Budgeting For Direct Material Usage, Manufacturing Cost, And

6 22 Budgeting Direct Material Usage Manufacturing Cost And Gross

Budgeting; direct material usage, manufacturing cost, and gross margin. (LO 2) — 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 total cost of $961,800 and 4,000 gallons of dye at a total cost of $23,680. The target ending inventory of wool and dye is zero, and the company uses the FIFO inventory cost flow method.

Xander's blue rugs are very popular, and demand is high, but capacity constraints limit production to 200,000 rugs annually. The budgeted selling price is $2,000 per rug. There is no beginning inventory of rugs, and the target ending inventory of rugs is also zero. Rugs are handmade, but a machine is used for dyeing, with overhead costs accumulated in two pools: weaving and dyeing. Weaving overhead is allocated based on direct manufacturing labor-hours (DMLH), and dyeing overhead is allocated based on machine-hours (MH).

There is no direct manufacturing labor cost for dyeing. Budgeted overhead costs for dyeing and weaving are based on the following parameters: dyeing based on 1,440,000 MH and weaving based on 12,400,000 DMLH. Budgeted variable costs include indirect materials, maintenance, utilities, and fixed costs such as indirect labor, depreciation, and others.

Requirements:

  1. Prepare a direct materials usage budget in 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 (a) 200,000 units sold and (b) 185,000 units sold.
  5. Calculate the budgeted cost of goods sold (COGS) for each sales assumption.
  6. Determine the budgeted gross margin under each sales scenario.
  7. Suggest managerial actions to improve profitability if sales drop to 185,000 blue rugs.
  8. Explain how top management can use these budgets to better manage the company.

Paper For Above instruction

Budgeting is a critical component of managerial accounting, providing a financial blueprint for operations and strategic decision-making. For Xander Manufacturing Company, which produces blue rugs, effective budgeting encompasses direct material usage, overhead allocations, and sales forecasts. This paper addresses these aspects through detailed calculations and managerial insights, based on the provided scenario and assumptions.

1. Direct Material Usage Budget

The primary direct materials for Xander’s blue rugs are wool and dye. Each rug uses 36 skeins of wool at $2 each, and 0.8 gallons of dye at $6 per gallon. To determine the annual material requirements, multiply the production volume by per-unit usage:

  • Wool: For 200,000 rugs, total skeins = 200,000 x 36 = 7,200,000 skeins
  • Dye: For 200,000 rugs, total gallons = 200,000 x 0.8 = 160,000 gallons

In dollar terms, the direct material costs are:

  • Wool: 7,200,000 skeins x $2 = $14,400,000
  • Dye: 160,000 gallons x $6 = $960,000

Similarly, if sales are expected to be 185,000 rugs, the material requirements are proportionally adjusted:

  • Wool: 185,000 x 36 = 6,660,000 skeins; Cost = $13,320,000
  • Dye: 185,000 x 0.8 = 148,000 gallons; Cost = $888,000

Therefore, the material usage budget clearly aligns with expected production levels and provides a forecast for purchasing and inventory management.

2. Budgeted Overhead Allocation Rates

The overhead costs are divided into dyeing and weaving pools. The total budgeted costs are given: $17,280,000 for dyeing and $31,620,000 for weaving.

Overhead rate for dyeing (based on machine-hours):

Rate = Total dyeing overhead / Total machine-hours = $17,280,000 / 1,440,000 MH = $12 per MH

Overhead rate for weaving (based on DMLH):

Rate = Total weaving overhead / Total DMLH = $31,620,000 / 12,400,000 DMLH ≈ $2.55 per DMLH

These rates allow for precise overhead allocation per unit, based on actual machine and labor usage during production.

3. Budgeted Unit Cost of a Blue Rug

Calculating the full cost per rug involves direct materials, direct labor, and allocated overhead:

Direct materials per rug:

  • Wool: 36 skeins x $2 = $72
  • Dye: 0.8 gallons x $6 = $4.80

Direct labor cost:

Each rug requires 62 DMLH at $13 per hour: 62 x $13 = $806

Overhead allocation:

  • Dyeing overhead: Machine-hours per skein = 0.2 MH; total MH for 36 skeins = 36 x 0.2 = 7.2 MH; overhead per rug = 7.2 MH x $12 = $86.40
  • Weaving overhead: DMLH per rug = 62 hours; overhead = 62 x $2.55 ≈ $158.10

Total unit cost:

  • Materials: $76.80
  • Labor: $806
  • Overhead: $86.40 + $158.10 = $244.50

Sum: $76.80 + $806 + $244.50 ≈ $1,127.30 per rug

This comprehensive cost per unit guides pricing, profitability analysis, and strategic planning.

4. Revenues Budget

For 200,000 rugs, revenue:

200,000 x $2,000 = $400,000,000

For 185,000 rugs, revenue:

185,000 x $2,000 = $370,000,000

This revenue forecast supports cash flow and profitability planning.

5. Budgeted Cost of Goods Sold (COGS)

COGS equals total unit cost x units sold:

  • At 200,000 units: 200,000 x $1,127.30 ≈ $225,460,000
  • At 185,000 units: 185,000 x $1,127.30 ≈ $208,424,500

Accurate COGS estimates facilitate gross margin calculations and inventory control.

6. Gross Margin Calculations

Gross margin equals sales revenue minus COGS:

  • At 200,000 units: $400,000,000 - $225,460,000 = $174,540,000
  • At 185,000 units: $370,000,000 - $208,424,500 ≈ $161,575,500

Assuming no other costs, these figures reflect profitability under different sales volumes.

7. Managerial Actions for Profitability Improvement

If sales decline to 185,000 units, managers can strategically improve profitability by reducing costs, optimizing production, or revising pricing strategies. Examples include renegotiating supplier contracts for materials, investing in more efficient dyeing equipment to lower overheads, or exploring value-added features to justify higher prices. Additionally, operational efficiencies such as reducing waste or streamlining labor can lower costs per unit, improving overall margins.

8. Use of Budget Data for Better Management

Top management can utilize these detailed budgets to monitor financial performance, identify cost overruns, and assess profit margins. Variance analysis comparing actual against budgeted costs informs corrective actions promptly. Furthermore, projections based on different sales scenarios enable strategic planning for capacity adjustments, inventory management, and capital investments. Regular review of budgets enhances decision-making, fosters accountability, and supports sustainable growth.

In conclusion, thorough budgeting and analysis of direct materials, overhead allocation, and sales forecasts empower Xander Manufacturing Company to optimize operations, enhance profitability, and adapt proactively to market fluctuations. Strategic use of these financial tools enables informed decisions that sustain competitive advantage and long-term success.

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