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Chapter 6: Problem 23

Direct material budget. Dawson Co. produces wine. The company expects to produce 2,535,000 two-liter bottles of Chablis in 2018 . Dawson purchases empty glass bottles from an outside vendor. Its target ending inventory of such bottles is 77,000 ; its beginning inventory is 54,000 . For simplicity, ignore breakage. Compute the number of bottles to be purchased in 2018

Short Answer

Expert verified
Dawson Co. should purchase 2,558,000 empty glass bottles in 2018.

Step by step solution

01

1: Identify the information given

In this problem, we have the following information given: - Expected wine production: 2,535,000 two-liter bottles - Target ending inventory of bottles: 77,000 - Beginning inventory of bottles: 54,000
02

2: Calculate the number of bottles required for production

As we know the expected wine production, we can determine the number of bottles required for production. This number is equal to the number of wine bottles produced and is given by: Number of bottles required for production = Expected wine production = 2,535,000 bottles
03

3: Compute the total number of bottles needed for the year

In addition to the bottles required for production, we need to consider the target ending inventory of bottles. Therefore, we can find the total number of bottles needed for the year using the following formula: Total number of bottles needed for the year = Number of bottles required for production + Target ending inventory Total number of bottles needed for the year = 2,535,000 + 77,000 = 2,612,000 bottles
04

4: Calculate the number of bottles to be purchased

Now, we must take into account the beginning inventory, which refers to the number of empty bottles that Dawson Co. already has at the start of the year. To determine the number of bottles to be purchased, we can use the following formula: Number of bottles to be purchased = Total number of bottles needed for the year - Beginning inventory Number of bottles to be purchased = 2,612,000 - 54,000 = 2,558,000 bottles So, Dawson Co. should purchase 2,558,000 bottles in 2018.

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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 all about efficiently overseeing and controlling the supply chain to ensure that the correct amount of inventory is available to meet demand without excess. In the context of Dawson Co., managing the inventory of bottles is crucial to maintain steady production.
  • Beginning Inventory: This is what you start with. For Dawson Co., they begin with 54,000 bottles. This ensures they are not starting from scratch.
  • Target Ending Inventory: This is a planned amount of inventory left at the end of the period. Dawson Co. wants to have 77,000 bottles by the year's end, ensuring they are ready for future production needs.
Efficient inventory management helps minimize costs while ensuring that production isn't halted due to lack of materials. By having a clear understanding of beginning and target inventories, businesses can accurately calculate what needs to be purchased.
Production Planning
Production planning is the process of organizing the resources required to carry out a production process efficiently. For Dawson Co., wine production planning involves calculating the number of bottles necessary to meet their 2018 production goal of 2,535,000 two-liter bottles.
  • Resource Requirement: Based on forecasted demand, Dawson Co. decides how many bottles need to be produced, requiring corresponding amounts of raw materials and storage.
  • Scheduling: Identifying when production should occur to meet demand without overproducing. By computing components like efficient bottle procurement, Dawson ensures steady production flow.
Production planning like this helps prevent production delays, minimize storage needs, and reduce waste, allowing Dawson Co. to meet their goals smoothly.
Cost Accounting
Cost accounting is about tracking, recording, and analyzing a company's costs of production. For Dawson Co., understanding the cost of bottles is essential to manage their overall wine production expenses effectively.
  • Direct Material Costs: These refer to the costs of raw materials used in production, such as the empty bottles in Dawson's case. Cost accounting helps track how many bottles are bought and used efficiently.
  • Overhead Cost Allocation: Besides material costs, Dawson Co. must consider overhead, which includes costs like storage and handling, that are indirectly tied to bottle management.
Through cost accounting, Dawson Co. can develop strategies to reduce costs and make informed financial decisions, enhancing their competitiveness in the market.
Budgeting Process
The budgeting process provides a financial plan for the upcoming period, ensuring resources are allocated efficiently and objectives are achievable. For Dawson Co., the direct material budget forecasts how many bottles are needed, aligning resources to fulfill production goals.
  • Forecasting: Companies like Dawson estimate the number of materials required, taking into account production demands and inventory levels, to create accurate material budgets.
  • Variance Analysis: They compare budgeted numbers against actual performance to understand deviations. It helps determine if fewer or more bottles were purchased than planned, guiding mid-course corrections.
An effective budgeting process ensures financial efficiency and helps in maintaining a balanced approach to material purchases, securing the company's future financial health.

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Most popular questions from this chapter

Responsibility and controllability. Consider each of the following independent situations for Prestige Fountains. Prestige manufactures and sells decorative fountains for commercial properties. The company also contracts to service both its own and other brands of fountains. Prestige has a manufacturing plant, a supply warehouse that supplies both the manufacturing plant and the service technicians (who often need parts to repair fountains), and 12 service vans. The service technicians drive to customer sites to service the fountains. Prestige owns the vans, pays for the gas, and supplies fountain parts, but the technicians own their own tools. 1\. In the manufacturing plant, the production manager is not happy with the motors that the purchasing manager has been purchasing. In May, the production manager stops requesting motors from the supply warehouse and starts purchasing them directly from a different motor manufacturer. Actual materials costs in May are higher than budgeted. 2\. Overhead costs in the manufacturing plant for June are much higher than budgeted. Investigation reveals a utility rate hike in effect that was not figured into the budget. 3\. Gasoline costs for each van are budgeted based on the service area of the van and the amount of driving expected for the month. The driver of van 3 routinely has monthly gasoline costs exceeding the budget for van 3. After investigating, the service manager finds that the diriver has been driving the van for personal use. 4\. Regency Mall, one of Prestige's fountain service customers, calls the service people only for emergencies and not for routine maintenance. Thus, the materials and labor costs for these service calls exceeds the monthly budgeted costs for a contract customer 5\. Prestige's service technicians are paid an hourly wage of S22, regardless of experience or time with the company. As a result of an analysis performed last month, the service manager determined that service technicians in their first year of employment worked on average 20\% more slowly than other employees. Prestige bills customers per service call, not per hour. 6\. The cost of health insurance for service technicians has increased by 40\% this year, which caused the actual health insurance costs to greatly exceed the budgeted health insurance costs for the service technicians For each situation described, determine where (that is, with whom) (a) responsibility and (b) controllability lie. Suggest ways to solve the problem or to improve the situation.

Budget schedules for a manufacturer. Hale 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: \(\cdot\) Broncos, with red blankets and the Broncos logo \(\cdot\) Rams, with black blankets and the Rams logo 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 2017 is \( 17\) per direct manufacturing labor-hour. The budgeted fixed manufacturing overhead for March 2017 is \( 14,625 .\) Both variable and fixed manufacturing overhead costs are allocated to each unit of finished goods. Budgeted sales for March 2017 are 140 units of the Broncos blankets and 195 units of the Rams blankets. The budgeted selling prices per unit in March 2017 are \( 305\) for the Broncos blankets and \( 378\) for the Rams blankets. Assume the following in your answer: \(\cdot\) Work-in-process inventories are negligible and ignored. \(\cdot\) Direct materials inventory and finished-goods inventory are costed using the FIF0 method. \(\cdot\) Unit costs of direct materials purchased and finished goods are constant in March 2017 . 1\. Prepare the following budgets for March 2017: a. Revenues budget b. Production budget in units c. Direct material usage budget and direct materials purchases budget d. Direct manufacturing labor costs budget e. Manufacturing overhead costs budget f. Ending inventories budget (direct materials and finished goods) g. cost of goods sold budget 2\. Suppose Hale 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.

Budgeted costs, Kaizen improvements environmental costs. US Apparel (USA) manufactures plain white and solid-colored T-shirts. Budgeted inputs include the following: USA has the opportunity to switch from using the dye it currently uses to using an environmentally friendly dye that costs \( 1.25\) per ounce. The company would still need 4 ounces of dye per shirt. USA is reluctant to change because of the increase in costs (and decrease in profit), but the Environmental Protection Agency has threatened to fine the company \(130,000\) if it continues to use the harmful but less expensive dye. 1\. Given the preceding information, would USA be better off financially by switching to the environmentally friendly dye? (Assume all other costs would remain the same.) 2\. Assume USA chooses to be environmentally responsible regardless of cost, and it switches to the new dye. The production manager suggests trying Kaizen costing. If USA can reduce fabric and labor costs each by \(1 \%\) per month on all the shirts it manufactures, by how much will overall costs decrease at the end of 12 months? (Round to the nearest dollar for calculating cost reductions.) 3\. Refer to requirement 2. How could the reduction in material and labor costs be accomplished? Are there any problems with this plan?

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Refer to the information in Problem \(6-44\) All purchases made in a given month are paid for in the following month, and direct material purchases make up all of the accounts payable balance and are reflected in the accounts payable balances at the beginning and the end of the year. Sales are made to customers with terms net 45 days. Fifty percent of a month's sales are collected in the month of the sale, \(25 \%\) are collected in the month following the sale, and \(25 \%\) are collected two months after the sale and are reflected in the accounts receivables balances at the beginning and the end of the year. Direct manufacturing labor, variable manufacturing overhead and variable marketing costs are paid as they are incurred. Fifty percent of fixed manufacturing overhead costs, \(60 \%\) of fixed marketing costs, and \(100 \%\) of fixed distribution costs are depreciation expenses. The remaining fixed manufacturing overhead and marketing costs are paid as they are incurred. Selected balances for December \(31,2017,\) follow:Hazlett has budgeted to purchase equipment costing \( 145,000\) for cash during 2018 . Hazlett desires a minimum cash balance of \( 25,000\). The company has a line of credit from which it may borrow in increments of \( 1,000\) at an interest rate of \(12 \%\) per year. By special arrangement, with the bank, Hazlett pays interest when repaying the principal, which only needs to be repaid in 2019 1\. Prepare a cash budget for 2018 . If Hazlett must borrow cash to meet its desired ending cash balance, show the amount that must be borrowed. 2\. Does the cash budget for 2018 give Hazlett's managers all of the information necessary to manage cash in \(2018 ?\) How might that be improved? 3\. What insight does the cash budget give to Hazlett's managers that the budgeted income statement does not?
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