Preparing an operating budget—direct materials, direct labor, and manufacturing overhead budgets

Grady, Inc. manufactures model airplane kits and projects production at 650, 500, 450, and 600 kits for the next four quarters. Direct materials are 4 ounces of plastic per kit and the plastic costs \(1 per ounce. Indirect materials are considered insignificant and are not included in the budgeting process. Beginning Raw Materials Inventory is 850 ounces, and the company desires to end each quarter with 10% of the materials needed for the next quarter’s production. Grady desires a balance of 200 ounces in Raw Materials Inventory at the end of the fourth quarter. Each kit requires 0.10 hours of direct labor at an average cost of \)10 per hour. Manufacturing overhead is allocated using direct labor hours as the allocation base. Variable overhead is \(0.20 per kit, and fixed overhead is \)165 per quarter. Prepare Grady’s direct materials budget, direct labor budget, and manufacturing overhead budget for the year. Round the direct labor hours needed for production, budgeted overhead costs, and predetermined overhead allocation rate to two decimal places. Round other amounts to the nearest whole number.

Step by step solution

01

Preparation of direct materials budget

	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Budgeted kits to be produced	650	500	450	600
Direct material (ounce)per kit	X 4	X 4	X 4	X 4
Direct material needed for production	2,600	2,000	1,800	2,400
Plus: Desired direct materials in ending inventory (Ounce)	200	180	240	200
Total direct materials needed	2,800	2,180	2,040	2,600
Less: Direct materials in beginning inventory (Ounce)	(850)	(200)	(180)	(240)
Budgeted purchases of direct materials	1,950	1,980	1,860	2,360
Direct materials cost per Ounce	X $1	X $1	X $1	X $1
Budgeted cost of direct materials purchases	$1,950	$1,980	$1,860	$2,360

02

Preparation of direct labor budget

	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Budgeted kits to be produced	650	500	450	600
Direct labor hours per kit	X 0.10	X 0.10	X 0.10	X 0.10
Direct labor hours needed for production	65	50	45	60
Direct labor cost per hour	X $10	X $10	X $10	X $10
Budgeted direct labor cost	$650	$500	$450	$600

03

Preparation of manufacturing overhead budget

	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
Budgeted kits to be produced	650	500	450	600	2,200
VOH* cost per kit	X $0.20	X $0.20	X $0.20	X $0.20	X $0.20
Budgeted VOH	$130	$100	$90	$120	$440
Budgeted FOH	$165	$165	$165	$165	$660
Budgeted manufacturing overhead costs	$295	$265	$255	$285	$1,100
Direct labor hours	65	50	45	60	220
Predetermined overhead allocation rate ($1,100/220)					$5/DLHr

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