91Ó°ÊÓ

Logo Specialties manufactures, among other things, woolen blankets for the athletic teams of the two local high schools. The company sews the blankets from fabric and sews on a logo patch purchased from the licensed logo store site. The teams are as follows: Knights, with red blankets and the Knights logo Raiders, with black blankets and the Raider logo Also, the black blankets are slightly larger than the red blankets. The budgeted direct-cost inputs for each product in 2012 are as follows: $$\begin{array}{lcc} & \text { Knights Blanket } & \text { Raiders Blanket } \\ \hline \text { Red wool fabric } & 3 \text { yards } & 0 \\ \text { Black wool fabric } & 0 & 3.3 \text { yards } \\ \text { Knight logo patches } & 1 & 0 \\ \text { Raider logo patches } & 0 & 1 \\ \text { Direct manufacturing labor } & 1.5 \text { hours } & 2 \text { hours } \end{array}$$ Unit data pertaining to the direct materials for March 2012 are as follows: $$\begin{array}{lcc} & \text { Knights Blanket } & \text { Raiders Blanket } \\ \hline \text { Red wool fabric } & 30 \text { yards } & 0 \\ \text { Black wool fabric } & 0 & 10 \text { yards } \\ \text { Knight logo patches } & 40 & 0 \\ \text { Raider logo patches } & 0 & 55 \end{array}$$ $$\begin{array}{lcc} & \text { Knights Blanket } & \text { Raiders Blanket } \\ \hline \text { Red wool fabric } & 20 \text { yards } & 0 \\ \text { Black wool fabric } & 0 & 20 \text { yards } \\ \text { Knight logo patches } & 20 & 0 \\ \text { Raider logo patches } & 0 & 20 \end{array}$$ Unit cost data for direct-cost inputs pertaining to February 2012 and March 2012 are as follows: $$\begin{array}{lcc} & \text { February 2012 (actual) } & \text { March 2012 (budgeted) } \\ \hline \text { Red wool fabric (per yard) } & \$ 8 & \$ 9 \\ \text { Black wool fabric (per yard) } & 10 & 9 \\ \text { Knight logo patches (per patch) } & 6 & 6 \\ \text { Raider logo patches (per patch) } & 5 & 7 \\ \text { Manufacturing labor cost per hour } & 25 & 26 \end{array}$$ Manufacturing overhead (both variable and fixed) is allocated to each blanket on the basis of budgeted direct manufacturing labor-hours per blanket. The budgeted variable manufacturing overhead rate for March 2012 is \(\$ 15\) per direct manufacturing labor-hour. The budgeted fixed manufacturing overhead for March 2012 is \(\$ 9,200 .\) Both variable and fixed manufacturing overhead costs are allocated to each unit of finished goods. Data relating to finished goods inventory for March 2012 are as follows: $$\begin{array}{lcc} & \text { Knights Blankets } & \text { Raiders Blankets } \\ \hline \text { Beginning inventory in units } & 10 & 15 \\ \text { Beginning inventory in dollars (cost) } & \$ 1,210 & \$ 2,235 \\ \text { Target ending inventory in units } & 20 & 25 \end{array}$$ Budgeted sales for March 2012 are 120 units of the Knights blankets and 180 units of the Raiders blankets. The budgeted selling prices per unit in March 2012 are \(\$ 150\) for the Knights blankets and \(\$ 175\) for the Raiders blankets. Assume the following in your answer: Work-in-process inventories are negligible and ignored. Direct materials inventory and finished goods inventory are costed using the FIF0 method. Unit costs of direct materials purchased and finished goods are constant in March 2012 . 1\. Prepare the following budgets for March 2012 : a. Revenues budget b. Production budget in units c. Direct material usage budget and direct material purchases budget d. Direct manufacturing labor budget e. Manufacturing overhead budget f. Ending inventories budget (direct materials and finished goods) g. cost of goods sold budget 2\. Suppose Logo Specialties decides to incorporate continuous improvement into its budgeting process. Describe two areas where it could incorporate continuous improvement into the budget schedules in requirement 1.

Step by step solution

01

Calculate Revenues Budget

To calculate the revenues for March 2012, multiply the sales units by the selling price for each blanket type. - **Knights Blankets**: Sold units = 120, Selling price = \\(150 - **Total revenue for Knights** = 120 \( \times \) \\)150 = \\(18,000 - **Raiders Blankets**: Sold units = 180, Selling price = \\)175 - **Total revenue for Raiders** = 180 \( \times \) \\(175 = \\)31,500 - **Total Revenues** = \\(18,000 + \\)31,500 = \$49,500

02

Calculate Production Budget in Units

The production budget is calculated by adjusting the sales demand for changes in inventory levels. Use the formula: - **Budgeted production** = Sales units + Target ending inventory units - Beginning inventory units. - **Knights Blankets**: 120 + 20 - 10 = 130 units - **Raiders Blankets**: 180 + 25 - 15 = 190 units

03

Direct Material Usage Budget

Calculate the direct material needed based on the production units and material requirements per unit:- **For Knights Blankets**: - Red wool fabric required: 3 yards per unit. Total: 130 \( \times \) 3 = 390 yards - Knight logo patches required: 1 per unit. Total: 130 patches- **For Raiders Blankets**: - Black wool fabric required: 3.3 yards per unit. Total: 190 \( \times \) 3.3 = 627 yards - Raider logo patches required: 1 per unit. Total: 190 patches

04

Direct Materials Purchases Budget

Use the following formula: - **Materials to Purchase** = Required material for production + Target ending inventory - Beginning inventory. - **Red Wool for Knights**: 390 + 20 - 30 = 380 yards - **Black Wool for Raiders**: 627 + 20 - 10 = 637 yards - **Knight Patches**: 130 + 20 - 40 = 110 patches - **Raider Patches**: 190 + 20 - 55 = 155 patches

05

Direct Manufacturing Labor Budget

Calculate using hours per unit and production budget:- **Knights Blankets**: 1.5 hours per unit. Total = 130 \(\times\) 1.5 = 195 hours- **Raiders Blankets**: 2 hours per unit. Total = 190 \(\times\) 2 = 380 hours- **Total Direct Labor cost** = Knights (195 \(\times\) \\(26) + Raiders (380 \(\times\) \\)26) = \\(5,070 + \\)9,880 = \$14,950

06

Manufacturing Overhead Budget

Manufacturing overhead = Variable overhead + Fixed overhead.- Variable overhead rate = \\(15 per labor hour.- Fixed overhead is total \\)9,200.- **Variable overhead**: (195 + 380) \(\times\) 15 = \\(8,625- **Total overhead** = \\)8,625 + \\(9,200 = \\)17,825

07

Ending Inventories Budget

Calculate costs using FIFO for both direct materials and finished goods:- **Direct Materials Inventory**: - Red wool: 20 yards \(\times\) \\(9 = \\)180 - Black wool: 20 yards \( \times \) \\(9 = \\)180 - Knight patches: 20 \( \times \) \\(6 = \\)120 - Raider patches: 20 \( \times \) \\(7 = \\)140- **Finished Goods Inventory**: - Knights: 20 units, cost \\(1,210 - Raiders: 25 units, cost \\)2,235

08

Cost of Goods Sold Budget

Calculate COGS using: - **COGS** = Cost of beginning inventory + Cost of production - Cost of ending inventory- Knights COGS: \\(1,210 + Total (direct material + labor + overhead) - Ending inventory cost- Raiders COGS: \\)2,235 + Total (direct material + labor + overhead) - Ending inventory cost

09

Continuous Improvement Areas

Identify potential areas: - **Material Usage Efficiency**: Adjust budgets based on material usage efficiency tracking. - **Workforce Productivity**: Include labor efficiency improvements in the budget for labor hours and costs.

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Key Concepts

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

Budgeting

Budgeting in cost accounting acts like a financial roadmap for an organization, providing a structured estimate of future financial activities. For manufacturing companies like Logo Specialties, a thorough budget helps anticipate materials, labor, and production needs.

A well-structured budget helps avoid under- or over-production. For instance, if Logo Specialties identifies sales demand from their budget, it can accordingly adjust its production levels and inventory policies. This practice ensures that sufficient resources are available while minimizing excessive costs. A comprehensive budgeting approach includes various components, such as revenue projections, production plans, and inventory assessments, enabling informed decision-making.

• Revenues Budget: Estimates total income by multiplying the units expected to be sold by their respective selling prices.
• Production Budget: Details quantities to produce, considering planned sales and desired inventory levels.
• Material Purchase Budget: Plans for purchasing raw materials, aligning with production and inventory needs.

Direct Costs

Direct costs are expenses that can be directly attributed to the manufacturing of a specific product. In the case of Logo Specialties, direct costs include the fabric, logo patches, and labor hours needed for producing blankets for local school teams.

Understanding direct costs is crucial for accurately assigning expenses to individual products, providing insights into profitability. Direct material costs involve expenses for wool fabric and logo patches, ordered specifically for each type of blanket—Knights or Raiders. Labor costs reflect the time worked directly involved in the production process.

• Direct Materials: Includes the cost of acquiring red and black wool fabric and logo patches.
• Direct Labor: Comprises the hourly wages paid to workers sewing the blankets.

Effective management of direct costs can lead to cost savings, allowing for price competitiveness and improved profit margins.

Inventory Management

Inventory management focuses on effectively controlling and overseeing purchases, storing and selling inventories. In a manufacturing context, it includes raw materials, work-in-process, and finished goods. For Logo Specialties, the inventory strategy ensures they maintain optimal levels of both materials and finished products, avoiding excessive holding costs or stockouts.

Efficient inventory management uses methods like the First-In-First-Out (FIFO) approach. This method helps in cost tracking and valuation by assuming that the oldest inventory is used first. It aligns well with natural inventory rotation, helping maintain product quality and accuracy in financial statements.

• Raw Materials Inventory: Comprises wool fabrics and patches used in production.
• Finished Goods Inventory: Completed blankets ready for sale following the right processing steps.

Managing inventory effectively can reduce operational costs and support a steady production flow, leading to higher customer satisfaction and business profitability.

Manufacturing Overhead

Manufacturing overhead encompasses all production-related costs not directly tied to a specific product. These include expenses for utilities, depreciation, and salaries of indirect labor like supervisors. These overheads are allocated over products based on metrics such as labor hours or machine hours.

For Logo Specialties, overhead costs are budgeted and distributed, considering both variable and fixed components. Variable manufacturing overhead varies with production volume, like energy consumption adjustments based on machine operations. On the other hand, fixed overhead includes costs like rent and equipment depreciation that remain constant regardless of production levels.

• Variable Overhead: Costs that fluctuate based on production intensity.
• Fixed Overhead: Consistent costs linked to property and equipment.

Proper allocation of overhead can reflect true product costs, supporting strategic pricing and profitability analysis.

Continuous Improvement

Continuous improvement is a mindset of ongoing enhancement in processes, aiming to boost efficiency and quality. For manufacturers like Logo Specialties, integrating continuous improvement into budgets aids in identifying potential efficiencies and cost-saving opportunities.

Incorporating continuous improvement involves regular analysis of previous budgets and operational results, leading to future improvements. Areas such as material usage efficiency and labor productivity are key targets.

• Material Usage Efficiency: Constant review and adjustment to minimize waste and optimize raw material use.
• Workforce Productivity: Focusing on reducing labor hours while maintaining output quality through training and process optimizations.

Adopting continuous improvement transforms budgeting from a static, periodic task into a dynamic, performance-enhancing strategy. This approach fosters innovation and long-term competitive advantage.