BMGT 321 Chapter 6 Homework

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Problem Solutions

6-16 (15 min.) Sales budget, service setting.

In 2014, Rouse & Sons, a small environmental-testing firm, performed 12,200 radon tests for $290 each and 16,400 lead tests for $240 each. Because newer homes are being built with lead-free pipes, lead-testing volume is expected to decrease by 10% next year. However, awareness of radon-related health hazards is expected to result in a 6% increase in radon-test volume each year in the near future. Jim Rouse feels that if he lowers his price for lead testing to $230 per test, he will have to face only a 7% decline in lead-test sales in 2015.

Required:
1. Prepare a 2015 sales budget for Rouse & Sons assuming that Rouse holds prices at 2014 levels.
2. Prepare a 2015 sales budget for Rouse & Sons assuming that Rouse lowers the price of a lead test to $230. Should Rouse lower the price of a lead test in 2015 if the company’s goal is to maximize sales revenue?
6-17 (5 min.) Sales and production budget.

The McKnight Company expects sales in 2015 of 208,000 units of serving trays. McKnight’s beginning inventory for 2015 is 18,000 trays, and its target ending inventory is 27,000 trays. Compute the number of trays budgeted for production in 2015.

6-18 (5 min.) Direct materials purchases budget.

Inglenook Co. produces wine. The company expects to produce 2,500,000 two-liter bottles of Chablis in 2015. Inglenook purchases empty glass bottles from an outside vendor. Its target ending inventory of such bottles is 80,000; its beginning inventory is 50,000. For simplicity, ignore breakage. Compute the number of bottles to be purchased in 2015.

6-19 (10 min.) Budgeting material purchases.

The Howell Company has prepared a sales budget of 43,000 finished units for a 3-month period. The company has an inventory of 11,000 units of finished goods on hand at December 31 and has a target finished goods inventory of 19,000 units at the end of the succeeding quarter. It takes 4 gallons of direct materials to make one unit of finished product. The company has an inventory of 66,000 gallons of direct materials at December 31 and has a target ending inventory of 56,000 gallons at the end of the succeeding quarter. How many gallons of direct materials should Howell Company purchase during the 3 months ending March 31?

6-22 (30 min.) 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 a cost of $6 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 gallons 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 $2,000 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 at 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:

Required:
1. Prepare a direct material usage budget in both units and dollars.
2. Calculate the budgeted overhead allocation rates for weaving and dyeing.
3. Calculate the budgeted unit cost of a blue rug for the year.
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. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
6. Find the budgeted gross margin for blue rugs under each sales assumption.
7. What actions might you take as a manager to improve profitability if sales drop to 185,000 blue rugs?
8. How might top management at Xander use the budget developed in requirements 1–6 to better manage the company?
6-32 (30–40 min.) 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 following data to prepare budgets for 2014:

The following direct materials are used in the two products:

Projected data for 2014 for direct materials are:

Projected direct manufacturing labor requirements and rates for 2014 are:

Manufacturing overhead is allocated at the rate of $19 per direct manufacturing labor-hour.

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

Required:
1. Revenues budget (in dollars)
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. Direct manufacturing labor budget (in dollars)
7. Budgeted finished goods inventory at December 31, 2014 (in dollars)
8. What questions might the CEO ask the production manager when reviewing the production, direct materials, and direct manufacturing labor budgets?
9. How does preparing a budget help Sabat Corporation’s top management better manage the company?

6-35 (60 min.) 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:

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

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:

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:

Required:
1. Revenues budget
2. Production budget in units
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. How does preparing the budget help Animal Gear’s management team better manage the company?