DATA: The East Division of Kensic Company manufactures a vital component that is used in one of Kensic’s major product lines. The East Division has been experiencing some difficulty in coordinating activities between its various departments, which has resulted in some shortages of the component at critical times. To overcome the shortages, the manager of East Division has decided to initiate a monthly budgeting system that is integrated between departments.
The first budget is to be for the second quarter of the current year (April, May and June). To assist in developing the budget figures, the divisional controller has accumulated the following information.
Sales: Sales through the first three months of the current year were 30,000 units. Actual sales in units for January, February, and March, and planned sales in units over the next five months, are given below:
January (actual) 6,000
February (actual) 10,000
March (actual) 14,000
April (planned) 20,000
May (planned) 34,000
June (planned) 51,000
July (planned) 45,000
August (planned) 30,000
In total, the East Division expects to produce and sell 250,000 units during the current year.
Direct Material: Two different materials are used in production of the component. Data regarding these materials are given below:
Materials per Finished Component: 4 pounds
Cost per lb: $5.00
Inventory at March 31: 46,000 pounds
Materials per Finished Component: 9 feet
Cost per foot: $2.00
Inventory at March 31: 69,000 feet
Material No. 208 is sometimes in short supply. Therefore, the East Division requires that enough of the material be on hand at the end of each month to provide for 50% of the following month’s production needs. Material No. 311 is easier to get, so only one-third of the following month’s production needs must be on hand at the end of each month.
Direct Labor: The East Division has three departments through which the components must past before they are completed. Information relating to direct labor in these departments is given below:
Direct Labor-Hours per Finished Component: .25
Cost per Direct Labor hour: $18.00
Direct Labor-Hours per Finished Component: .70
Cost per Direct Labor hour: $16.00
Direct Labor-Hours per Finished Component: .10
Cost per Direct Labor Hour: $20.00
Direct labor is adjusted to the workload each month.
Manufacturing Overhead: East Division manufactured 32,000 components during the first three months of the current year. The actual variable overhead costs incurred during this three-month period are shown below. Each Division’s controller believes that the variable overhead costs incurred during the last nine months of the year will be at the same rate per component as experienced during the first three months.
Utilities $ 57,000
Indirect Labor $31,000
Total variable overhead $112,000
The East Division has planned/estimated fixed manufacturing overhead costs for the entire year as follows:
Supervision $ 872,000
Property Taxes $143,000
Total fixed manufacturing Overhead $4,628,000
Finished Goods Inventory: The desired monthly ending inventory of completed components is 20% of the next month’s estimated sales. The East Division has 4,000 units in the finished goods inventory on March 31.
Selling and Administrative Expenses: Selling and Administrative Expenses are budgeted at $400,000 per month plus 1% of total credit sales for the month.
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