Question 1: Budget

You are now preparing the budget for the Sheep Drench department for the months of April and May. Sheep Drench manufacturing costs have been budgeted as follows:

 

 
Direct materials  $          3.0 per unit
Direct labour  $          1.5 per unit
Factory overhead
Variable  $        0.25 per unit
Fixed  $      5,000 per month
(Includes $1000 depreciation)

 

Selling and administrative expenses, including depreciation of $400 per month, are all fixed and total $2500 per month.

Other information is as follows:

There is an opening inventory of direct materials of $22,500 purchased in February.

The selling price of the product has been set at $26 per unit. Collections are scheduled as follows: 70% in month of sale, 28% in month following sale, and 2% uncollectable.

The inventory of direct materials will be maintained at 25% of the next month’s production requirements. 70% of each month’s purchases will be paid for in the month of purchase, and the remainder in the following month. A cash discount of 2% will be taken on all purchases. Opening inventory at the beginning of March was $22,500 purchased in February.

The direct labour payroll, factory overhead and selling and administrative expenses will be paid for in the month incurred.

Sales and production for the March, April, May and June have been scheduled as follows:

 

Units Sold Units Produced
March 8000 11000
April 7000 10000
May 10000 12000
June 9000 8000  

 

Required:

  1. Use a spreadsheet to prepare a budget showing the cash receipts and cash payments for the months of April and May with supporting calculations.

 

Question 2: Variance Analysis

You have introduced a standard cost accounting system for FOL. The following standard costs have been developed for producing 1kg of the Cattle drench.

 

Direct materials (1 kilogram)  $         20
Direct Labour (.25 hours)  $         15
Overhead (DLH basis) $           3
$         38

 

Production and cost information for May was:

 

Actual direct material purchased 1200 kilograms
Actual direct materials issued 900 kilograms
Actual output   800 kilograms
Actual cost of materials purchased $        25,500
Actual direct labour rate  $             60 per hour
Actual direct labour hours 280
Actual overhead costs  $        4,500

 

Required

  1. Calculate the following standard cost variances for May and provide general journal entries to record the cost flows for May.

(a)    materials price

(b)    materials usage

(c)    direct labour rate

(d)    direct labour efficiency

(e)    total overhead

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