Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. One
rug is budgeted to use 36 skeins of wool at a cost of $2 per skein and 0.8 gallons of dye
at a cost of $6 per gallon. All other materials are indirect. At the beginning of the year
Xander has an inventory of 458,000 skeins of wool at a cost of $961,800 and 4,000 gallons
of dye at a cost of $23,680. Target ending inventory of wool and dye is zero. Xander uses
the FIFO inventory cost flow method.
Xander blue rugs are very popular and demand is high, but because of capacity constraints
the firm will produce only 200,000 blue rugs per year. The budgeted selling price is $2,00
0 each. There are no rugs in beginning inventory. Target ending inventory of rugs is also
zero.
Xander makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are a
ccumulated in two cost pools
—one for weaving and the other for dyeing. Weaving overhead i
s allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead
is allocated to products based on machine-hours (MH).
The following table presents the budgeted overhead costs for the dyeing and weaving co
st pools:
Dyeing
Weaving
(based on 1,440,000 MH)
(based on 12,400,000 DMLH)
Variable costs
$
0
$
15,400,000
Maintenance
6,560,000
5,540,000
Utilities
7,550,000
2,890,000
347,000
1,700,000
2,100,000
274,000
723,000
5,816,000
$
$
17,280,000
31,620,000
Indirect materials
Fixed costs
Indirect labor
Depreciation
Other
Total budgeted costs
Requirement 1. Prepare a direct material usage budget in both units and dollars.
Begin with the physical units portion, then prepare the cost budget portion of the direct
material usage budget.
Direct Material Usage Budget in Quantity and Dollars
Material
Wool
Dye
Total
Physical Units Budget
Direct materials required for
7,200,000 skeins
Blue rugs
160,000 gal
Cost Budget
Available from beginning direct mater
ials inventory
(under a FIFO cost-flow assumption)
$
961,800
Wool
$
23,680
Dye
To be purchased this period
Wool
13,484,000
936,000
Dye
Direct materials to be used this peri
od
$
$
$
14,445,800
959,680
15,405,480
Requirement 2. Calculate the budgeted overhead allocation rates for weaving and dyeing.
Begin by determining the formula, then calculate the budgeted overhead allocation rate for
weaving. (Round your answer to the nearest cent.)
Total budgeted overhead co
sts
/ Direct manuf. labor hours
$
31,620,000
/
12,400,000
=
Budgeted manufacturing overhe
ad rate
=
$
2.55
Begin by determining the formula, then calculate the budgeted overhead allocation rate for
dyeing.
Total budgeted overhead co
sts
Budgeted manufacturing overhe
/
Machine hours
=
$
17,280,000
ad rate
$
/
1,440,000
=
12
Requirement 3. Calculate the budgeted unit cost of a blue rug for the year. (Round your an
swers to two decimal places.)
Cost per
Input per
Budgeted
unit of input
x unit of output =
unit cost
$
$
Wool
2 x
36 =
72.00
Dye
6 x
0.80 =
4.80
Direct manufacturing labor
13 x
62 =
806.00
Dyeing overhead
12 x
7.20 =
86.40
2.55 x
62 =
158.10
Weaving overhead
$
1,127.30
Total
Part 7
Requirement 4. Prepare a revenue budget for blue rugs for the year, assuming
Xander sells (a)
200,000 or (b)
185,000 blue rugs (that is, at two different sales levels).
Revenue Budget
Units
Selling price
(a) Blue rugs
200,000
$
2,000
(b) Blue rugs
185,000
2,000
Total revenues
$
400,000,000
370,000,000
Part 8
Requirement 5. Calculate the budgeted cost of goods sold for blue rugs under each sales as
sumption. (For amounts with a $0 balance, make sure to enter "0" in the appropriate cell.)
Begin by (a) completing the cost of goods sold budget assuming sales of
200,000 rugs, and then (b) complete a cost of goods sold budget assuming sales of
185,000 rugs.
Cost of Goods Sold Budget
(a) 200,000 units
$
0
Beginning finished goods inventory
$
Direct materials used
15,405,480
Direct manufacturing labor
161,200,000
48,900,000
Manufacturing overhead
Cost of goods manufactured
225,505,480
Cost of goods available for sale
225,505,480
Deduct ending finished goods inventor
y
0
$
225,505,480
Cost of goods sold
(b) 185,000 units
$
0
$
15,405,480
161,200,000
48,900,000
225,505,480
225,505,480
16,909,500
$
208,595,980
Part 9
Requirement 6. Find the budgeted gross margin for blue rugs under each sales assumption.
Begin by (a) finding the budgeted gross margin assuming sales of
200,000 rugs, and then (b) finding the budgeted gross margin assuming sales of
185,000 rugs.
Budgeted Income Statement
(a) 200,000 uni
ts
Revenues
$
400,000,000
Cost of goods sold
225,505,480
Gross margin
174,494,520
(b) 185,000 uni
ts
$
370,000,000
208,595,980
161,404,020
Part 10
Requirement 7. What actions might you take as a manager to improve profitability if sales
drop to
185,000 blue rugs?
If sales drop to
185,000 blue rugs,
Xander should look to
reduce
fixed costs and produce
less
to reduce variable costs and inventory costs.
Part 11
Requirement 8. How might top management at
Xander use the budget developed in requirements 1-6 to better manage the company? (Select
all that apply.)
Look for ways to increase sales and improve quality, efficiency and input p
rices.
Coordinate and communicate across different parts of the organization.
Create a framework for judging performance.