Tutorial Questions Week 4

1. Sales budget, service setting

In 2017, Hart & Sons, a small environmental-testing firm, performed 11 400 radon tests for $260
each and 15 000 lead tests for $210 each. Because newer homes are being built with lead-free
pipes, lead-testing volume is expected to decrease by 12% next year. However, awareness of
radon-related health hazards is expected to result in a 5% increase in radon-test volume each
year in the near future. Jim Hart feels that if he lowers his price for lead testing to $200 per test,
he will have to face only a 4% decline in lead-test sales in 2018.

Required

1. Prepare a 2018 sales budget for Hart & Sons assuming that Hart holds prices at 2017
levels.
2. Prepare a 2018 sales budget for Hart & Sons assuming that Hart lowers the price of a
lead test to $200. Should Hart lower the price of a lead test in 2018 if the company’s goal
is to maximise sales revenue?

Solution:
Sales budget, service setting
1.

Expected 2018
2017 At 2017
Volum Selling Change in Expected
Hart & Sons e Prices Volume 2018 Volume
Radon Tests 11 400 $260 + 5% 11 970
Lead Tests 15 000 $210 –12% 13 200

Hart & Sons Sales Budget

For the Year Ended 31 December 2018
       
Selling Units Total
  Price Sold Revenues
Radon Tests $260 11 970 $3 112 200
Lead Tests $210 13 200 2 772 000
      $5 884 200

2.
2017 Planned Expected 2018 Expected
Volum 2018 Selling Change in 2018
Hart & Sons e Prices Volume Volume
Radon Tests 11 400 $260 +5% 11 970
Lead Tests 15 000 $200 –4% 14 400

Hart & Sons Sales Budget

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 For the Year Ended 31 December 2018
       
Selling Total
  Price Units Sold Revenues
Radon Tests $260 11 970 $3 112 200
Lead Tests $200 14 400 2 880 000
  $5 992 200

2. Revenues and production budget

Purity Ltd bottles and distributes mineral water from the company’s natural springs in Hepburn
Springs. Purity markets two mineral water products: 1-litre disposable plastic bottles and 15-litre
reusable plastic containers.

Required

1. For 2019, Purity Ltd’s marketing managers project monthly sales of 500 000 1-litre
bottles and 130 000 15-litre containers. Average selling prices are estimated at $0.30 per
1-litre bottle and $1.60 per 15-litre container. Prepare a revenues budget for Purity Ltd
for the year ending 31 December 2019.
2. Purity Ltd begins 2019 with 980 000 1-litre bottles in inventory. The manager of
operations requests that 1-litre bottles ending inventory on 31 December 2019 be no
less than 660 000 bottles. Based on sales projections as budgeted above, what is the
minimum number of 1-litre bottles Purity Ltd must produce during 2019?
3. The manager of operations requests that ending inventory of 15-litre containers, on 31
December 2019, be 300 000 units. If the production budget calls for Purity Ltd to
produce 1 200 000 15-litre containers during 2019, what is the beginning inventory of 15-
litre containers on 1 January 2019?

Solution:
Revenues and production budget
1.
Selling Units Total
Price Sold Revenues

1-litre bottles $0.30 6 000 000a $1 800 000

15-litre containers 1.60 1 560 000b 2 496 000

$4 296 000
a
500 000 × 12 months = 6 000 000
b
130 000 × 12 months = 1 560 000

2. Budgeted unit sales (1-litre bottles) 6 000 000

Add target ending finished goods inventory 660 000
Total requirements 6 660 000
Deduct beginning finished goods inventory 980 000
Units to be produced 5 680 000

3.

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 Beginning = Budgeted + Target  Budgeted
inventory sales ending inventory production
= 1 560 000 + 300 000  1 200 000
= 660 000 15-litre containers

4. Budgets for production and direct manufacturing labour

Zhang Manufacturing makes and sells artistic frames for photographs of weddings, graduations
and other special events. Bob Anderson, the management accountant, is responsible for
preparing Zhang Manufacturing’s master budget and has accumulated the following information
for 2019:

2019
January February March April May
Estimated
sales in units 12 000 13 000 6 000 11 000 11 000
Selling price $53.00 $52.00 $52.00 $52.00 $52.00
Direct
manufacturin
g labour-
hours per
unit 3.0 3.0 2.0 2.0 2.0
Wage per
direct
manufacturin
g labour-hour $11.00 $11.00 $11.00 $12.00 $12.00

In addition to wages, direct-manufacturing-labour-related costs include pension contributions of

$0.40 per hour, worker’s compensation insurance of $0.10 per hour, employee medical
insurance of $0.50 per hour and compulsory superannuation contributions. Assume that as of 1
January 2019, the superannuation guarantee obligations are 9% of wages. The cost of employee
benefits paid by Zhang Manufacturing on its employees is treated as a direct manufacturing
labour cost.
Zhang Manufacturing has a labour contract that calls for a wage increase to $12 per hour on 1
April 2019. New labour-saving machinery has been installed and will be fully operational by 1
March 2019. Zhang Manufacturing expects to have 16 000 frames on hand at 31 December
2018, 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.

Required
Prepare a production budget and a direct manufacturing labour budget for Zhang
Manufacturing by month and for the first quarter of 2019. Both budgets may be combined in

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one schedule. The direct manufacturing labour budget should include labour-hours and show
the details for each labour cost category.

Solution:

Budgets for production and direct manufacturing labour

Zhang Manufacturing
Budget for Production and Direct Manufacturing Labour
for the Quarter Ended 31/March/2019
January February March Qua
Budgeted sales (units) 12 00013 000 6 000 31 000
Add target ending finished goods
inventorya (units) 16 000 11 500 16 500 16 500
Total requirements (units) 28 000 24 500 22 500 47 500
Deduct beginning finished goods
inventory (units) 16 000 16 000 11 500 16 000
Units to be produced 12 000 8 500 11 000 31 500
Direct manufacturing labour-hours
(DMLH) per unit × 3.0 × 3.0  2.0
Total hours of direct manufacturing
labour time needed 36 000 25 500 22 000 83 500
Direct manufacturing labour costs:
Wages ($11.00 per DMLH) $396 000 $280 500 $242 000 $918 500
Pension contributions
($0.40 per DMLH) 14 400 10 200 8 800 33 400
Workers’ compensation insurance
($0.10 per DMLH) 3 600 2 550 2 200 8 350
Employee medical insurance
($0.50 per DMLH) 18 000 12 750 11 000 41 750
Superannuation contribution (employer’s share)
($11.00  0.075 = $0.825 per DMLH) 29 700 21 038 18 150 68 888

Total direct manufacturing labour costs $461 700$327 038$282 150$1 070 888

a
100% of the first following month’s sales plus 50% of the second following month’s sales

Problems

11.29 Budget schedules for a manufacturer

Sierra Furniture is an elite desk manufacturer. It makes two products:

• Executive desks—small silky oak desks

• Chairman desks—medium Tasmanian oak desks.

The budgeted direct cost inputs for each product in 2018 are:

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 Executive line Chairman line
Silky oak top 2 square 0
metres
Tasmanian oak top 0 5 square metres
Silky oak legs 4 0
Tasmanian oak legs 0 4
Direct 3 hours 5 hours
manufacturing
labour

Unit data pertaining to the direct materials for March 2018 are:

Actual beginning direct materials inventory (1 March 2018)

Executive line Chairman line
Silky oak top (square metres) 40 0
Tasmanian oak top (square 0 30
metres)
Silky oak legs 100 0
Tasmanian oak legs 0 40

Target ending direct materials inventory (31 March 2018)

Executive line Chairman line
Silky oak top (square metres) 24 0
Tasmanian oak top (square 0 40
metres)
Silky oak legs 80 0
Tasmanian oak legs 0 44

Unit cost data for direct cost inputs pertaining to February 2018 and March 2018 are:

February (actual) March (budgeted)

Silky oak top (per square $144 $160
metre)
Tasmanian oak top (per 115 125
square metre)
Silky oak legs (per leg) 11 12
Tasmanian oak legs (per leg) 17 18
Manufacturing labour cost 30 30
per hour

Manufacturing overhead (both variable and fixed) is allocated to each desk on the basis of
budgeted direct manufacturing labour-hours per desk. The budgeted variable manufacturing
overhead rate for March 2018 is $35 per direct manufacturing labour-hour. The budgeted fixed
manufacturing overhead for March 2018 is $42 500. Both variable and fixed manufacturing
overhead costs are allocated to each unit of finished goods.

Data relating to finished goods inventory for March 2018 are:

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 Executive line Chairman line
Beginning inventory in units 20 5
Beginning inventory in dollars $10 480 $4 850
(cost)
Target ending inventory in units 30 15

Budgeted sales for March 2018 are 740 units of the Executive line and 390 units of the Chairman
line. The budgeted selling prices per unit in March 2018 are $1020 for the Executive-line desk
and $1600 for the Chairman-line desk. Assume the following in your answer:

• Work-in-process inventories are negligible and ignored.

• Direct materials inventory and finished goods inventory are costed using the FIFO method.
• Unit costs of direct materials purchased and finished goods are constant in March 2018.

Required
1. Prepare the following budgets for March 2018:
a. revenues budget
b. production budget in units
c. direct materials usage budget and direct materials purchases budget
d. direct manufacturing labour budget
e. manufacturing overhead budget
f. ending inventories budget (direct materials and finished goods)
g. cost of goods sold budget.
2. Suppose that Sierra Furniture decides to incorporate continuous improvement into its
budgeting process. Describe two areas where Sierra could incorporate continuous
improvement into the budget schedules in Requirement 1.

Solution:
Budget schedules for a manufacturer
1.
a. Revenues budget:

Executive Chairman
Line Line Total
Units sold 740 390
Selling price A$ 1 020 A$ 1 600
Budgeted revenues A$754 800 A$624 000 A$1 378 800

b. Production budget in units:

Executive Chairman
Line Line
Budgeted unit sales 740 390
Add budgeted ending finished goods 30 15
inventory
Total requirements 770 405
Deduct beginning finished goods inventory 20 5
Budgeted production 750 400
(cont’d…)

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c. Direct materials usage budget (units):

Silky
Silky Tas Oak Tas
Oak Oak Legs Legs Total
Executive-line:
1. Budgeted input
per f.g. unit 2 – 4 –
2. Budgeted
production 750 – 750 –
3. Budgeted usage
(1 × 2) 1 500 – 3 000 –

Chairman-line:
4. Budgeted input
per f.g. unit – 5 – 4
5. Budgeted
production – 400 – 400
6. Budgeted usage (4
× 5) – 2 000 – 1 600
7. Total direct
materials usage (3 + 6) 1 500 2 000 3 000 1 600

Direct Materials Cost Budget

8. Beginning
inventory 40 30 100 40
9. Unit price (FIFO) A$144 A$115 A$11 A$17
10. Cost of DM used
from beginning A$10
inventory (8 × 9) A$5 760 A$3 450 A$1 100 A$680 990
11. Materials to be
used from
purchases (7 – 8) 1 460 1 970 2 900 1 560
12. Cost of DM in
March A$160 A$125 A$12 A$18
13. Cost of DM
purchased and
used in March (11 A$233 A$246 A$34 A$28 A$542
× 12) 600 250 800 080 730
14. Direct materials to A$239 A$249 A$35 A$28 A$553
be used (10 + 13) 360 700 900 760 720

Direct Materials Purchases Budget:

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 Silky
Silky Tas Oak Tas Oak
Oak Oak Legs Legs Total
Budgeted usage
(from line 7) 1 500 2 000 3 000 1 600
Add target ending
inventory 24 40 80 44
Total requirements 1 524 2 040 3 080 1 644
Deduct beginning
inventory 40 30 100 40

Total DM purchases 1 484 2 010 2 980 1 604

Purchase price (March) A$160 A$125 A$12 A$18 _______
Total purchases A$237 440 A$251 250 A$35 760 A$28 872 A$553 322

d. Direct manufacturing labour budget:

Direct
Manuf.
Output Labour-
Units Hours per
Produce Output Total Hourly
d Unit Hours Rate Total
Executive-line 750 3 2 250 A$30 A$ 67 500
Chairman- 400 5 2 000 A$30 60 000
line
4 250 A$127
500

e. Manufacturing overhead budget:

Variable manufacturing overhead costs (4 250 × A$35) A$148 750

Fixed manufacturing overhead costs 42 500
Total manufacturing overhead costs A$191 250

Total manuf. overhead cost per hour =

= A$45 per direct manufacturing labour-hour

Fixed manuf. overhead cost per hour =

= A$10 per direct manufacturing labour-hour

f. Computation of unit costs of ending inventory of finished goods:

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 Executive Chairman
Line Line
Direct materials
Silky oak top (A$160 × 2, 0) A$320 A$0
Tasmanian oak top (A$125 × 0, 5) 0 625
Silky oak legs (A$12 × 4, 0) 48 0
Tasmanian oak legs (A$18 × 0, 4) 0 72
Direct manufacturing labour (A$30 × 3, 5) 90 150
Manufacturing overhead
Variable (A$35 × 3, 5) 105 175
Fixed (A$10 × 3, 5) 30 50
Total manufacturing cost A$593 A$1 072

Ending inventories budget:

Cost per Unit Units Total
Direct Materials
Silky oak top A$160 24 A$3 840
Tasmanian oak top 125 40 5 000
Silky oak legs 12 80 960
Tasmanian oak legs 18 44 792
10 592
Finished Goods
Executive 593 30 17 790
Chairman 1 072 15 16 080
33 870
Total A$44 462

g. Cost of goods sold budget:

Budgeted finished goods inventory,

1 Mar 2018 (A$10 480 + A$4 850) A$15 330
Direct materials used
(From Dir. materials usage budget) 553 720
Direct manufacturing labour
(Dir. manuf. labour budget) 127 500
Manufacturing overhead
(Manuf. overhead budget) 191 250
Cost of goods manufactured 872 470
Cost of goods available for sale 887 800
Deduct ending finished goods inventory,
31 March 2018 (Inventories budget) 33 870
Cost of goods sold A$853 930

1. Areas where continuous improvement might be incorporated into the budgeting

process:

(a) Direct materials. Either an improvement in usage or price could be budgeted. For
example, the budgeted usage amounts could be related to the maximum
improvement (current usage – minimum possible usage) for either desk:
• Executive: 2 square metres – 1.5 square metres minimum = 0.5 square metre
• Chairman: 5 square metres – 4.5 square metres minimum = 0.5 square metre

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 Thus, a 1% reduction target per month could be:
• Executive: 1.5 square metres + (0.99 × 0.5) = 1.995
• Chairman: 4.5 square metres + (0.99 × 0.5) = 4.995

Some students suggested the 1% be applied to the two and square-metre amounts.
This can be done as long as after several improvement cycles, the budgeted amount
is not less than the minimum desk requirements.

(b) Direct manufacturing labour. The budgeted usage of three hours/five hours could be
continuously revised on a monthly basis. Similarly, the manufacturing labour cost
per hour of A$30 could be continuously revised down. The former appears more
feasible than the latter.

(c) Variable manufacturing overhead. By budgeting more efficient use of the allocation
base, a signal is given for continuous improvement. A second approach is to budget
continuous improvement in the budgeted variable overhead cost per unit of the
allocation base.

(d) Fixed manufacturing overhead. The approach here is to budget for reductions in the
year-to-year amounts of fixed overhead. If these costs are appropriately classified as
fixed, then they are more difficult to adjust down on a monthly basis.

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