The connecting link between the statement of owner's equity and ...

[Mimi]

The connecting link between the statement of owner's equity and the balance sheet is the owner's withdrawals.
  Indicate whether the statement is true or false

Question 2

Budgeting: direct material usage, manufacturing cost, and gross margin.
 
  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 cost of 961,800 and 4,000 gallons of dye at a cost of 23,680. Target ending inventory of wool and dye is zero. Xander uses the FIFO inventory cost flow method.
   Xander blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 200,000 blue rugs per year. The budgeted selling price is 2,000 each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero.
   Xander makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are accumulated in two cost poolsone for weaving and the other for dyeing. Weaving overhead is allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead is allocated to products based on machine-hours (MH).
   There is no direct manufacturing labor cost for dyeing. Xander budgets 62 direct manufacturing labor-hours to weave a rug at a budgeted rate of 13 per hour. It budgets 0.2 machine-hours to dye each skein in the dyeing process.
  The following table presents the budgeted overhead costs for the dyeing and weaving cost pools:
 
   Required:
  1. Prepare a direct material usage budget in both 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 Xander sells (a) 200,000 or (b) 185,000 blue rugs (that is, at two different sales levels).
  5. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
  6. Find the budgeted gross margin for blue rugs under each sales assumption.
  7. What actions might you take as a manager to improve profitability if sales drop to 185,000 blue rugs?
  8. How might top management at Xander use the budget developed in requirements 16 to better manage the company?

[wshriver]

Answer to Question 1

F

Answer to Question 2

1.
Direct Material Usage Budget in Quantity and Dollars

Material
Wool Dye Total
Physical Units Budget
Direct materials required for
Blue Rugs (200,000 rugs  36 skeins and 0.8 gal.) 7,200,000 skeins 160,000 gal.

Cost Budget
Available from beginning direct materials inventory: (a)
Wool: 458,000 skeins  961,800
Dye: 4,000 gallons  23,680
To be purchased this period: (b)
Wool: (7,200,000  458,000) skeins  2 per skein 13,484,000
Dye: (160,000  4,000) gal.  6 per gal. 936,000
Direct materials to be used this period: (a) + (b) 14,445,800  959,680 15,405,480

2.
= = 2.55 per DMLH

= = 12 per MH

3.
Budgeted Unit Cost of Blue Rug

Cost per
Unit of Input Input per
Unit of
Output
Total
Wool  2 36 skeins  72.00
Dye 6 0.8 gal. 4.80
Direct manufacturing labor 13 62 hrs. 806.00
Dyeing overhead 12 7.21 mach-hrs. 86.40
Weaving overhead 2.55 62 DMLH 158.10
Total 1,127.30

10.2 machine hour per skein 36 skeins per rug = 7.2 machine-hrs. per rug.

4.
Revenue Budget

Units Selling Price Total Revenues
Blue Rugs 200,000 2,000 400,000,000
Blue Rugs 185,000 2,000 370,000,000

5a.
Sales = 200,000 rugs
Cost of Goods Sold Budget

From Schedule Total
Beginning finished goods inventory  0
Direct materials used  15,405,480
Direct manufacturing labor (806  200,000) 161,200,000
Dyeing overhead (86.40  200,000) 17,280,000
Weaving overhead (158.10  200,000) 31,620,000 225,505,480
Cost of goods available for sale 225,505,480
Deduct ending finished goods inventory 0
Cost of goods sold 225,505,480

5b.
Sales = 185,000 rugs
Cost of Goods Sold Budget

From Schedule Total
Beginning finished goods inventory  0
Direct materials used  15,405,480
Direct manufacturing labor (806  200,000) 161,200,000
Dyeing overhead (86.40  200,000) 17,280,000
Weaving overhead (158.10  200,000) 31,620,000 225,505,480
Cost of goods available for sale 225,505,480
Deduct ending finished goods inventory
(1,127.30  15,000) 16,909,500
Cost of goods sold 208,595,980

6.
200,000 rugs sold 185,000 rugs sold
Revenue 400,000,000 370,000,000
Less: Cost of goods sold 225,505,480 208,595,980
Gross margin 174,494,520 161,404,020

7. If sales drop to 185,000 blue rugs, Xander should look to reduce fixed costs and produce less to reduce variable costs and inventory costs.

8. Top management can look for ways to increase (stretch) sales and improve quality, efficiency, and input prices to reduce costs in each cost category such as direct materials, direct manufacturing labor, and overhead costs. Top management can also use the budget to coordinate and communicate across different parts of the organization, create a framework for judging performance and facilitating learning, and motivate managers and employees to achieve stretch targets of higher revenues and lower costs.