Chapter 22: Q12RQ (page 1228)
What are the two types of manufacturing overhead? How do they affect the manufacturing overhead budget calculations?
Variable manufacturing overheadandFixed manufacturing overheadare two types of manufacturing overhead.
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Southeast Suites operates a regional hotel chain. Each hotel is operated by a manager and an assistant manager/controller. Many of the staff who run the front desk, clean the rooms, and prepare the breakfast buffet work part-time or have a second job, so employee turnover is high.
Assistant Manager/Controller Terry Dunn asked the new bookkeeper to help prepare the hotel’s master budget. The master budget is prepared once a year and is submitted to company headquarters for approval. Once approved, the master budget is used to evaluate the hotel’s performance. These performance evaluations affect hotel managers’ bonuses, and they also affect company decisions on which hotels deserve extra funds for capital improvements.
When the budget was almost complete, Dunn asked the bookkeeper to increase the amounts budgeted for labor and supplies by 15%. When asked why, Dunn responded that hotel manager Clay Murry told her to do this when she began working at the hotel. Murry explained that this budgetary cushion gave him flexibility in running the hotel. For example, because company headquarters tightly control capital improvement funds, Murry can use the extra money budgeted for labor and supplies to replace broken televisions or pay “bonuses” to keep valued employees. Dunn initially accepted this explanation because she had observed similar behavior at the hotel where she worked previously.
Requirements Put yourself in Dunn’s position. In deciding how to deal with the situation, answer the following questions:
1. What is the ethical issue?
2. What are the options?
3. What are the possible consequences?
4. What should you do?
Using Excel for to prepare an operating budeget (manufacturing company)
Download an Excel template for this problem online in MyAccountingLab or athttp://www.pearsonhighered.com/Horngren.
Thunder Creek Company is preparing budgets for the first quarter of 2018. All relevant information is presented on the Excel template.
Requirements
1. Prepare a Sales Budget.
2. Prepare a Production Budget.
3. Prepare a Direct Materials Budget.
4. Prepare a Direct Labor Budget.
5. Prepare a Manufacturing Overhead Budget.
6. Prepare a Cost of Goods Sold Budget
7. Prepare a Selling and Administrative Expense Budget.
11. Kendall Company projects 2019 first quarter sales to be $10,000 and increase by 5% per quarter. Determine the projected sales for 2019 by quarter and in total. Round answers to the nearest dollar.
12. Friedman Company manufactures and sells bicycles. A popular model is the XC. The company expects to sell 1,500 XCs in 2018 and 1,800 XCs in 2019. At the beginning of 2018, Friedman has 350 XCs in Finished Goods Inventory and desires to have 10% of the next year’s sales available at the end of the year. How many XCs will Friedman need to produce in 2018?
Completing a comprehensive budgeting problem—manufacturing company The Gavin Tire Company manufactures racing tires for bicycles. Gavin sells tires for \(70 each. Gavin is planning for the next year by developing a master budget by quarters. Gavin’s balance sheet for December31, 2018, follows:
Other data for Gavin Tire Company: a. Budgeted sales are 1,000 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 10% of total sales, with the remaining 90% of sales on account. b. Finished Goods Inventory on December 31, 2018, consists of 300 tires at \)36 each.
c. Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2020 are expected to be 1,800 tires; FIFO inventory costing method is used. d. Raw Materials Inventory on December 31, 2018 consists of 750 pounds of rubber compound used to manufacture the tires. e. Direct materials requirements are 2.5 pounds of rubber compound per tire. The cost of the compound Is \(4 per pound. f. Desired ending Raw Materials Inventory is 40% of the next quarter’s direct materials needed for production; desired ending inventory for December 31, 2019 is 750 pounds; indirect materials are insignificant and not considered for budgeting purposes. g. Each tire requires 0.30 hours of direct labor; direct labor costs average \)20 per hour. h. Variable manufacturing overhead is \(3 per tire. i. Fixed manufacturing overhead includes \)6,000 per quarter in depreciation and \(10,860 per quarter for other costs, such as utilities, insurance, and property taxes. j. Fixed selling and administrative expenses include \)8,000 per quarter for salaries; \(4,800 per quarter for rent; \)1,950 per quarter for insurance; and \(2,000 per quarter for depreciation. k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include \)25,000 for new manufacturing equipment, to be purchased and paid in the first quarter. m. Cash receipts for sales on account are 70% in the quarter of the sale and 30% in the quarter following the sale; December 31, 2018, Accounts Receivable is received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes. n. Direct materials purchases are paid 50% in the quarter purchased and 50% in the following quarter; December 31, 2018, Accounts Payable is paid in the first quarter of 2019. o. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred. p. Income tax expense is projected at \(3,500 per quarter and is paid in the quarter incurred. q. Gavin desires to maintain a minimum cash balance of \)20,000 and borrows from the local bank as needed in increments of \(1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of \)1,000; interest is 12% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.
Requirements
1. Prepare Gavin’s operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated basedon direct labor hours. Round all calculations to the nearest dollar.
2. Prepare Gavin’s annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.
How does the master budget for a merchandising company differ from a manufacturing company?
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