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Problem 9-32 Production and Direct-Labor Budgets; Activity-Based Overhead Budget (LO 9-3, 9-4, 9-5, 9-6)

Shady Shades, Inc., manufactures artistic frames for sunglasses. Talia Demarest, controller, is responsible for preparing the companys master budget. In compiling the budget data for 20x1, Demarest has learned that new automated production equipment will be installed on March 1. This will reduce the direct labor per frame from 1.0 hour to .75 hours.

Labor-related costs include pension contributions of $1.05 per hour, workers' compensation insurance of $.75 per hour, employee medical insurance of $3 per hour, and employer contributions to Social Security equal to 4.00 percent of direct-labor wages. The cost of employee benefits paid by the company on its employees is treated as a direct-labor cost. Shady Shades, Inc., has a labor contract that calls for a wage increase to $14.00 per hour on April 1, 20x1. Management expects to have 19,000 frames on hand at December 31, 20x0, and has a policy of carrying an end-of-month inventory of 100 percent of the following months sales plus 40 percent of the second following months sales.

These and other data compiled by Demarest are summarized in the following table.

	January			February			March			April			May
Direct-labor hours per unit		1.0			1.0			.75			.75			.75
Wage per direct-labor hour	$	12.00		$	12.00		$	12.00		$	14.00		$	14.00
Estimated unit sales		13,000			15,000			11,000			12,000			12,000
Sales price per unit	$	54.00		$	51.50		$	51.50		$	51.50		$	51.50
Production overhead:
Shipping and handling (per unit sold)	$	4.00		$	4.00		$	4.00		$	4.00		$	4.00
Purchasing, material handling,
and inspection (per unit produced)	$	5.00		$	5.00		$	5.00		$	5.00		$	5.00
Other production overhead
(per direct-labor hour)	$	7.00		$	7.00		$	7.00		$	7.00		$	7.00
Required: 1. Prepare a production budget and a direct-labor budget for Shady Shades, Inc., by month and in total for the first quarter of 20x1. SHASY SHADES, INC. BUDGET FOR PRODUCTION AND DIRECT LABOR FOR THE FIRST QUARTER OF 20X1 MONTH JANURARY FEBURARY MARCH QUARTER SALES (UNITS) ADD: ENDING INVENTORY TOTAL NEEDS LESS: BEGINNING INVENTORY UNITS TO BE PRODUCED DIRECT-LABOR HOURS PER UNIT TOTAL HOURS OF DIRECT LABOR TIME NEEDED DIRECT-LABOR COSTS: WAGES PENSION CONTRIBUTIONS WORKERS COMPENSATION INSURANCE EMPLOYEE MEDICAL INSURANCE EMPLOYERS SOCIAL SECURITY TOTAL DIRECT-LABOR COST 2. Prepare a production-overhead budget for each month and for the first quarter. SHADY SHADES, INC PRODUCTION OVERHEAD BUDGET FOR THE FIRST QUARTER OF 20X1 MONTH JANURARY FEBURARY MARCH QUARTER SHIPPING AND HANDLING PURCHASING, MATERIAL HANDLING, AND INSPECTION OTHER OVERHEAD TOTAL PRODUCTION OVEHEAD

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