Question

Black Diamond Company produces snow skis. Each ski requires 2 pounds of carbon fiber. The company’s management predicts that 5,000 skis and 6,000 pounds of carbon fiber will be in inventory on June 30 of the current year and that 150,000 skis will be sold during the next (third) quarter. A set of two skis sells for \(300. Management wants to end the third quarter with 3,500 skis and 4,000 pounds of carbon fiber in inventory. Carbon fiber can be purchased for \)15 per pound. Each ski requires 0.5 hours of direct labor at \(20 per hour. Variable overhead is applied at the rate of \)8 per direct labor hour. The company budgets fixed overhead of $1,782,000 for the quarter.

Required

1. Prepare the third-quarter production budget for skis.

2. Prepare the third-quarter direct materials (carbon fiber) budget; include the dollar cost of purchases.

3. Prepare the direct labor budget for the third quarter.

4. Prepare the factory overhead budget for the third quarter.

Short answer

1. The units to be produced are 148,500 units
2. The total cost of direct material purchases is $4,425,000
3. The total cost of direct labor is $1,485,000
4. The budgeted total factory overhead is$2,376,000

Step-by-step solution

Meaning of Factory Overhead Budget

A budget shows the total factory overhead budgeted costs that need to be incurred to achieve the budgeted production is known as the factory overhead budget.

(1) Preparing third quarter production budget

Back Diamond Company
Production budget
For third quarter
Particulars	Units .
Budgeted Ending inventory	3,500 units
Add: Budgeted sales for the second quarter	150,000 units
Required units of available production	153,500 units
Less: Beginning inventory	5,000 units
Units to be produced	148,500 units

(2) Preparing third quarter direct material budget

Back Diamond Company

Direct materials budget

For third quarter

Particulars	Amount
Budgeted production	148,500 units
Materials requirement per unit	2
Materials needed for production	297,000
Add: Budgeted ending inventory	4,000
Total material requirements	301,000
Less: Beginning inventory	6,000
Materials to be purchased	295,000
Material price per pound	$15
Total cost of direct material purchases	$4,425,000

(3) Preparing third quarter direct labor budget

Back Diamond Company

Direct labor budget

For third quarter

Particulars	Amount
Units to be produced	148,500 units
Labor requirement per unit (hours)	0.50
Total direct labor hours needed	74,250 hours
Direct labor cost per hour	$20
Total cost of direct labor	$1,485,000

(4) Preparing third quarter factory overhead budget

Back Diamond Company

Factory overhead budget

For third quarter

Particulars	Amount
Total direct labor hours needed	74,250 units
Variable overhead rate per direct labor hour	$8
Budgeted variable overhead	$594,000
Budgeted fixed overhead	$1,782,000
Budgeted total factory overhead	$2,376,000