Question

Exercise 23.3 Production Budgets (LO23-4, LO23-5) Mercury Bag Company produces cases of grocery bags. The managers at Mercury are trying to develop budgets for the upcoming quarter. The following data have been gathered. Projected sales in units Selling price per case Inventory at the beginning of the quarter Target inventory at the end of the quarter Direct labor hours needed to produce one case Direct labor wages Direct materials cost per case Variable manufacturing overhead cost per case Fixed overhead costs for the upcoming quarter 1,800 cases $ 240 150 cases 100 cases 2 hours $ $ $ $220,000 10 per hour 6 a. Using the above information, develop Mercury's sales forecast in dollars and production schedule in units. b. What is Mercury's budgeted variable manufacturing cost per case? c. Prepare Mercury's manufacturing cost budget. d. What is the projected ending value of the Inventory account? S

Answer 1

a. Mercury's sales forecast in dollars and production schedule in units
Budgeted sales (in dollars)    [Refer working note 1]	$432,000
Planned production (cases)   [Refer working note 2]	1,750
b. Budgeted variable manufacturing cost per case
Total variable cost per case   [Refer working note 3]	$34
c. Manufacturing cost budget.
Variable manufacturing costs:
Direct Materials      [Planned production x Direct material cost per case = 1,750 cases x $8]                    (a)	$14,000
Direct Labor            [Planned production x Direct labor cost per case = 1,750 cases x 2 hours x $10]       (b)	$35,000
Variable overhead   [Planned production x Variable overhead cost per case = 1,750 cases x $6]               (c)	$10,500
Total variable manufacturing costs          (a + b + c)	$59,500
Add: Fixed manufacturing overhead	$220,000
Total cost of finished goods manufactured	$279,500
Manufacturing cost per unit   [Total cost of finished goods manufactured / Planned production = $279,500 / 1,750 cases]	$159.71
d. Projected ending value of the Inventory account
Ending inventory value [Refer working note 4]	$15,971

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Working note 1 - Sales forecast in dollars
Sales forecast:
Budgeted sales (in cases)             (a)	1,800
Selling price per case                   (b)	$240
Budgeted sales (in dollars)           (a x b)	$432,000
Working note 2 - Planned production (cases)
Production Schedule:
Budgeted sales (cases)                                      (a)	1,800
Target ending inventory                                     (b)	100
Cases budgeted to be available for sale             (a + b)	1,900
Less: Beginning inventory	150
Planned production (cases)	1,750

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Working note 3 - Total variable cost per case
Direct labor hours needed to produce one case      (a)	2	hours
Direct labor wages                                                 (b)	$10	per hour
Direct labor wages per case                                   (c = a x b)	$20
Direct materials cost per case                                (d)	$8
Variable manufacturing overhead cost per case     (e)	$6
Total variable cost per case                                    (c + d + e)	$34	per case

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Working note 4 - Projected ending value of the Inventory account
Manufacturing cost per unit                                   (a)	$159.71
Target inventory at the end of the quarter              (b)	100
Ending value of the Inventory account                  (a x b)	$15,971