Budgeting; direct material usage, manufacturing cost, and gross margin. (LO

 6-22 Budgeting; direct material usage, manufacturing cost, and gross margin. (LO 2) 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 pools—one for weaving and the other for dyeing. Weaving overhead is allocated to products based on direct manufacturing labour-hours (DMLH). Dyeing overhead is allocated to products based on machine-hours (MH).  There is no direct manufacturing labour cost for dyeing. Xander budgets 62 direct manufacturing labour-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:

 BackThe table is as follows

Parameter Dyeing, based on 1,440,000 M H Weaving, based on 12,400,000 D M L H Variable costs blank Blank Indirect materials $ 0  $15,400,000  Maintenance 6,560,000    5,540,000  Utilities 7,550,000    2,890,000  Fixed costs blank blank Indirect labor 347,000    1,700,000  Depreciation 2,100,000    274,000  Other 723,000    5,816,000  Total budgeted costs 17,280,000  $31,620,000  


1. Prepare a direct materials 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 (i.e., 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 1–6 to better manage the company? 

Please explain in excel worksheet.


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