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Chapter 22: Problem 11

Anticipated sales for Sure Grip Tire Company were 42,000 passenger car tires and 15,000 truck tires. There were no anticipated beginning or ending finished goods inventories for either product. Rubber and steel belts are used in producing passenger car and truck tires according to the following table: \begin{tabular}{lrl} & Passenger Car & Truck \\ \hline Rubber & \(30 \mathrm{lbs}\). per unit & \(70 \mathrm{lbs}\). per unit \\ Steel belts & \(4 \mathrm{lbs}\). per unit & \(10 \mathrm{lbs}\). per unit \end{tabular} The purchase prices of rubber and steel are \(\$ 3.20\) and \(\$ 4.20\) per pound, respectively. The desired ending inventories of rubber and steel belts are 40,000 and 10,000 pounds, respectively. The estimated beginning inventories for rubber and steel belts are 46,000 and 8,000 pounds, respectively. Prepare a direct materials purchases budget for Sure Grip Tire Company for the year ended December 31, \(2010 .\)

Short Answer

Expert verified
The total cost of rubber purchases is $7,372,800 and steel purchases is $1,344,000, totaling $8,716,800.

Step by step solution

01

Calculate Total Rubber Needed for Production

Calculate the total amount of rubber needed for passenger and truck tires.\[\text{Passenger Car Rubber} = 42,000 \text{ units} \times 30 \text{ lbs/unit} = 1,260,000 \text{ lbs}\] \[\text{Truck Rubber} = 15,000 \text{ units} \times 70 \text{ lbs/unit} = 1,050,000 \text{ lbs}\] \[\text{Total Rubber Needed} = 1,260,000 \text{ lbs} + 1,050,000 \text{ lbs} = 2,310,000 \text{ lbs}\]
02

Calculate Total Steel Belts Needed for Production

Calculate the total amount of steel belts needed for passenger and truck tires.\[\text{Passenger Car Steel} = 42,000 \text{ units} \times 4 \text{ lbs/unit} = 168,000 \text{ lbs}\] \[\text{Truck Steel} = 15,000 \text{ units} \times 10 \text{ lbs/unit} = 150,000 \text{ lbs}\] \[\text{Total Steel Needed} = 168,000 \text{ lbs} + 150,000 \text{ lbs} = 318,000 \text{ lbs}\]
03

Determine Total Rubber Required

To determine the total rubber required, consider both the production needs and desired ending inventory.\[\text{Total Rubber Required} = 2,310,000 \text{ lbs (for production)} + 40,000 \text{ lbs (desired ending inventory)} = 2,350,000 \text{ lbs}\]
04

Determine Total Steel Belts Required

To determine the total steel belts required, consider both the production needs and desired ending inventory.\[\text{Total Steel Required} = 318,000 \text{ lbs (for production)} + 10,000 \text{ lbs (desired ending inventory)} = 328,000 \text{ lbs}\]
05

Calculate Rubber to Purchase

Subtract the beginning inventory of rubber to find how much needs to be purchased.\[\text{Rubber to Purchase} = 2,350,000 \text{ lbs (total requirement)} - 46,000 \text{ lbs (beginning inventory)} = 2,304,000 \text{ lbs}\]
06

Calculate Steel Belts to Purchase

Subtract the beginning inventory of steel to find how much needs to be purchased.\[\text{Steel to Purchase} = 328,000 \text{ lbs (total requirement)} - 8,000 \text{ lbs (beginning inventory)} = 320,000 \text{ lbs}\]
07

Calculate Cost of Rubber and Steel Purchases

Determine the total cost for purchasing the required quantities.\[\text{Cost of Rubber} = 2,304,000 \text{ lbs} \times \\(3.20/\text{lb} = \\)7,372,800\] \[\text{Cost of Steel} = 320,000 \text{ lbs} \times \\(4.20/\text{lb} = \\)1,344,000\]
08

Prepare Direct Materials Purchases Budget

Summarize the information into a budget format.\[\text{Rubber Purchases} = 2,304,000 \text{ lbs, costing } \\(7,372,800\] \[\text{Steel Purchases} = 320,000 \text{ lbs, costing } \\)1,344,000\] \[\text{Total Cost of Purchases} = \\(7,372,800 + \\)1,344,000 = \$8,716,800\]

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Inventory Management
Inventory management is a crucial component for any production-focused company. It involves the careful tracking of stock levels, including raw materials, work-in-progress, and finished goods.
In the context of a direct materials budget, inventory management ensures that the required raw materials are in place to meet production needs without excess waste or stockouts.
This reduces holding costs and ensures efficiency in the production process.
  • Maintain optimal stock levels: Avoiding overstocking or understocking ensures that production runs smoothly but does not incur additional holding costs.
  • Forecast demand accurately: Proper demand forecasting helps prepare for production needs, ensuring materials are available when needed.
  • Monitor usage rates: Regularly tracking how quickly inventory is being used allows for timely reordering before levels get too low.
Effective inventory management aligns closely with production schedules, which relies on accurate predictions of future sales and production volumes.
Cost Accounting
Cost accounting involves tracking, recording, and analyzing costs associated with a company鈥檚 operations. In the direct materials budget, understanding the costs associated with raw materials like rubber and steel is essential.
This includes considering both the price per unit and the quantities needed.
The ultimate goal is to efficiently manage costs to maximize profitability.
  • Allocate costs efficiently: Identifying the cost of each component can help in better allocation of resources.
  • Ensure accurate pricing: Proper cost accounting helps set accurate pricing for products by knowing how much it costs to produce them.
  • Evaluate cost-saving opportunities: Regular analysis can identify areas to cut waste and reduce expenses.
Overall, cost accounting provides valuable insights into where money is going and helps in creating strategies to improve financial performance.
Production Budgeting
Production budgeting is a method of planning and controlling the manufacturing process and determining how many units need to be produced.
This is based on anticipated sales, ensuring that production meets demand without excessive output.
The focus is on balancing production capacity with the demand forecast.
  • Align production with sales forecasts: Ensure that the number of units produced matches what the market is expected to need.
  • Optimize resource use: Efficient use of materials and labor ensures cost-effectiveness in production.
  • Adjust for variability: Stay flexible to adapt the production schedule as forecasts and actual sales data deven are updated.
Production budgeting is vital for maintaining operational efficiency while meeting market demands.
Resource Planning
Resource planning involves coordinating all necessary resources to achieve the production goals efficiently and effectively. This includes planning for manpower, machinery, and materials.
In the case of the Sure Grip Tire Company, resource planning would involve coordinating these elements to ensure they can produce both the passenger and truck tires as forecasted.
  • Integrate planning across the organization: Develop a cohesive strategy that aligns production, inventory, and supply chain processes.
  • Balance resource allocation: Ensure that resources are distributed based on demands, not just availability.
  • Plan for future capacity: Resource planning includes preparing for future growth, ensuring the company can scale up or down as needed.
Successful resource planning results in a synchronized operation that minimizes downtime and maximizes productivity.

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Most popular questions from this chapter

Excel Learning Systems Inc. was organized on May 31, 2010. Projected selling and administrative expenses for each of the first three months of operations are as follows: \(\begin{array}{lr}\text { June } & \$ 117,400 \\ \text { July } & 110,500 \\\ \text { August } & 100,400\end{array}\) Depreciation, insurance, and property taxes represent \(\$ 25,000\) of the estimated monthly expenses. The annual insurance premium was paid on May 31 , and property taxes for the year will be paid in December. Sixty percent of the remainder of the expenses are expected to be paid in the month in which they are incurred, with the balance to be paid in the following month. Prepare a schedule indicating cash payments for selling and administrative expenses for June, July, and August.

The production supervisor of the Machining Department for Nell Company agreed to the following monthly static budget for the upcoming year: Nell Company Machining Department Monthly Production Budget Wages . . . . . . . . . . . . . . . . . . . . . . \(540,000 Utilities . . . . . . . . . . . . . . . . . . . . . . 36,000 Depreciation . . . . . . . . . . . . . . . . . . 60,000 ________ Total . . . . . . . . . . . . . . . . . . . . . . \)636,000 ________ ________ The actual amount spent and the actual units produced in the first three months of 2010 in the Machining Department were as follows: Amount Spent Units Produced January \(600,000 110,000 February 570,000 100,000 March 545,000 90,000 The Machining Department supervisor has been very pleased with this performance, since actual expenditures have been less than the monthly budget. However, the plant manager believes that the budget should not remain fixed for every month but should 鈥渇lex鈥� or adjust to the volume of work that is produced in the Machining Department. Additional budget information for the Machining Department is as follows: Wages per hour \)18.00 Utility cost per direct labor hour $1.20 Direct labor hours per unit 0.25 Planned unit production 120,000 a. Prepare a flexible budget for the actual units produced for January, February, and March in the Machining Department. Assume depreciation is a fixed cost. b. Compare the flexible budget with the actual expenditures for the first three months. What does this comparison suggest?

Coca-Cola Enterprises is the largest bottler of Coca-Cola in North America. The company purchases Coke \({ }^{\otimes}\) and Sprite \({ }^{-}\)concentrate from The Coca-Cola Company, dilutes and mixes the concentrate with carbonated water, and then fills the blended beverage into cans or plastic two-liter bottles. Assume that the estimated production for Coke and Sprite two-liter bottles at the Dallas, Texas, bottling plant are as follows for the month of March: \(\begin{array}{ll}\text { Coke } & 214,000 \text { two-liter bottles } \\\ \text { Sprite } & 163,000 \text { two-liter bottles }\end{array}\) In addition, assume that the concentrate costs \(\$ 80\) per pound for both Coke and Sprite and is used at a rate of \(0.2\) pound per 100 liters of carbonated water in blending Coke and \(0.15\) pound per 100 liters of carbonated water in blending Sprite. Assume that twoliter bottles cost \(\$ 0.08\) per bottle and carbonated water costs \(\$ 0.06\) per liter. Prepare a direct materials purchases budget for March 2010, assuming no changes between beginning and ending inventories for all three materials.

On January 1, 2010, the controller of Gardeneer Tools Inc. is planning capital expenditures for the years 2010-2013. The following interviews helped the controller collect the necessary information for the capital expenditures budget: Director of Facilities: A construction contract was signed in late 2009 for the construction of a new factory building at a contract cost of \(\$ 13,000,000\). The construction is scheduled to begin in 2010 and be completed in \(2011 .\) Vice President of Manufacturing: Once the new factory building is finished, we plan to purchase \(\$ 1.7\) million in equipment in late 2011. I expect that an additional \(\$ 200,000\) will be needed early in the following year (2012) to test and install the equipment before we can begin production. If sales continue to grow, I expect we'll need to invest another million in equipment in \(2013 .\) Vice President of Marketing: We have really been growing lately. I wouldn't be surprised if we need to expand the size of our new factory building in 2013 by at least \(40 \%\). Fortunately, we expect inflation to have minimal impact on construction costs over the next four years. Additionally, I would expect the cost of the expansion to be proportional to the size of the expansion. Director of Information Systems: We need to upgrade our information systems to wireless network technology. It doesn't make sense to do this until after the new factory building is completed and producing product. During 2012, once the factory is up and running, we should equip the whole facility with wireless technology. I think it would cost us \(\$ 1,600,000\) today to install the technology. However, prices have been dropping by \(25 \%\) per year, so it should be less expensive at a later date. President: I am excited about our long-term prospects. My only short-term concem is financing the \(\$ 7,000,000\) of construction costs on the portion of the new factory building scheduled to be completed in \(2010 .\) Use the interview information above to prepare a capital expenditures budget for Gardeneer Tools Inc. for the years 2010-2013.

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