explanation of Solution

Master Budget: The master budget is the core budget that describes the full process of budget. This budget shows all the operating and financial budgets of the company for a budgeted accounting period and this budget includes all the budgets and budgeted financial statements.

Identify the other components of the master budget:

The following are the components of the master budget except production budget and direct labor budget but use the sales data:

• Sales budget
• Cost of goods sold budget
• Selling and administrative expense budget

The following are the components of the master budget except production budget and direct labor budget but use the production data:

• Direct material budget
• Production-overhead budget
• Cost of goods sold budget

The following are the components of the master budget except production budget and direct labor budget but use the direct labor hour data:

• Production-overhead budget

The following are the components of the master budget except production budget and direct labor budget but use the direct labor cost data:

• Production-overhead budget
• Cost of goods sold budget
• Cash budget
• Budgeted income statement

To determine

Prepare a production overhead budget for each month and for the first quarter.

Explanation of Solution

Manufacturing Overhead Budget: Manufacturing overhead budget is prepared to predict all indirect manufacturing costs. It excludes direct materials and direct labor. It is necessary to anticipate overhead budget to meet the budgeted production for the next accounting period.

Prepare a production overhead budget for each month and for the first quarter:

Table (2)