Spiffy Shades Corporation manufactures artistic frames for sunglasses. Talia Dem

Question

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 3.0 hours to 2.75 hours.

Labor-related costs include pension contributions of $1.05 per hour, workers’ compensation insurance of $0.75 per hour, employee medical insurance of $3 per hour, and employer contributions to Social Security equal to 6.00 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 $17.00 per hour on April 1, 20x1. Management expects to have 29,500 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.

January February March April May Direct-labor hours per unit 3.0 3.0 2.75 2.75 2.75 Wage per direct-labor hour $ 15.00 $ 15.00 $ 15.00 $ 17.00 $ 17.00 Estimated unit sales 19,000 21,000 17,000 18,000 18,000 Sales price per unit $ 52.00 $ 49.50 $ 49.50 $ 49.50 $ 49.50 Production overhead: Shipping and handling (per unit sold) $ 4.00 $ 4.00 $ 4.00 $ 4.00 $ 4.00 Purchasing, material handling, and inspection (per unit produced) $ 5.00 $ 5.00 $ 5.00 $ 5.00 $ 5.00 Other production overhead (per direct-labor hour) $ 9.00 $ 9.00 $ 9.00 $ 9.00 $ 9.00 SPIFFY SHADES CORPORATION Budget for Production and Direct Labor For the First Quarter of 20x1 Month January February March Quarter 21,000 Sales (units) Add: Ending inventory Total needs 19,000 17,000 57,000 19,000 21,000 17,000 57,000 ess: Beginning inventory Units to be produced Direct-labor hours per unit Total hours of direct labor time needed Direct-labor costs 19,000 21,000 17,000 57,000 Wages Pension contributions Workers' compensation insurance Employee medical insurance Employer's social security Total direct-labor cost

Explanation / Answer

SPIFFY SHADES CORPORATION

Budget for Production and Direct Labor

For the first quarter of 20X1 (Amount in $)

SPIFFY SHADES CORPORATION

Production Overhead Budget

For the first quarter of 20X1 (Amount in $)

Particulars January February March Quarter Sales(units) 19,000 21,000 17,000 57,000 Add: Ending Inventory (100% of next month sales and 50% of second following month sales) 29,500 26,000 27,000 27,000 Total needs (units) 48,500 47,000 44,000 84,000 Less: Beginning Inventory (29,500) (29,500) (26,000) (29,500) Units to be produced (A) 19,000 17,500 18,000 54,500 Direct labor hours per unit (B) 3.00 3.00 2.75 Total hours of direct labor time needed (C = A*B) 57,000 52,500 49,500 159,000 Direct Labor costs: Wages ($15*C) 855,000 787,500 742,500 2,385,000 Pension contributions ($1.05*C) 59,850 55,125 51,975 166,950 Workers Compensation Insurance ($0.75*C) 42,750 39,375 37,125 119,250 Employee Medical Insurance ($3*C) 171,000 157,500 148,500 477,000 Employer's Social Security (6% of wages) 51,300 47,250 44,550 143,100 Total direct labor cost 1,179,900 1,086,750 1,024,650 3,291,300

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