Answer to Question 1
Roletter Company
Budget for Production and Direct Manufacturing Labor
for the Quarter Ended March 31, 2015
January February March Quarter
Budgeted sales (units) 10,000 14,000 7,000 31,000
Add target ending finished goods
inventorya (units) 17,500 11,000 12,000 12,000
Total requirements (units) 27,500 25,000 19,000 43,000
Deduct beginning finished goods
inventory (units) 17,500 17,500 11,000 17,500
Units to be produced 10,000 7,500 8,000 25,500
Direct manufacturing labor-hours
(DMLH) per unit 2.0 2.0 1.5
Total hours of direct manufacturing
labor time needed 20,000 15,000 12,000 47,000
Direct manufacturing labor costs:
Wages (12.00 per DMLH) 240,000 180,000 144,000 564,000
Pension contributions
(0.50 per DMLH) 10,000 7,500 6,000 23,500
Workers' compensation insurance
(0.20 per DMLH) 4,000 3,000 2,400 9,400
Employee medical insurance
(0.30 per DMLH) 6,000 4,500 3,600 14,100
Social Security tax (employer's share)
(12.00 0.075 = 0.90 per DMLH) 18,000 13,500 10,800 42,300
Total direct manufacturing
labor costs 278,000 208,500 166,800 653,300
a100 of the first following month's sales plus 50 of the second following month's sales.
Note that the employee Social Security tax of 7.5 is irrelevant. Such taxes are withheld from employees' wages and paid to the government by the employer on behalf of the employees; therefore, the 7.5 amounts are not additional costs to the employer.
2. The budget process would prompt Roletter's management to look for ways to reduce finished goods inventories, the manufacturing labor hours needed to produce each unit both before and after installing new labor-saving machinery; some of the other costs such as Social Security tax and workers' compensation insurance may be fixed by law, while pension contributions and medical insurance might be features that make Roletter an attractive employer.
3. We already see one example of a decision that Roletter's management took based on the budgeted expensesinstalling labor-saving machines ahead of wage increases. Roletter's management should also continue to work with employees to increase labor productivity.
Answer to Question 2
d