MCO Leather Goods manufactures leather purses. Each purse requires 2 pounds of direct materials at a cost of $4 per pound and 0.7 direct labor hours at a rate of $15 per hour. Variable manufacturing overhead is charged at a rate of $3 per direct labor hour. Fixed manufacturing overhead is $10,000 per month. The company’s policy is to end each month with direct materials inventory equal to 20% of the next month’s materials requirement. At the end of August the company had 2,880 pounds of direct materials in inventory. The company’s production budget reports the following.

Production Budget September October November
Units to be produced 5,200 6,300 6,100

a. Prepare direct materials budgets for September and October.
b. Prepare direct labor budgets for September and October.
c. Prepare factory overhead budgets for September and October.

Direct Materials Purchases Budget Sept 51680  October  60160              

Direct labor Budget September 54600 October  66150

Overhead Budget Sept  $ 20920  October  $23,230

Explanation:

The budgets are calculated in the following ways.

We multiply the required material , direct labor hour or variable overhead rate with the given number of units and then with the cost per unit to get the total costs.

MCO Leather Goods Manufacturers

Direct Materials

Purchases Budget

                              September      October      November

Production              5200             6300             6100

Pounds per units       *  2                 *2                    *2

Total Pounds           10400           12600           12200

Cost per pound         * $4               * $4                   *$4

Total cost                41600           50400           48800

On hand

Inventory               + 10080             + 9760                 ---    

Direct Materials

Purchases Budget  51680           60160                    

MCO Leather Goods Manufacturers

Direct Labor Budget

                                       September           October

Production                        5200                   6300

Hours required per unit * 0.7                          *0.7

Total hours                      3640                      4410

Rate per hour                 * $15                           *$15

Total labor Cost            54600                   66150

MCO Leather Goods Manufacturers

Factory Overhead Budget

                                       September           October

Production                        5200                   6300

Hours required per unit * 0.7                         * 0.7

Labor Hours                      3640                  4410

Variable OH                      * $3                     *$3        

Variable Costs                 $10920             $13230

Fixed OH                        + $10,000             +$10,000

Total OH                          $ 20920             $23,230