Question

6-27 Budgeting; direct material usage, manufacturing cost, and gross margin. Xander Manufactur Company manufactures blue rugs, using wool and dye as direct materials. One rug is budgeted to le 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 mate als 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 zern 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 accumu. lated in two cost pools-one for weaving and the other for dyeing. Weaving overhead is allocated to prod- ucts 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

Answer 1

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1.

Direct Material Usage Budget in Quantity and Dollars
	Material
	Wool	Dye	Total
Physical Units Budget
Direct materials required for
Blue Rugs (200,000 rugs × 36 skeins and 0.8 gal.)	7,200,000 skeins	160,000 gal.
Cost Budget
Available from beginning direct materials inventory: (a)
Wool: 458,000 skeins	$   961,800
Dye: 4,000 gallons		$   23,680
To be purchased this period: (b)
Wool: (7,200,000 – 458,000) skeins × $2 per skein	13,484,000
Dye: (160,000 – 4,000) gal. × $6 per gal.		936,000
Direct materials to be used this period: (a) + (b)	$14,445,800	$ 959,680	$15,405,480

2.

= = $2.55 per DMLH

= = $12 per MH

3.

Budgeted Unit Cost of Blue Rug
	Cost per Unit of Input		Input per Unit of Output	Total
Wool	$    2		36 skeins	$      72.00
Dye	6		0.8 gal.	4.80
Direct manufacturing labor	13		62 hrs.	806.00
Dyeing overhead	12		7.21 mach-hrs.	86.40
Weaving overhead	2.55		62 DMLH	158.10
Total				$1,127.30

              

               ¹0.2 machine hour per skein36 skeins per rug = 7.2 machine-hrs. per rug.

4.

Revenue Budget
	Units	Selling Price	Total Revenues
Blue Rugs	200,000	$2,000	$400,000,000
Blue Rugs	185,000	$2,000	$370,000,000

5a.

	Sales = 200,000 rugs
	Cost of Goods Sold Budget
			From Schedule	Total
Beginning finished goods inventory				$                 0
Direct materials used			$ 15,405,480
Direct manufacturing labor ($806 × 200,000)			161,200,000
Dyeing overhead ($86.40 × 200,000)			17,280,000
Weaving overhead ($158.10 × 200,000)			31,620,000	225,505,480
Cost of goods available for sale				225,505,480
Deduct ending finished goods inventory				0
Cost of goods sold				$225,505,480

5b.

	Sales = 185,000 rugs
	Cost of Goods Sold Budget
			From Schedule	Total
Beginning finished goods inventory				$                  0
Direct materials used			$ 15,405,480
Direct manufacturing labor ($806 × 200,000)			161,200,000
Dyeing overhead ($86.40 × 200,000)			17,280,000
Weaving overhead ($158.10 × 200,000)			31,620,000	225,505,480
Cost of goods available for sale				225,505,480
Deduct ending finished goods inventory      ($1,127.30 × 15,000)				16,909,500
Cost of goods sold				$208,595,980

6.

	200,000 rugs sold	185,000 rugs sold
Revenue	$400,000,000	$370,000,000
Less: Cost of goods sold	225,505,480	208,595,980
Gross margin	$174,494,520	$161,404,020

7.        If sales drop to 185,000 blue rugs, Xander should look to reduce fixed costs and produce less to reduce variable costs and inventory costs.

8.        Top management can look for ways to increase (stretch) sales and improve quality, efficiency, and input prices to reduce costs in each cost category such as direct materials, direct manufacturing labor, and overhead costs. Top management can also use the budget to coordinate and communicate across different parts of the organization, create a framework for judging performance and facilitating learning, and motivate managers and employees to achieve “stretch” targets of higher revenues and lower costs.