The West Division of Vader Corporation produces an intricate component part used in Vader's major product line. The divisional manager has recently been concerned about a lack of coordination between purchasing and production personnel and believes that a monthly budgeting system would be better than the present system.
The manager of the West Division has decided to develop budget information for the third quarter of the current year as a trial before the budget system is implemented for an entire fiscal year. In response to the manager's request for data that could be used to develop budget information, the controller of the West Division accumulated the following data :
Sales. Sale through June 30, the first six months of the current year, were 24,000 units. Actual sales in units for May and June and estimated unit sales for the next five months are detailed as follows:
May (actual) 4,000
June (actual) 4,000
July (estimated) 5,000
August (estimated) 6,000
September (estimated) 7,000
October (estimated) 7,500
November (estimated) 8,000
The West Division expects to sell 65,000 units during the year ending December 31.
Direct Material. Data regarding the direct materials used in the component are shown in the following schedule. Each month's ending materials inventory should equal 50% of the next month's production needs.
Direct Material Units of Direct Materials per Finished Component Cost per unit Inventory Level, June 30
No. 101 6 ounces $2.40 35,000 ounces
No. 211 4 pounds $5.00 30,000 pounds
Direct Labor. Each component must pass through three processes to be completed. Data regarding the direct labor are as follows:
Process Direct Labor-Hours per Finished Component Cost per Direct Labor-Hour
Forming 0.40 $16.00
Assembly 1.00 $11.00
Finishing 0.10 $15.00
Manufacturing Overhead. The West Division produced 27,000 components and incurred the variable overhead costs shown below during the six-month period ended June 30. The controller of the West Division believes that the variable overhead costs will be incurred at the same rate during the last sex months of the year.
Indirect labor $54,000
Total variable overhead $148,500
The actual fixed manufacturing overhead costs incurred during the first six months amounted to $93,500. Fixed manufacturing overhead costs are budgeted for the entire year as follows:
Total fixed manufacturing overhead $186,000
Finished Goods Inventory. The desired monthly ending finished goods inventory in units is 80% of the next month's estimated sales. There are 4,000 finished units in inventory on June 30.
1. Prepare a production budget for the West Division for the third quarter ending September 30. Show computations by month and in total for the quarter.
2. Prepare a direct materials budget for each type of material for the third quarter ending September 30. Again show computations by month and in total for the quarter.
3. Prepare a direct labor budget for the third quarter ending September 30. This time it is not necessary to show monthly figures; show quarterly totals only. Assume that the work force is adjusted as work requirements change.
Excel file shows production budget, direct materials budget and direct labor budget for the West Division of Vader Corporation.