Question

MCO Leather Goods manufactures leather purses. Each purse requires 2 pounds of direct materials at a cost of \(4 per pound and 0.8 direct labor hours at a rate of \)16 per hour. Variable manufacturing overhead is charged at a rate of \(2 per direct labor hour. Fixed manufacturing overhead is \)10,000 per month. The company’s policy is to end each month with direct materials inventory equal to 40% of the next month’s materials requirement. At the end of August the company had 3,680 pounds of direct materials in inventory. The company’s production budget reports the following.

Prepare budgets for September and October for (1) direct materials(2) direct labor(3) factory overhead.

Short answer

The organizations material requirementis based on the level of production and level of salesin the market. ABC analysisis used to optimize the optimal inventory level.

Step-by-step solution

(1) Direct materials

MCO Leather Goods
Direct materials budget
For the month of September and October
Particulars	September	October
Budgeted production	4,600	6,200
Multiply: Materials requirement	2	2
Materials needed	9,200	12,400
Add: Budgeted ending inventory	4,960	4,640
Total material requirements	14,160	17,040
Less: Beginning inventory	3,680	4,960
Materials to be purchased	10,480	12,080
Multiply: Direct materials cost	$4	$4
Total budgeted direct materials	$41,920	$48,320

Step 2:(2) Preparation of direct labor budget

Direct labor budget
Direct labor budget
For the month of September and October
Particulars	September	October
Budgeted production	4,600	6,200
Multiply: Direct labor hours	0.8	0.8
Total direct labor hours	3,680	4,960
Multiply: Direct labor rate	$16	$16
Total budgeted direct labor	$58,880	$79,360

Step 3:(3) Preparation of factory overhead budget

MCO Leather Goods
Factory overhead budget
For the month of September and October
Particulars	September	October
Total direct labor hours	3,680	4,960
Multiply: Variable overhead rate	$2	$2
Budgeted variable overhead	$7,360	$9,920
Add: Fixed overhead	$10,000	$10,000
Total budgeted factory overhead	$17,360	$19,920