Chapter 6 - Budgets
The number of units in the sales budget will differ from the number of units in the production budget when there is a change in:
a. the Finished Goods Inventory account.
b. overhead charges.
c. the Direct Materials Inventory account.
d. sales returns and allowances.
a. Production is the quantity of finished goods.
Budgeted overhead divided by budgeted activity level
What is: Overhead allocation rate for normal costing
Direct materials (DM) efficiency variances are recorded when?
When materials are used
What is the final product of the operating budget?
A budgeted income statement
Ending credit balance in manufacturing overhead account
What is: Overapplied overhead
Which type of costs will transfer from the master budget to the flexible budget unchanged assuming an operating capacity within the relevant range?
Fixed costs
Jack is preparing the production budget for Candy Cane Corporation (CCC). Jack determines that the production department generally holds 20% of the following month's budgeted sales in ending inventory each month. From the sales and marketing department, Jack learned that budgeted unit sales for the next 3 months are: January; 1,000 units, February; 1,500 units, and March; 2,500 units. How many units should Jack have the production department produce in February?
1,700 units
Ending inventory = 20% March sales
2,500 * .2 = 500 units
Plus sales Feb. 1,500 units
= Needed items 2,000 units
- Beg inventory 20% Feb sales (300)
= Production Feb 1,700
Joe recently began working at Luce Company as a cost accountant. In order to prepare financial statements, Ahmed was provided the following:
Direct materials used $10,000
Direct labor $10,000
Actual overhead incurred $25,000
Manufacturing overhead applied $20,000
Beginning WIP inventory $25,000
Ending WIP inventory $35,000
Beginning FG inventory $60,000
Ending FG Inventory $45,000
Luce uses normal costing and writes off variances using the direct method. What was cost of goods manufactured for the period?
What is: $30,000
Beg WIP $25,000
+ DM 10,000
+ Dl 10,000
+ OH 20,000
- End bal $35,000
= COGM $30,000
Note that the overhead variance would be written off to COGS, not COGM.
Memorable Moments manufactures a product that uses 2.5 standard labor hours per unit at a standard hourly rate of $12.00 per hour. If 3,000 units required 7,400 actual hours at an hourly rate of $12.40 per hour, what is the Direct Labor (DL) Price Variance and (DL) Efficiency Variance?
Price Variance = $2,960 Unfavorable
Efficiency variance = $1,200 favorable
Price:
Actual costs AQ @ SP Flex
AQ * AP AQ * SP FG * SQ * SP
7,400* $12.40 7,400 * $12 3,000 * 2.5*12
= 91,760 = 88,800 =90,000
Price diff $2,960U Eff $1,200F
The following table represents the credit sales of Seneca Foods for the first five months of this year:
Month Credit Sales
January $40,000
February $55,000
March $45,000
April $51,000
May $55,000
According to their records, the company is expecting to receive payments for credit sales as follows: 60% in the month of sale, 20% in the first month after the sale, 15% in the second month after the sale, and the remainder becomes uncollectible. How much cash should Seneca expect to receive in May as a result of credit sales?
$49,950
May sales collected that month
$55,000 * .6 33,000
April sales 51,000 * .20 10,200
March sales 45,000 * .15 6,750
Total collections in May 49,950
Boxes R Us uses normal costing and allocates overhead based on direct labor costs. Overhead was budgeted for the year at $600,000 but actual overhead was $680,000. Actual direct labor costs for the year were $325,000 and the budget was $300,000. Actual direct labor hours for the year were 16,250 and budgeted at 15,400.
Boxes prorates any under/over allocation of overhead to the applicable accounts. At year-end, amounts are:
Direct materials $100,000
WIP $200,000
FG $300,000
Cost of sales $1,500,000
Selling costs $200,000
What is the journal entry for the proration of under/over applied overhead, if any?
WIP 3,000
FG 4,500
COS 22,500
MOH 30,000
Rate: 600,000 / 300,000 = $2 per DL$
* 325,000 DL$
= Applied $650,000
Actual 680,000
Underapplied 30,000
Proration: (000s) (% total) * 30,000
WIP 200 10% 3,000
FG 300 15% 4,500
COS 1,500 75% 22,500
TOTAL 2,000 100% 30,000
Century Company has the following information for the past month:
Actual Flexible Budget Master Budget
Sales $51,000 $54,000 $50,000
Var costs 23,000 23,000 21,000
Century's Sales Activity Variance for contribution margin is
$2,000 favorable
Sales Activity Variance = Flexible Budget Contribution Margin - Master Budget Contribution Margin = [($54,000 - $23,000) - ($50,000 - $21,000)] = $31,000 - $29,000 = 2,000, favorable
Mallards Manufacturing produces waterproof tarps for camping, and the company has been in business since 1955. The following budget information has been provided for the 2026 production year:
Budgeted Sales Volume (Units) 105,000
Targeted Ending Finished Goods 45,000
Beginning Finished Goods 25,000
Beginning Direct Material (Yards) 34,000
Targeted Ending Direct Material (Yards) 56,250
Quantity of Direct Material per Unit (Yards) 1.25
Cost of Direct Materials per Yard $23.50
What is the budgeted quantity of direct materials to be purchased?
178,500 yards
Production needs:
Target ending inventory 45,000
+ sales 105,000
= Needed F/G 150,000
- Begin F/G (25,000)
F/G to be produced 125,000
Purchases:
Target EI Raw materials 56,250
+ production 125,000 * 1.25 156,250
= Needed yards of RM 212,500
- Begin inventory (34,000)
= Purchases (Q) 178,500
Creative Accountant CPS is a service firm and applies overhead based upon direct labor cost. For the year 2025, the actual overhead cost incurred totaled $50,000. Creative had underapplied overhead cost by $10,000. The Company utilized an overhead application rate of 50% of direct labor cost. What was the total direct labor cost incurred for the year?
What is: $80,000
Incurred $50,000
less: under applied (10,000)
Equals Applied $40,000
/ rate 50%
= Base 80,000
Triton Manufacturing produces a specialized commercial-grade blender, the "Titan X." The standard cost card for a single Titan X blender allows for 5.0 pounds of raw material (aluminum) at a standard cost of $8.50 per pound.
Compute the Direct Materials Price Variance and efficiency variances.
Direct materials price variance $1,310 F
Direct materials efficiency variance $9,350 Unfavorable
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