91Ó°ÊÓ

Budgeting; direct material usage, manufacturing cost, and gross margin. Xander 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 FIF0 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 \(2,000\) 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 accumulated in two cost pools- one for weaving and the other for dyeing. Weaving overhead is allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead is allocated to products based on machine-hours (MH). There is no direct manufacturing labor cost for dyeing. Xander budgets 62 direct manufacturing laborhours to weave a rug at a budgeted rate of \(13\) per hour. It budgets 0.2 machine-hours to dye each skein in the dyeing process. 1\. Prepare a direct materials usage budget in both units and dollars. 2\. Calculate the budgeted overhead allocation rates for weaving and dyeing. 3\. Calculate the budgeted unit cost of a blue rug for the year. 4\. Prepare a revenues 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). 5\. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption. 6\. Find the budgeted gross margin for blue rugs under each sales assumption. 7\. What actions might you take as a manager to improve profitability if sales drop to 185,000 blue rugs? 8\. How might top management at Xander use the budget developed in requirements \(1-6\) to better manage the company?

Step by step solution

01

1. Direct Materials Usage Budget

To calculate the direct materials usage budget, we need to determine the required materials for each rug and then multiply by the number of rugs produced: Wool: 36 skeins per rug × 200,000 rugs = 7,200,000 skeins Dye: 0.8 gallons per rug × 200,000 rugs = 160,000 gallons Now, we'll calculate the cost for each material: Wool: 7,200,000 skeins × \(2 per skein = \)14,400,000 Dye: 160,000 gallons × \(6 per gallon = \)960,000 The direct materials usage budget in units and dollars is as follows: Wool: 7,200,000 skeins, $14,400,000 Dye: 160,000 gallons, $960,000

02

2. Budgeted Overhead Allocation Rates

To calculate the budgeted overhead allocation rates, we need the total cost for weaving and dyeing overhead. We are given that weaving overhead is allocated based on Direct Manufacturing Labor Hours (DMLH) and dyeing overhead based on Machine Hours (MH). Weaving labor cost: 62 DMLH per rug × \(13 per hour = \)806 per rug Dyeing labor cost: 0.2 MH per skein × 7,200,000 skeins = 1,440,000 MH Next, we'll divide the total costs by the allocation bases: Weaving overhead rate: \(\frac{806}{62}\) = \(13\) per DMLH Dyeing overhead rate: \(\frac{1,440,000}{1,440,000}\) = \(1\) per MH

03

3. Budgeted Unit Cost

To calculate the budgeted unit cost of a blue rug, we'll add the direct materials cost, weaving labor cost, and dyeing labor cost: Direct materials cost: \(2(36) + \)6(0.8) = \(72 + \)4.8 = $76.8 Weaving labor cost: \(13(62) = \)806 Dyeing labor cost: \(1(0.2) = \)0.20 Budgeted unit cost: \(76.8 + \)806 + \(0.20 = \)883

04

4. Revenues Budget

Selling price per rug is $2,000. Let's calculate the revenues budget for both scenarios: (a) 200,000 blue rugs: \(2,000 × 200,000 = \)400,000,000 (b) 185,000 blue rugs: \(2,000 × 185,000 = \)370,000,000

05

5. Budgeted Cost of Goods Sold

Cost per rug is calculated as the budgeted unit cost, so the cost of goods sold for both scenarios will be: (a) 200,000 blue rugs: \(883 × 200,000 = \)176,600,000 (b) 185,000 blue rugs: \(883 × 185,000 = \)163,335,000

06

6. Budgeted Gross Margin

Gross margin is calculated by subtracting the cost of goods sold from the revenues: (a) 200,000 blue rugs: \(400,000,000 - 176,600,000 = \)223,400,000 (b) 185,000 blue rugs: \(370,000,000 - 163,335,000 = \)206,665,000

07

7. Actions to Improve Profitability

As a manager, you might consider the following actions to improve profitability if sales drop: - Decrease production costs by finding cheaper direct materials or improving the efficiency of the production process. - Increase pricing for the rugs, assuming the demand is flexible. - Implement promotional campaigns to increase sales. - Diversify the product line to include other types of rugs, using the same resources. - Invest in technology to boost production and reduce costs.

08

8. Using the Budget for Better Management

Top management at Xander can use the developed budget to: - Monitor actual costs compared to the budgeted costs, identifying areas of inefficiency or overspending. - Set performance targets for departments and individual employees. - Evaluate the cost structure of the company and look for areas to improve efficiency. - Provide a framework for decision-making and resource allocation. - Assess the financial impact of strategic decisions, including pricing, product mix, and production levels.

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91Ó°ÊÓ!

Key Concepts

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

Direct Materials Usage Budget

Understanding the direct materials usage budget is crucial for a company's production planning and controlling costs. It involves estimating the amount and cost of direct materials necessary to meet production goals. In the case of Xander Manufacturing Company, for each rug, they require 36 skeins of wool and 0.8 gallons of dye.
To create the budget, multiply the materials needed per unit by the number of units planned for production. Here, wool usage is multiplied by the annual production, resulting in 7,200,000 skeins, and a similar process is followed for dye to get 160,000 gallons. These figures are then multiplied by their respective costs, yielding a comprehensive budget in both quantities and dollars, critical for procurement and financial planning.

Overhead Allocation Rates

Allocating overhead costs accurately to products or services is essential for precise costing and pricing, and it ensures fair distribution of indirect expenses. Xander's two overhead pools, weaving and dyeing, are allocated using direct manufacturing labor-hours and machine-hours respectively. To determine the allocation rates, the total overhead costs are divided by the corresponding allocation base.
For instance, with weaving overhead costs, they divide the total estimated weaving labor cost by the total labor-hours to obtain an allocation rate per labor-hour. A similar approach is taken with dyeing overhead, where the allocation rate is per machine-hour. Correctly setting these rates helps Xander in pricing their products and monitoring cost control effectively.

Budgeted Unit Cost

The budgeted unit cost reveals the estimated cost to produce one unit of product, including direct materials, labor, and allocated overheads. Xander calculates this to determine the production cost per rug. Starting with the direct materials cost, they add the cost of wool and dye used in one rug.
Next, they incorporate the labor cost for weaving each rug and the overhead cost allocated per machine-hour for dyeing. Summing these up provides the budgeted unit cost which is instrumental for setting sales prices, estimating profitability, and making cost management decisions.

Revenues Budget

A revenues budget estimates the income a company expects to generate from selling its goods or services. For Xander, this involves calculating expected sales at the budgeted selling price per rug. They consider selling either 200,000 or 185,000 blue rugs, yielding different revenue scenarios.
This financial forecast is an essential component of the master budget, aiding in setting revenue targets and planning for the necessary production capacity. It also serves as a benchmark to evaluate actual sales performance throughout the year.

Cost of Goods Sold

The cost of goods sold (COGS) is a financial metric indicating the direct costs related to the production of the goods sold by a company. It includes costs for materials and labor used in creating the product but doesn't account for indirect expenses like overheads.
For Xander, COGS is computed based on the budgeted unit cost. The calculation involves multiplying this unit cost by the number of rugs sold under different sales volumes. Understanding COGS helps in analyzing gross margin efficiency and in managing product pricing strategies.

Gross Margin

Gross margin, a critical profitability metric, measures the difference between revenues and the cost of goods sold, revealing the financial health and efficiency of production processes. In the context of Xander's rugs, the gross margin is obtained by subtracting the COGS from the sales revenues for both sales levels. A positive gross margin indicates that Xander is selling rugs at a price higher than the cost to produce, contributing to the company's profit. Analyzing the gross margin helps management in making informed decisions regarding pricing, cost control, and strategy formulation.