BloomBoards, Inc. is a small manufacturing firm that produces and sells one mode
ID: 2372380 • Letter: B
Question
BloomBoards, Inc. is a small manufacturing firm that produces and sells one model of snowboard (the Pipex). In the fall of 2012, you (the management accountant) gathered the following data to prepare the 2013 annual budget:
Direct materials Wood = 5 boardfeet (bf) per snowboard
Fiberglass = 6 yards (yds) per snowboard
Direct Labor 5 hours per snowboard
It has been estimated that 1,000 units of Pipex will be sold during 2013, at a price of $450 per board. There will be 100 completed boards in inventory at 12/31/12 and it is budgeted that there will be 200 completed boards in inventory at 12/31/13. The direct materials inventories will include:
Inventory at 12/31/12 Inventory at 12/31/13
Wood 2,000 bf 1,500 bf
Fiberglass 1,000 yds 2,000 yds
Variable manufacturing overhead is applied at $7.00 per direct labor hour and fixed manufacturing overhead is estimated at $66,000 annually (including $26,000 of depreciation). Variable marketing costs are $250 per sales visit, with 30 visits planned for 2013. Fixed marketing and administrative costs are estimated at $30,000 for 2013, including$12,000 of depreciation.
Various budgeted costs for the manufacturing components includes:
2012 Cost 2013 Cost
Wood $28.00 per bf $30.00 per bf
Fiberglass $ 4.80 per yd $ 5.00 per yd
Direct Labor $24.00 per hour $25.00 per hour
The cost of a finished board for 2012 is $374.80. Assume a FIFO flow for all inventories. There is not expected to be any work-in-process inventories at the end of 2012 or 2013.
All sales, wages/salaries, and purchases are for cash and the company has a policy to maintain an ending cash balance of $10,000. On 12/31/12, BloomBoards expects to borrow $20,000 on a line-of-credit and maintains exactly $10,000 as the required balance. The loan carries an interest rate of 11 percent annually. They will repay as much of the loan as possible (in multiples of $100), along with accrued interest for the year on December 31, 2013. Income taxes, at a rate of 30 percent, will also be paid at the end of 2013.
Required
1. Prepare the following budgets for BloomBoards for 2013: 1. Sales; 2. Production; 3. Direct Materials (purchases and cost); 4. Direct Labor; 5. Manufacturing Overhead; 6. Operating Expense; 7. Manufacturing Cost per Unit; 8. Ending Inventories (FG and DM); 9. Cost of Goods Sold; 10. Pro forma Income Statement, and 11. Cash Budget.
Explanation / Answer
FOLLOW THIS SOLVED EXAMPLE
"Manufacturing overhead costs" refer to any costs within a manufacturing facility other than direct material and direct labor. Manufacturing overhead includes such things as indirect labor, indirect materials (such as manufacturing supplies), utilities, quality control, material handling, and depreciation on the manufacturing equipment and facilities.
"Variable" manufacturing overhead costs will increase in total as output increases. An example is the cost of the electricity needed to operate the machines that cut and sew the denim. Another example is the cost of the manufacturing supplies (such as needles and thread) that increase when production increases. In our example we assume that these variable manufacturing overhead costs fluctuate in response to the number of direct labor hours. Recall the original estimates made when DenimWorks was formed:
January 2012
Let's begin by determining the standard cost of variable manufacturing overhead for the good output that DenimWorks produces in January 2012:
Recall that there were 50 actual direct labor hours in January. Let's assume that the actual cost for the variable manufacturing overhead (electricity and manufacturing supplies) during January is $90.
Our analysis will look like this:
Variable Manufacturing Overhead Analysis for January 2012:
Notice that for the good output produced in January, the actual cost of variable manufacturing overhead was $90 and the total standard cost of variable manufacturing overhead cost allowed for the good output was $84. This unfavorable difference of $6 agrees to the sum of the two variances:
Variable Manufacturing Overhead Efficiency Variance
As the above analysis shows, DenimWorks did not produce the good output efficiently—it used 50 actual direct labor hours instead of the 42 standard direct labor hours allowed.
The additional 8 hours no doubt caused the company to use additional electricity and supplies. Measured at the originally estimated rate of $2 per direct labor hour, this amounts to $16 (8 hours x $2). This is referred to as an unfavorable variable manufacturing overhead efficiency variance.
Variable Manufacturing Overhead Spending Variance
In the analysis above, item 2 shows that based on the 50 direct labor hours actually used, electricity and supplies could reasonably add up to $100 instead of the standard of $84. (If the good output took 8 actual direct labor hours more than the standard hours to cut and sew the denim, the company will likely have additional electricity and supplies costs since it is operating the machines for an additional 8 hours.) We find, however, that the actual cost of the electricity and supplies is $90, not $100. This $10 favorable variance indicates that the company did not spend the planned $2 per direct labor hour. (Perhaps electricity rates were lower than the rates anticipated when the standard costs were established.)
Actual variable manufacturing overhead costs are debited to overhead cost accounts. The credits are made to accounts such as Accounts Payable. For example:
Another entry records how these overheads are assigned to the product based on standard costs:
As our analysis notes above and these entries illustrate, DenimWorks has an actual variable manufacturing overhead of $90, but only $84 (the standard amount) was applied to the products. The $6 difference is "explained" by the two variances:
February 2012
Recall that in February 2012 the company produced 200 large aprons and 100 small aprons. We use that good output to compute the standard cost of variable manufacturing overhead for February 2012:
Given that there were 75 actual direct labor hours in February and assuming that the actual cost for the variable manufacturing overhead in February was $156, our analysis will look like this:
Variable Manufacturing Overhead Analysis for February 2012:
The favorable difference between the actual cost of $156 and the standard cost of $160 agrees to the sum of the two variances:
Actual variable manufacturing overhead costs are debited to overhead cost accounts. The credits are made to accounts such as Accounts Payable. For example:
Another entry records how these overheads are assigned to the product:
As our analysis notes above and as these entries illustrate, even though DenimWorks had actual variable manufacturing overhead of $156, the standard amount of $160 was applied to the products. For the month of February 2012 the company applied more variable manufacturing overhead to its products than it actually incurred.
We will discuss later how to report the balances in the variance accounts under the heading "What To Do With Variance Amounts".
Large Apron
Small Apron
Time required to cut and sew
0.3 hr. (18 min.) 0.2 hr. (12 min.) Electricity and supplies used per hour of labor $2