Homework Chapter 6

Question Description:


6-22. Budgeting; direct material usage, manufacturing cost, and gross margin. Xander manufacturing company manufactures blue rugs, using wool and dye as direct materials. One rug is budgeted to use 36 skeins of wool at a cost of $2 per skein and 0.8 gallons of dye at cost of $^ per gallon. All other materials are indirect. At the beginning of the year Xander has an inventory of 458,000 skeins of wool at a cost of $961,800 and 4,000 gallos of dye at a cost of $23,680. Target ending inventory of wool and dye is zero. Xander uses the FIFO inventory cost flow method.

Xander blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 200,000 blue rugs per year. The budgeted selling price is $200 each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero.

Xander makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are accumulated in two cost pools –one for weaving and the other for dyeing. Weaving overhead is allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead is allocated to products based on machine-hours (MH).

There is no direct manufacturing labor cost for dyeing. Xander budgets 62 direct manufacturing labor hours to weave a rug and a budgeted rate of $13 per hour. It budgets 0.2 machine-hours to dye each skein in the dyeing process.

The following table presents the budgeted overhead costs for the dyeing and weaving cost pools.

Dyeing Weaving
(based on 1,440,000 MH) (based on 12,400000 DMLH)
Variable costs:
  Indirect materials  0  $ 15,400,000
  Maintenance                              6,560,000        5,540,000
  Utilities                              7,550,000        2,890,000
Fixed Costs:
  Indirect labor                                  347,000     1,700,000
  Depreciation                              2,100,000        274,000
  Other                                  723,000     5,816,000
Total budgeted costs  $                        17,280,000 $ 31,620,000


  1. Prepare a direct material usage budget in both units and dollars.
  2. 2. Calculate the budgeted overhead allocation rates for weaving and dyeing.
  3. 3. Calculate the budgeted unit cost of a blue rug for the year.
  4. 4. Prepare a revenues budget for blue rugs for the year, assuming Xander sells (a) 200,000 or (b) 185,000 blue rugs (that is, at two different sales levels)
  5. 5. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
  6. 6. Find the budgeted gross margin for blue rugs under each sales assumption.
  7. 7. What actions might you take as a manager to improve profitability if sales drop to 185,000 blue rugs?
  8. 8. How might top management at Xander uses the budget developed in requirements 1-6 to better manage the company?


6-23. Budgeting, Service Company. Sunshine Window Washers (SWW) provides window-washing services to commercial clients. The company has enjoyed considerable growth in recent years due to a successful marketing campaign and favorable reviews on service-rating Web sites. Sunshine owner
Sam Davis makes sales calls himself and quotes on job based on square footage of window surface. Sunshine hires college students to drive the company vans to jobs and wash the windows. A part-time bookkeeper takes care of billing customers and other office tasks. Overhead is accumulated in two cost pools, one for travel to jobs, allocated based on miles driven, and one for window washing, allocated on direct labor-hours (DLH).

Sam Davis estimates that his window washers will work a total of 2,000 jobs during the year each job averages 2,000 square feet of window surface and requires 5 direct labor-hour and 12.5 miles of travel. Davis pays his window washers $12 per hour. Taxes and benefits equal 20% of wages. Wages, taxes and benefits are considered direct labor costs. The following table presents the budgeted overhead costs for the travel and Window Washing cost pools:

 Travel  Window Washing
 (based on 25,000 miles driven)  (based on 10,000 DLH)
Variable costs
   Supplies (4.40 per DLH)                                                 –                                              44,000
   Fuel ($0.60 per mile)                                        15,000                                                       –
Fixed Costs (to support capacity of 30,000 miles driven and 12,000 direct labor-hours)                                                 –
   Indirect labor                                              20,000
   Depreciation                                        40,000                                              35,000
Other                                           5,000                                              23,000
Total budgeted costs  $                                    60,000  $                                        122,000


  1. 1. Prepare a direct labor budget in both hours and dollars. Calculate the direct labor rate.
  2. 2. Calculate the budgeted overhead allocation rates for travel and window washing based on the budgeted quantity of the cost drivers.
  3. Calculate the budgeted total cost of all jobs for the year and the budgeted cost of an average 2,000 square-foot-window-washing job.
  4. Prepare a revenues budget for the year, assuming that Sunshine charges customers $0.10 per square foot.
  5. Calculate the budgeted operating income.
  6. Davis believes that spending $15,000 advertising will lead to a 20% increase in the number of jobs. Recalculate the budgeted revenue and operating income assuming this change is made. Calculate expenses by multiplying the existing budgeted cost per job calculated in requirement 3 by the number of jobs and adding the $15,000 advertising cost. Based on the change in budgeted operating income, would you recommend the investment?
  7. Do you see any flaw in this analysis? How could the analysis be improved? Should SWW spend $15,000 in additional advertising?
  8. What is SWW’s profitability if sales should decline to 1,800 jobs annually? What actions can
    Davis take to improve profitability?

6-24 Budgets for production and direct manufacturing labor.  (CMA, adapted) Roletter Company makes and sells artistic frames for pictures of weddings, graduations, and other special events. Bob Anderson the controller is responsible for preparing Roletter’s master budget and has accumulated the following information for 2015:

  January February March April May
Estimated sales in units    10,000      14,000      7,000      8,000      8,000
Selling price  $  54.00  $    50.50  $  50.50  $  50.50  $  50.50
Direct manufacturing labor-hour per unit 2.00 2.00 1.50 1.50 1.50
Wage per direct manufacturing labor-hour  $  12.00  $    12.00  $  12.00  $  13.00  $  13.00


In addition to wages, direct manufacturing labor-related costs include pension contribution of $0.50 per hour, worker’s compensation insurance of $0.20 per hour, employee medical insurance of $0.30 per hour, and Social Security taxes. Assume that the cost of employee benefits paid by Roletter on its employees is treated as a direct manufacturing labor cost.

Roletter has a labor contract that calls for a wage increase to $13 per hour on April, 2015. New labor-saving machinery has been installed and will be fully operational by March 1, 2015. Roletter expects to have 17,500 frames on hand at December 31, 2014, and it has a policy of carrying an end-of-month inventory of 100% of the following month’s sales plus 50% of the second following month’s sales.

  1. 1. Prepare a production budget and a direct manufacturing labor budget for Roletter Company by month and for the first quarter of 2015. You may combine both budgets in one schedule. The direct manufacturing labor budget should include labor-hours and show the details for each labor cost category.
  2. What action has the budget process prompted Roletter’s management to take?
  3. How might Roletter’s managers use the budget developed in requirement 1 to better manage the company.

6-25. Activity based budgeting.  The Jerico store of Jiffy Mart, a chain of small neighborhood convenience stores, is preparing its activity-based budget for January 2015. Jiffy Mart has three product categories: soft drinks (35% of cost of goods sold (COGS), fresh produce (25% of COGS), and packaged food (40% of COGS). Following table shows the four activities that consume indirect resources at the Jerico store, the cost drivers and their rates, and the cost-driver amount budgeted to be consumed by each activity in January 2015.

Activity Cost Driver January 2015 Budgeted Cost-Driver Rate Soft Drinks Fresh Snacks Packaged Food
Ordering Number of purchase orders  $          45.00 14 24 14
Delivery Number of deliveries  $          41.00 12 62 19
Shelf stocking Hours of stocking time  $          10.60 16 172 94
Customer support  Number of items sold  $            0.09          4,600          34,200            10,750


  1. 1. What is the budgeted indirect cost at the Jerico store in January 2015? What is the total budgeted cost of each activity at the Jerico store for January 2015? What is the budgeted indirect cost of each product category for January 2015?
  2. Which product category has the largest fraction of total budgeted indirect costs?
  3. Given your answer in requirement 2, what advantage does Jiffy Mart gain by using an activity-based approach to budgeting over, say, allocation indirect costs to products based on cost of goods sold?

 6-32. Revenue and production budgets. (CPA, adapted) The Sabat Corporation manufactures and sells two products:

Thingone and Thingtwo. In July 2013, Sabat’s budget department gathered the folloing data to prepare budgets for 2014:

2014 Projected Sales Product Units Price
Thingone 62,000  $                         172
Thingtwo 46,000  $                         264
2014 Inventories in Units Expected Target
Product January 1, 2014 December 31, 2014
Thingone                 21,000                       26,000
Thingtwo                 13,000                       14,000


The following direct materials are used in the two products:

Amount Used per Unit
Direct Material Unit Thingone Thingtwo
A pound 5 6
B pound 3 4
C each 0 2


Projected data for 2014 direct materials are:

Direct Material Anticipated purchase price Expected Inventories January 1, 2014 Target Inventories December 31, 2014
A $11 37,000 lb 40,000 lb
B 6 32,000 lb 35,000 lb
C 5 10,000 units 12,000 units


Projected direct manufacturing labor requirements and rates for 2014 are:

Product Hours per Unit Rate per Hours
Thingone 3 $                    11
Thingtwo 4 $                    14

Projected direct manufacturing labor requirements and rate of $19 per direct manufacturing labor-hour.

Based on the preceding projections and budget requirement for Thingone and Thingtwo, prepare the following budgets for 2014:

  1. Revenues budget (in dollars)
  2. 2. What questions might the CEO ask the marketing manager when reviewing the revenues budget? Explain briefly.
  3. Production budget (in units)
  4. Direct material purchases budget (in quantities)
  5. Direct material purchases budget (in dollars)
  6. 6. Direct manufacturing labor budget (in dollars)
  7. Budgeted finished goods inventory at Dec. 31 2014 (in dollars)

What questions might the CEO ask the production manager when reviewing the production, direct materials and direct manufacturing labor budgets?

  1. 9. How does preparing a budget help Sabat Corporation’s top management better manage the company?

6-35. Comprehensive problem with ABC costing.  Animal Gear Company makes two pet carriers, the Cat-allac and the Dog-eriffic. They are both made of plastic with metal doors, but the cat-allac is smaller. Information for the two products for the month of April is given in the following tables.

Input Prices

Direct Materials

Plastic                                                   $ 5 per pound

Metal                                                    $ 4 per pound

Direct manufacturing labor                $10 per direct manufacturing labor-hour

Input Quantities per Unit of Output

                                                                                Cat-allac                                Dog-eriffic

Direct materials

Plastic                                                                   4 pounds               6 pounds

Metal                                                                    0.5 pounds            1 pound

Direct Manufacturing labor-hours                    3 hours                  5 hours

Machine-Hour (MH)                                            11 MH                    19 MH

Inventory Information, Direct Materials

                                                                                Plastic                    Metal    

Beginning inventory                                            290 pounds           70 pounds

Target ending inventory                                     410 pounds           65 pounds

Cost of beginning inventory                                               $1,102                   $217

Animal Gear accounts for direct materials using a FIFO cost flow assumption.

Sales and Inventory Information, finished Goods                        

                                                                                Cat-allac                                 Dog-eriffic

Expected sales in units                                              530                        225

Selling price                                                          $    205                   $    310

Target ending inventory                                             30                          10

Beginning inventory in units                                                      10                           25

Beginning inventory in dollars                           $ 1,000                  $ 4,650

Animal Gear uses a FIFO cost flow assumption for finished goods inventory.

Animal Gear uses an activity-based costing system and classifies overhead into three activity pools: Setup, processing and inspection. Activity rates for these activities are $105 per setup-hour, $10 per machine-hour and $15 per inspection-hour, respectively. Other information follows:

                                Cost Driver Information                                                    

                                                                Cat-allac                                Dog-eriffic            

Number of units per batch                    25                             9

Setup time per batch                          1.50 hours             1.75 hours

Inspection time per batch                  0.5 hour                 0.7 hour

Nonmanufacturing fixed costs for March equal $32,000, half of which are salaries. Salaries are expected to increase 5% in April. The only variable nonmanufacturing cost is sales commission, equal to 1% of sales revenue.

Prepare the following for April:

  1. Revenue budget
  2. 2. Production budget in units
  3. 3. Direct material usage budget and direct material purchases budget
  4. Direct manufacturing labor cost budget
  5. Manufacturing overhead cost budgets for each of the three activities.
  6. Budgeted unit cost of ending finished goods inventory and ending inventories budget
  7. Cost of goods sold budget
  8. Nonmanufacturing costs budget
  9. Budgeted income statement (ignore income taxes)
  10. 10. How does preparing the budget help Animal Gear’s management team better manage the company

6-37 Comprehensive operating budget, budgeted balance sheet. Skulas, Inc., manufactures and sells snowboards. Skulas manufactures a single model, the Pipex. In the summer of 2014, Skulas’ management accountant gathered the following data to prepare budgets for 2015:

Materials and Labor Requirements
Direct materials
Wood 9 board feet (b.f.) per snowboard
Fiberglass 10 yards per snowboard
Direct manufacturing labor 5 hours per snowboard

Sjulas’ CEO expects to sell 2,900 snowboards during 2015 at an estimated retail price of $650 per board. Further, the CEO expects 2015 beginning inventory of 500 snowboards and would like to end 2015 with 200 snowboards in stock.

Direct Materials Inventories
Beginning Inventory 01/01/2015 Ending Inventory 12/31/2015
Wood 2,040 b.f. 1,540 b.f.
Fiberglass 1,040 yards 2,040 yards

Variable manufacturing overhead is $7 per direct manufacturing labor-hour. There are also $81,000 in fixed manufacturing overhead costs budgeted for 2015. Skulas combines both variable and fixed manufacturing overhead into a single rate based on direct manufacturing labor-hour. Variable marketing costs are allocated at the rate of $250 per sales visit. The marketing plan calls for 38 sales visits during 2015. Finally,

Other data include:

2014 Unit Price 2015 Unit Price
Wood $32.00 per b.f. $34.00 per b.f.
Fiberglass $ 8.00 per yard $ 9.00 per yard
Direct manufacturing labor $28.00 per hour $29.00 per hour


The inventoriable unit cost for ending finished goods inventory on December 31, 2014, is $374.80. Assume Skulas uses a FIFO inventory method for both direct materials and finished goods. Ignore work in process in your calculations.

Cash  $ 14,000
Property, plant and equipment (net)   854,000
Current liabilities     21,000
Long-term liabilities   182,000
Stockholders’ equity   857,120
  1. Prepare 2015 revenues budget (in dollars).
  2. Prepare the 2015 production budget (in units).
  3. Prepare the direct material usage and purchases budgets for 2015.
  4. Prepare a manufacturing labor budget for 2015.
  5. Prepare a manufacturing overhead budget for 2015.
  6. What is the budgeted manufacturing overhead rate for 2015?
  7. What is the budgeted manufacturing overhead costs per output unit in 2015.
  8. Calculate the cost of a snowboard manufactured in 2015.
  9. Prepare the cost of a snowboard manufactured in 2015.
  10. Prepare a cost of goods sold budget for 2015.
  11. Prepare the budgeted income statement for Skulas Inc., for the year ending December 31, 2015.
  12. Prepare the budgeted income statement for Skulas, Inc,. for the year ending December 31, 2015.
  13. What questions might the CEo ask the management team when reviewing the budget? Should the CEO set stretch targets? Explain briefly.
  14. How does preparing the budget help Skula’s management team better manage the company?