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.