91Ó°ÊÓ

Budgets for production and direct manufacturing labor. (CMA, adapted) DeWitt Company makes and sells artistic frames for pictures of weddings, graduations, and other special events. Ron Bahar, the controller, is responsible for preparing DeWitt's master budget and has accumulated the following information for 2018 : In addition to wages, direct manufacturing labor-related costs include pension contributions of \(0.40\) per hour, worker's compensation insurance of \(\0.10\) per hour, employee medical insurance of \(0.50\) per hour, and Social Security taxes. Assume that as of January 1,2018 , the Social Security tax rates are \(7.5 \%\) for employers and \(7.5 \%\) for employees. The cost of employee benefits paid by DeWitt on its direct manufacturing employees is treated as a direct manufacturing labor cost. DeWitt has a labor contract that calls for a wage increase to \( 12\) per hour on April 1,2018 . New laborsaving machinery has been installed and will be fully operational by March 1,2018 . DeWitt expects to have 16,000 frames on hand at December \(31,2017,\) and it has a policy of carrying an end-of-month inventory of \(100 \%\) of the following month's sales plus \(50 \%\) of the second following month's sales. 1\. Prepare a production budget and a direct manufacturing labor cost budget for DeWitt Company by month and for the first quarter of \(2018 .\) You may combine both budgets in one schedule. The direct manufacturing labor cost budget should include labor-hours and show the details for each labor cost category. 2\. What actions has the budget process prompted DeWitt's management to take? 3\. How might DeWitt's managers use the budget developed in requirement 1 to better manage the company?

Step by step solution

01

Calculate Sales Units

To create a production budget and a direct manufacturing labor cost budget, we first need to determine the number of sales units for each month of the first quarter of 2018 and the inventory requirements for each month. To calculate sales units, use the information given: 16,000 frames on hand at December 31, 2017, and carrying an end-of-month inventory of 100% of the following month's sales plus 50% of the second following month's sales. January 2018 Sales Units: 16,000 + (100% * February Sales) + (50% * March Sales) February 2018 Sales Units: (100% * March Sales) + (50% * April Sales) March 2018 Sales Units: (100% * April Sales) + (50% * May Sales)

02

Calculate the Production Level

Next, determine the production level for each month of the first quarter of 2018. The production level can be calculated as follows: Production Level = Sales Units + Desired End-of-Month Inventory - Beginning Inventory Calculate the production level for each month in the first quarter of 2018 using the sales units calculated in Step 1.

03

Calculate Labor Hours

Now we need to calculate the total labor hours for each month. We know that before April 1, 2018, the labor rate is \(11 per hour worked and after April it changes to \)12 per hour. We also know that new machinery will be installed by March 1, 2018. Based on this information, calculate the labor hours for each month in the first quarter of 2018.

04

Calculate Direct Manufacturing Labor Costs

Now it's time to calculate the direct manufacturing labor costs. These costs include wages, pension contributions, worker's compensation insurance, employee medical insurance, and Social Security taxes. Determine the rates for each cost category and calculate the total direct manufacturing labor costs for each month in the first quarter of 2018.

05

Create a Combined Budget Schedule

Prepare a production budget and a direct manufacturing labor cost budget for DeWitt Company by month and for the first quarter of 2018. You may combine both budgets in one schedule. The direct manufacturing labor cost budget should include labor-hours and show the details for each labor cost category.

06

Discuss Actions Prompted by the Budget Process

Now, discuss the actions that the budget process has prompted DeWitt's management to take. For example, installing new laborsaving machinery and adjusting the labor wage rate.

07

Discuss Ways to Use the Budget for Better Management

Finally, discuss how DeWitt's managers can use the budget developed in requirement 1 to better manage the company. For instance, by monitoring labor costs and production levels, making adjustments based on market demand, and evaluating the effectiveness of the new machinery.

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Key Concepts

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

Direct Manufacturing Labor Costs

Direct manufacturing labor costs are a significant part of any production budget. These costs include wages, employee benefits, and various mandatory contributions by the employer. For DeWitt Company, direct manufacturing labor costs involve several components:

\[ \begin{align*} &\text{1. Wages: before April 1, 2018} = \\(11\text{/hour, after April 1, 2018} = \\)12\text{/hour} \ &\text{2. Pension contributions} = \\(0.40\text{/hour} \ &\text{3. Worker's compensation insurance} = \\)0.10\text{/hour} \ &\text{4. Employee medical insurance} = \$0.50\text{/hour} \ &\text{5. Social Security Taxes for both employer and employee} = 7.5\% \end{align*} \]
These components require careful calculation to ensure accurate financial planning.

• Wages: The primary cost, changes with wage increase planned during the year.
• Benefits: Include insurance and pension, which are additional per-hour costs.
• Taxes: Determine using the total wages, affecting both employer and employee expenses.

The combination of these costs gives a clear picture of the labor expenses per hour, crucial for budgeting effectively.

Master Budget

The master budget is a comprehensive financial plan that includes all aspects of a company's operations. It provides an overview of both operational and financial goals. For DeWitt Company, creating a master budget means integrating various micro-budgets including sales, production, and labor costs.

The master budget serves several purposes:

• Forecasting: It sets forecasts for sales, production, and direct labor within specified periods.
• Resource Allocation: Ensures that resources are effectively allocated according to expected demand.
• Performance Evaluation: Provides benchmarks for comparing actual performance against budgeted figures.

This overarching budget helps management in decision-making by aligning financial capacity and operational demands, ensuring that the company adheres to its strategic objectives.

Cost Management

Cost management involves monitoring and controlling the costs associated with operating a business. It is crucial for maintaining profitability, especially in manufacturing where costs are diverse and can fluctuate.

Effective cost management allows DeWitt Company to:
- Analyze Variable Costs: Understanding costs like labor, materials, and overheads that vary with production levels.
- Implement Cost-Saving Strategies: Such as introducing laborsaving machinery to reduce labor costs.
- Enhance Budget Accuracy: By adjusting projected costs based on historical data and market trends.
- Control Cost Variations: Reacting in real time to control overspending and preserve profit margins.
Overall, a sound cost management strategy enables companies to maximize profits by ensuring expenses do not exceed budgetary constraints.

Budget Planning

Budget planning is a critical phase in the budgeting process, involving setting financial objectives, estimating revenue, and forecasting expenses. For a company like DeWitt, meticulous budget planning involves several steps:

• Setting Sales Targets: Forecasting sales to ensure alignment with production capabilities.
• Calculating Inventory Needs: Determining end-of-month and beginning inventory levels to meet sales demand.
• Estimating Costs: Includes labor, material, and overhead to create an accurate expenditure forecast.

Budget planning is essential to:
- Navigate Cash Flow: Ensures funds are available when needed throughout the year.
- Make Strategic Decisions: Informs decisions like capital investments, such as buying new machinery.
Ultimately, a well-thought-out plan acts as a roadmap, guiding the company towards financial prudence and operational efficiency.