Both Budgets May Be Combined Into A Single Schedule

P9.36
(appendix) Production and direct labour budgets: manufacturer
Alpha Mann Lid makes and sells computer carry bags. Bill Blake, the company accountant, is responsible for
LO9.11
preparing the company’s annual budget. In compiling the budget data for next year, Blake has learned that
new automated production equipment will be installed on 1 March. This will reduce the direct labour per unit
from 1 hour to 0.75 hour.
Labour-related costs include employer superannuateon contributions of 9 per cent of employee wages,
workers’ compensation insurance of $0.20 per hour, and payroll tax equal to 7 per cent of employee wages.
These on-costs are treated as an additional direct labour cost. The accountant estimates that a wage increase
for production workers of $4.00 per hour will take place on 1 April.
Management expects to have 16 000 bags on hand at the beginning of the budget year, and has a policy
of carrying an end-of-month inventory of 100 per cent of the following month’s sales plus 50 per cent of the
second following month’s sales.
This and other data compiled by Blake are summarised in the following table:
January
February
March
April
May
Direct labour hours per unit
1.0
1.0
0.75
0.75
0.75
Wage per direct labour hour
$32.00
$32.00
$32.00
$36.00
$36.00
Estimated unit sales
20 000
24 000
16 000
18 000
18 000
Sales price per unit
$50.00
$47.50
$47.50
$47.50
$47.50
Manufacturing overhead:
Shipping and handling (per unit sold)
$ 3.00
$ 3.00
$ 3.00
$ 3.00
$ 3.00
Purchasing and material handling (per
$ 4.50
$ 4.50
$ 4.50
$ 4.50
$ 4.50
unit produced)
Other (per direct labour hour)
$10.50
$10.50
$10.50
$10.50
$10.50
Required:
1. Prepare a production budget and a direct labour budget for Alpha Mann Lid, by month and for the first
quarter of the next budget year. Both budgets may be combined into a single schedule. The direct labour
budget should include direct labour hours and show the detail for each direct labour cost category.
Z. For each item used in the firm’s production budget and direct labour budget, identify the other components
of the annual budget that would also use these data.
Prepare a manufacturing overhead budget for each month and for the first quarter.Managerial Accounting