91Ó°ÊÓ

Comprehensive problem with \(A B C\) costing. Animal Gear Company makes two pet carriers, the Cat-allac and the Dog-eriffic. They are both made of plastic with metal doors, but the Cat-allac is smaller. Information for the two products for the month of April is given in the following tables: Animal Gear uses a FIF0 cost-flow assumption for finished-goods inventory. Animal Gear uses an activity-based costing system and classifies overhead into three activity pools: Setup, Processing, and Inspection. Activity rates for these activities are \( 105\) per setup-hour, \( 10\) per machine-hour, and \( 15\) per inspection-hour, respectively. Other information follows: If necessary, round up to calculate number of batches. Nonmanufacturing fixed costs for March equal \( 32,000\), half of which are salaries. Salaries are expected to increase \(5 \%\) in April. 0 ther nonmanufacturing fixed costs will remain the same. The only variable nonmanufacturing cost is sales commission, equal to \(1 \%\) of sales revenue. Prepare the following for April: 1\. Revenues budget 2\. Production budget in units 3\. Direct material usage budget and direct material purchases budget 4\. Direct manufacturing labor cost budget 5\. Manufacturing overhead cost budgets for each of the three activities 6\. Budgeted unit cost of ending finished-goods inventory and ending inventaries budget 7\. cost of goods sold budget 8\. Nonmanufacturing costs budget 9\. Budgeted income statement (ignore income taxes) 10\. How does preparing the budget help Animal Gear's management team better manage the company?

Step by step solution

01

Calculate total sales revenues

To calculate the total sales revenue for April, we first need to find the sales revenue for each product by multiplying the price per unit by the number of units sold. Then add up the revenues for both products to obtain the total sales revenue. #Step 2: Production budget in units#

02

Calculate required production units

To calculate the required production units, we need to consider the beginning and ending inventories and the estimated sales. The required production units for each product can be calculated by adding the desired ending inventory to the sales and subtracting the beginning inventory. #Step 3: Direct material usage budget and direct material purchases budget#

03

Calculate direct material usage and purchases

For each product, we need to calculate the amount of direct materials needed for production by multiplying the units to be produced by material required to produce one unit. The total cost of materials can be calculated by multiplying the quantity required by the unit material cost. To calculate the required material purchases, we add the required direct materials to the desired ending direct materials inventory and subtract the beginning direct materials inventory. #Step 4: Direct manufacturing labor cost budget#

04

Calculate direct labor cost

Determine the number of labor hours required for each product by multiplying the units to be produced by labor hours to produce one unit. Then, multiply the total labor hours for each product by the hourly wage rate to obtain the total direct labor cost. #Step 5: Manufacturing overhead cost budgets for each of the three activities#

05

Calculate manufacturing overhead costs

Determine the total cost of each activity pool by calculating the number of hours required for each activity and multiplying it by the corresponding activity rate (\(105\) for setup, \(10\) for processing, and \(15\) for inspection). #Step 6: Budgeted unit cost of ending finished-goods inventory and ending inventories budget#

06

Calculate budgeted unit cost and ending inventories

Sum up the direct material cost, direct labor cost, and the manufacturing overhead cost for each product to find the total production cost. Then, divide the total production cost by the number of units produced to find the budgeted unit cost. To calculate the ending inventories budget, multiply the budgeted unit cost by the number of units in the ending inventory for each product, and sum up the values for both products. #Step 7: Cost of goods sold budget#

07

Calculate cost of goods sold

To find the cost of goods sold for each product, simply multiply the budgeted unit cost by the number of units sold. Add the cost of goods sold for both products to obtain the total cost of goods sold. #Step 8: Nonmanufacturing costs budget#

08

Calculate nonmanufacturing fixed and variable costs

Adjust the salaries portion of the fixed costs (50% of $32,000) for the estimated increase, while keeping the other fixed costs the same. Then, find the sales commissions by taking 1% of the total sales revenue. #Step 9: Budgeted income statement (ignore income taxes)#

09

Prepare a budgeted income statement

Deduct the cost of goods sold and nonmanufacturing costs (both fixed and variable) from the total revenues to obtain the budgeted operating income. #Step 10: How does preparing the budget help Animal Gear's management team better manage the company?#

10

Importance of budget preparation

Preparing a budget helps Animal Gear's management team to better manage the company by providing them with a detailed financial plan for the upcoming month. This includes an understanding of the expected revenues, costs, and resources required for different aspects of production. The budget also helps to identify potential areas for cost control, efficiency improvements, and financial decision making. Additionally, it sets performance benchmarks against which the actual outcomes can be measured and analyzed for future planning and adjustments.

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Key Concepts

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

Cost Allocation

Cost allocation refers to the process of identifying, accumulating, and assigning costs to cost objects. A cost object can be a product, a department, a project, etc., and cost allocation is a critical step in management accounting. This ensures that all costs incurred by a business are attributed to the appropriate products or services. In the context of activity-based costing (ABC), which the Animal Gear Company employs, cost allocation is done by identifying various activities that incur costs and then assigning those costs based on actual consumption by different products.

For example, the Animal Gear Company uses setup, processing, and inspection activities, each with an associated cost per hour. By determining how many hours each product requires for these activities, the company can allocate overhead costs more accurately than traditional costing methods, which might allocate costs based solely on machine hours or labor hours. Accurate cost allocation allows businesses to price their products appropriately and identify areas for cost reduction.

Manufacturing Overhead

Manufacturing overhead consists of all the indirect costs associated with producing a product that can't be directly traced to that product. It includes expenses such as factory rent, equipment depreciation, and costs related to administrative staff within the manufacturing facility. In activity-based costing, overhead is broken down into various activities, like setup, processing, and inspection in the case of the Animal Gear Company. Each activity has a cost driver (e.g., setup-hours, machine-hours, and inspection-hours), which is used to assign the overhead costs to specific products.

Manufacturing overhead costs must be carefully budgeted and monitored to maintain profitability. In the budgeting process, managers estimate the number of each activity's cost drivers that will be needed (such as the number of setup-hours) and multiply this by the cost per driver to arrive at the total overhead allocation for each activity. For budget-conscious management, understanding and controlling these overhead costs are crucial for keeping product pricing competitive while ensuring adequate profit margins.

Budgeting Process

The budgeting process is a forward-looking activity where companies like Animal Gear estimate revenues, plan expenditures, and anticipate financial needs for future periods. By laying out the financial roadmap through a budget, companies can allocate resources efficiently, set financial targets, and establish constraints that ensure fiscal responsibility.

In preparing a detailed budget, Animal Gear must anticipate the costs associated with production (direct materials, direct labor, and manufacturing overhead) and nonmanufacturing costs (like sales commissions and fixed costs). Each budget piece feeds into an overarching budgeted income statement, which projects profitability. The budgeting process is not only about prediction but also acts as a control mechanism; actual financial results can be compared against the budget to analyze discrepancies, enabling management to make informed decisions and strategic adjustments. It's a compass for steering the company towards its financial goals and objectives.