CMA Budgeting For Production Costs

8/25/2019 CMA Exam Review - Part 1
Overview
Budgeting for Production Costs
Upon completion of this lesson, candidates should be able to:
Demonstrate an understanding of the relationship between the direct materials budget, the direct labor
budget, and the production budget (1.B.5.g).
Explain how inventory levels and procurement policies affect the direct materials budget (1.B.5.h).
Prepare direct materials and direct labor budgets based on relevant information and evaluate the feasibility of
achieving production goals on the basis of these budgets (1.B.5.i).
Demonstrate an understanding of the relationship between the overhead budget and the production budget
(1.B.5.j).
Separate costs into their fixed and variable components (1.B.5.k).
Prepare an overhead budget (1.B.5.l).
This lesson continues the Sunbird Boat Company example from the previous lesson to describe how to build
cost budgets for direct materials, direct labor, and manufacturing overhead.
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Study Guide
I. The Master Budget “Big Picture”

A. This lesson continues the example from the previous lesson on Sunbird Boat Company's
operational budget. This lesson focuses on building the production cost budgets that eventually
form budgeted cost of goods sold for the pro forma income statement.
B. Typically, the production cost budgets represent the three product costs: direct materials, direct
labor, and manufacturing overhead. Be sure to keep in mind the position of these three budgets
within the big picture of the overall master budget. You can visually position these three budgets in
the illustration below.
II. Direct Materials Budget

A. The direct materials budget, like all of the production cost budgets, is a function of the production
budget. The direct materials budget can be described in three parts.
1. First, beginning with budgeted production volume, the direct materials budget uses the
standard input quantity to determine the total direct materials needed to support
production.
2. Second, if the organization maintains an inventory of direct materials, then the budgeted
production needs will not equal the quantity of direct materials that will need to be
purchased. As a result, the relationship between production needs and materials to be

purchased is:
Production needs + Ending inventory − Beginning inventory = Materials to purchase
3. Finally, by multiplying the materials to be purchased by the standard price of materials, the
cost budget for direct materials purchases can be established.
B. Let's carry forward from the previous lesson the budgeting example for the Sunbird Boat
Company. In the previous lesson, we determined a budget for quarterly production of custom
wood-built rowboats. That production volume is used below to build the direct materials budget
for Sunbird based on a standard quantity of 80 board feet of wood per boat and a standard price of
$10 per board foot.
1. Sunbird's budget policy follows a practice of maintaining inventory equal to 30% of next
quarter's production needs. Hence, the Q1 planned ending inventory of 1,248 feet is
computed by the 4,160 feet needed for Q2 production multiplied by 30%. Note that the 960
feet of inventory planned for the end of Q4 indicates that Sunbird management plans to
produce 40 boats in the following quarter (40 boats × 80 feet × 30% = 960 feet).
2. Notice that the beginning inventory planned for Q1 is 600 feet. This amount is different from
Sunbird's 30% budget policy, which would be 816 feet (Q1 production needs 2,720 feet ×
30%). Please understand that this budget is following the final results of the current year. It
appears that while Sunbird may have originally planned to end the current year with 816 feet
of wood in inventory, it is actually ending the year with 600 feet.
3. After the materials needed for production are adjusted by Sunbird's inventory policy, the
budgeted quantity of wood to be purchased each quarter is multiplied by the standard price
to determine the final direct material purchases budget.

III. Direct Labor Budget
A. The direct labor budget is obviously uncomplicated by any kind of inventory policy. The budgeted
production volume is multiplied by the standard quantity of hours, which for Sunbird Boat
Company is 50 hours per boat, to establish the direct labor hours needed to support production.
The direct labor hours needed to support production are multiplied by the standard price (i.e.,
wage rate) for labor to determine the budgeted direct labor payroll. Using Sunbird's standard
wage rate of $28 per hour, the organization's direct labor budget is presented below.
IV. Manufacturing Overhead Budgets

A. Manufacturing overhead (sometimes called production overhead, factory overhead, or plant
overhead) is composed of many different kinds of costs necessary for the organization's
production process.
1. In the budgeting process, manufacturing overhead is separated into variable costs and fixed
costs. This distinction is important since variable costs have a constant cost rate per unit
that results in a varying total cost based on changing levels of production volume.
Conversely, fixed costs are fixed at the total amount, but will have a varying cost rate based
on changing levels of production volume.
2. Note that direct materials and direct labor costs are traditionally assumed to be variable
(though this may or may not be the case for particular organizations). On the other hand, the
manufacturing overhead budget is effectively managing two different types of costs, variable
costs and fixed costs.
B. In the Sunbird Boat Company example, management has identified three sources of variable
manufacturing overhead costs (indirect materials, indirect labor, and utilities). Management has
also identified four sources of fixed manufacturing overhead costs (property taxes, insurance,
depreciation, and supervisor's salary). The budgeted costs for each quarter are presented in the
MOH budget below.
C. Building the MOH budget involves two aspects. The first aspect of this budgeting process is
determining MOH costs. Note that the depreciation of plant assets is included in MOH costs.
However, remember that depreciation is a non-cash expense, which is why depreciation expense
needs to be deducted to determine the budgeted MOH payments. (We'll come back to MOH
payments in a later lesson on cash budgets.)
D. The second aspect is building standard cost rates in order to apply MOH costs to units produced.
This is necessary in order to establish the budgeted cost of goods sold for the pro forma income
statement (which we'll cover in the next lesson). The math involved in budgeted overhead
application rates is simple:
Overhead allocation rate = Budgeted annual MOH costs ÷ Budgeted annual activity volume
1. The standard MOH cost rates for Sunbird are computed below.
2. It must, however, be understood that it is a significant challenge for management to build

these rates accurately based on the appropriate activity volume or volumes. [You'll study
this important topic in Part 1 Section D.]
3. In our example, Sunbird is using direct labor hours as the activity basis to allocate overhead
costs. If it turns out that direct labor hours are not the right cost driver for these overhead
costs, the MOH budget is not going to be accurate for planning, controlling, and evaluation
purposes.
V. The Budgeted Standard Cost Sheet
A. With the production cost budgets completed and standard cost rates established, the standard
cost sheet can be developed. This cost sheet is necessary for the pro forma income statement (i.e.,
budgeting operating statement). It is also a valuable management tool for building cost variances
in order to control and evaluate performance in the organization. [You'll study this important topic
in Part 1 Section C.]
B. The Sunbird Boat Company standard cost sheet is provided below. Note that this cost sheet
stipulates the standard input quantity and standard input price of each production cost for a single
boat product.
C. This standard cost sheet carries forward into the pro forma income statement, which we will study
in the next lesson.
Practice Question
Jordan Auto has developed the following production plan for its new auto part.
Each part contains four pounds of raw material at a standard price of $16 per pound. The desired raw
materials ending inventory is 40% of the next month's production needs plus an additional 100 pounds.
Prepare the direct materials purchases budget for each of the first three months of the coming year. Jordon
Auto management is planning on the beginning inventory for January to be in compliance with its inventory
policy of 40% needed to support production that month.

Answer
January beginning inventory = January production needs 48,000 parts × 40% + 100 = 19,300 pounds.
Practice Question
Annecy Chocolate Company makes and sells two kinds of candy: chocolate peanut bars and caramel bars.
The second-quarter production budget for each of the bars is as follows:
From experience, Annecy's management knows that it takes approximately 15 minutes to make a box of
chocolate peanut bars and 30 minutes to make a box of caramel bars. Annecy pays its direct labor
employees $14 per hour.
Prepare a direct labor budget for each of the two products for second quarter of the year.
Answer
Practice Question
Sanchez Sleep Systems manufactures nylon mesh hammocks for a chain of retail outlets located
throughout the Southeast. The company plans to manufacture and sell 30,000 hammocks during the fourth
quarter. Overhead costs are expected to include:
Compute Sanchez's overhead cost rates per hammock and prepare the manufacturing overhead budget for
the fourth quarter.
Answer
Note that depreciation expense ($25,000) is included here in the total fixed overhead costs of $90,000. This is
because Sanchez is building a cost rate for its overhead cost budget. Later, when Sanchez is building a cash
budget, this depreciation expense won't be included.
Summary
Once the production budget has been built, the budgets for all the production costs can commence.
Traditionally, there are three basic production cost budgets: direct materials, direct labor, and
manufacturing overhead. Remember that the direct materials budget will need to be adjusted based on the
organization's inventory management policies. On the other hand, the direct labor budget simply combines
the standard input quantities and standard input prices to compute the labor costs that need to be
scheduled for production. The manufacturing overhead (MOH) budget should be separated into its variable
cost and fixed cost components. Once the MOH budget has been built, it can be used to establish the
standard MOH costs per unit of output, which are needed to build budgeted costs of goods sold.
Slides
Flashcards

1
FC.pc.bud.FC001_1802
What are the three production cost budgets?

1. Direct materials budget
2. Direct labor budget
3. Manufacturing overhead budget
2
1. Multiply budgeted production volume by

the standard input quantity to determine
Describe the process of creating a direct total direct materials needed.
materials budget. 2. If the organization maintains inventory of
direct materials, determine materials to
purchase as follows: Production Needs +
Ending Inventory – Beginning Inventory.
3. Multiply the materials to be purchased by
the standard price of materials to
determine the final direct materials
budget.
3
Describe the process of creating a direct labor

1. Multiply budgeted production volume by
budget.
the standard quantity of hours to
determine direct labor hours needed
2. Multiply direct labor hours needed by the
standard price for labor to determine the
budgeted direct labor payroll
4
Manufacturing overhead is separated into

Describe the two types of manufacturing variable costs and fixed costs.
overhead.
1. Variable costs will vary as a total amount
but are constant (fixed) as a cost rate.
2. Fixed costs are fixed at the total amount,
but will have a varying fixed cost rate
based on changing levels of production
volume.
5
How are overhead allocation rates calculated? Overhead Allocation Rate = Budgeted Annual
MOH Costs ÷ Budgeted Annual Activity Volume
6
What is a standard cost sheet? A standard cost sheet lists the standard input
quantity and standard input price to determine
the production cost for each unit of a certain
good.
Test Bank Questions

Question 1 (1B5-AT06)
1B5-AT06
Jordan Auto has developed the following production plan.
Each unit contains three pounds of raw material; the desired raw material ending inventory each month is 120
percent of the next month's production, plus 500 pounds. (The beginning inventory meets this requirement.)
Jordan has developed the following direct labor standards for production of these units.
How much raw material should Jordan Auto purchase in March?
43,700 pounds.
32,900 pounds.
37,800 pounds.
27,000 pounds.
The monthly raw material purchase requirement must be sufficient to cover the necessary monthly
production requirement, plus the required monthly ending inventory, less the month's beginning
inventory.
Monthly raw material purchase amount = current month production requirement + current month's
ending inventory − current month's beginning inventory
Monthly raw material purchase amount = [(current month production requirement in units)(amount of
raw material required per unit)] + [(next month's production)(1.2) + 500 pounds] + (current month raw
materials beginning inventory) (Note: The current month's raw materials beginning inventory is
calculated by taking the current month's production and multiplying it by 1.2)
The production requirement is 3 pounds of raw material per unit of output.

The desired ending inventory for each month is 120% of, or 1.2 times the next month's production
requirement, which works out to 3.6 pounds (1.2 times 3 pounds) per unit multiplied by the next
month's production in units, plus 500 pounds. Keep in mind that the ending inventory for one
month will become the beginning inventory for the next month.
March raw materials requirement = March production units × pounds used per unit = 9,000 units × 3
pounds per unit = 27,000 pounds
March raw materials ending inventory = (1.2)(3 pounds)(12,000 April units) + 500 pounds = 43,200 + 500 =
43,700 pounds
March raw materials beginning inventory (which is the same as the February raw materials ending
inventory) = (1.2)(3 pounds)(9,000 March units) + 500 pounds = 32,400 + 500 = 32,900 pounds
Therefore, the March raw material purchase requirement = 27,000 pounds + 43,700 pounds − 32,900
pounds = 37,800 pounds.
1B5-AT07
Jordan Auto has developed the following production plan.
Each unit contains three pounds of raw material; the desired raw material ending inventory each month is
120% of the next month's production, plus 500 pounds. (The beginning inventory meets this requirement.)
Jordan has developed the following direct labor standards for production of these units.
Jordan Auto's total budgeted direct labor dollars for February usage should be:
$156,000.
$108,000.
$48,000.
$150,000.
The budgeted direct labor costs per month are calculated by taking the monthly budgeted direct labor
costs incurred in Department 1 and adding that to the monthly budgeted direct labor costs incurred in
Department 2.
The monthly budgeted direct labor costs for Department 1 are calculated by taking the monthly
budgeted production in units and multiplying that by the labor requirement of 2 direct labor hours per
unit, and then multiplying that by the hourly direct labor rate of $6.75. The monthly budgeted direct labor
costs for Department 2 are calculated by taking the monthly budgeted production in units and
multiplying that by the labor requirement of 0.5 direct labor hours per unit, and then multiplying that by
the hourly direct labor rate of $12.00.
Department 1 budgeted direct labor costs for February = (8,000 units)(2 direct labor hours per unit)($6.75)
= $108,000
Department 2 budgeted direct labor costs for February = (8,000 units)(0.5 direct labor hours per unit)
($12.00) = $48,000
Therefore, the budgeted direct labor costs for February for both Departments 1 and 2 = $108,000 +
$48,000 = $156,000.
1B5-AT09
Karmee Company has been accumulating operating data in order to prepare an annual profit plan. Details
regarding Karmee's sales for the first six months of the coming year are:
Karmee's cost of goods sold averages 40% of the sales value. Karmee's objective is to maintain a target
inventory equal to 30% of the next month's sales. Purchases of merchandise for resale are paid for in the
month following the sale.
The variable operating expenses (other than cost of goods sold) for Karmee are ten percent of sales and are
paid for in the month following the sale. The annual fixed operating expenses are presented below. All of these
are incurred uniformly throughout the year and paid monthly except for insurance and property taxes.
Insurance is paid quarterly in January, April, July, and October. Property taxes are paid twice a year in April
and October.
The purchases of merchandise that Karmee Company will need to make during February will be:
$182,000.
$266,000.
$254,000.
$344,000.
The monthly purchase requirement must be sufficient to cover the cost of goods sold requirement for the
month, plus the required ending inventory for the month, less the beginning inventory for the month.
The cost of goods sold requirement is 40% of the month's sales. The ending inventory is supposed to be
set at 30% of the following month's sales.
The budgeted purchases for February = cost of goods sold for February + February ending inventory -
February beginning inventory
Cost of goods sold for February = 0.4(February sales)
February projected ending inventory = (0.3)(0.4)(March sales)
February beginning inventory (same as January's projected ending inventory) = (0.3)(0.4)(February sales)
The budgeted purchases for February = 0.40($650,000) + (0.3)(0.4)($700,000) − (0.3)(0.4)($650,000) =

$260,000 + $84,000 − $78,000 = $266,000.
Question 4 (1B5-CQ06)
1B5-CQ06
Tyler Company produces one product and budgeted 220,000 units for the month of August with the following
budgeted manufacturing costs.
The variable cost per unit and the total fixed costs are unchanged within a production range of 200,000 to
300,000 units per month. The total for the batch set-up cost in any month depends on the number of
production batches that Tyler runs. A normal batch consists of 50,000 units unless production requires less
volume. In the prior year, Tyler experienced a mixture of monthly batch sizes of 42,000 units, 45,000 units, and
50,000 units. Tyler consistently plans production each month in order to minimize the number of batches. For
the month of September, Tyler plans to manufacture 260,000 units. What will be Tyler's total budgeted
production costs for September?
$4,134,000.
$3,930,000.
$3,498,000.
$3,914,000.
September budgeted production costs = (fixed costs) + (variable costs) + (batch set-up costs)
Variable costs = (260,000 units)($6.40 per unit) = $1,664,000
Batch set-up costs:
260,000 units require a minimum of 6 batches.
In August, 220,000 units were produced in 5 batches for a total of $880,000.
The cost per batch was $880,000/5 = $176,000.
6 batches at $176,000 per batch = $1,056,000
September budgeted production costs = ($1,210,000) + ($1,664,000) + ($1,056,000) = $3,930,000
1B5-CQ11
Krouse Company is in the process of developing its operating budget for the coming year. Given below are
selected data regarding the company's two products, laminated putter heads and forged putter heads, sold
through specialty golf shops.
Manufacturing overhead is applied to units produced on the basis of direct labor hours. Variable
manufacturing overhead is projected to be $25,000, and fixed manufacturing overhead is expected to be
$15,000.
The estimated cost to produce one unit of the laminated putter head is:
$46.
$62.
$52.
$42.
Production costs = direct materials + direct labor + manufacturing overhead
Direct materials = (1 lb. Steel)($5/lb.) + (1 lb. Copper)($15/lb.) = $5 + $15 = $20
Direct labor = (1 hour)($22/hour) = $22
Manufacturing overhead is calculated as follows:
Manufacturing overhead = (total expected overhead) / (total expected direct labor hours)
Manufacturing overhead = ($25,000 variable overhead + $15,000 fixed overhead) / 4,000 direct labor hours
= $10
Use the following calculation to determine direct labor hours for the overhead calculation:
Direct labor hours = (# laminated PHs produced)(# hours/laminated PH) + (# forged PHs produced)(#
hours/forged PH)
Production of PHs = (expected sales) + (expected ending inventory) − (expected beginning

inventory)
Production of laminated PHs = 2,000 + 60 − 60 = 2,000 units
Production of forged PHs = 8,200 + 100 − 300 = 8,000 units
Direct labor hours = (2,000 units)(1 hr/unit) + (8,000 units)(0.25 hrs/unit)
Direct labor hours = 2,000 hours + 2,000 hours = 4,000 hours
1B5-CQ14
Petersons Planters Inc. budgeted the following amounts for the coming year.
Overhead is estimated to be two times the amount of direct labor dollars. The amount that should be
budgeted for direct labor for the coming year is:
$315,000.
$105,000.
$157,500.
$210,000.
Since there was no change in work-in-process inventory, cost of goods manufactured equals total
manufacturing costs.
Cost of goods manufactured is calculated as follows:
Cost of goods manufactured = (ending finished goods) + (cost of goods sold) − (beginning finished goods)
Cost of goods manufactured = $25,000 + $400,000 − $10,000 = $415,000
Since, cost of goods manufactured is equal to total manufacturing costs, use the following formula to
solve for direct labor costs:
Total manufacturing costs = (direct material) + (direct labor) + (manufacturing overhead)
$415,000 = $100,000 + direct labor + 2(direct labor)
$415,000 = $100,000 + 3(direct labor)
$315,000 = 3(direct labor)
Direct labor = $105,000
Question 7 (1B5-LS01)
1B5-LS01
A firm has projected sales of 20,000 and 22,000 units for the next two periods (periods 1 and 2, respectively).
The firm maintains an ending finished goods inventory equal to 15% of the next period's projected sales. Each
unit requires 2 hours of direct labor at a cost of $15 per hour. Assuming that all inventory standards are
currently met, what is the direct labor budget for period 1?
$690,000.
$600,000.
$609,000.
$699,000.
Compute the number of units that must be produced in period 1
(budgeted production = budgeted sales + ending inventory − beginning inventory):
20,000 + desired ending inventory of 3,300 (22,000 × 15%) − beginning inventory of 3,000 (20,000 × 15%) =
20,300.
Each unit takes 2 hours at a cost of $15 per hour; 20,300 × 2 hours × $15 = $609,000.
1B5-LS10
A firm has projected sales of 50,000, 51,000, and 52,000 units for the next three periods (periods 1, 2 and 3,
respectively). The firm maintains an ending finished goods inventory equal to 10% of the next period's
projected sales. Each unit requires 5 pounds of direct material (DM). The firm maintains an ending DMs
inventory equal to 15% of the next period's DMs needs. Assume that all inventory standards are currently met.
How many pounds of material must be purchased in period 1?
251,250 pounds.
250,500 pounds.
255,500 pounds.
250,000 pounds.
Compute the number of units that must be produced in periods 1 and 2 (budgeted production = budgeted
sales + ending inventory − beginning inventory):
Period 1 = 50,000 + (51,000 × 0.1) − (50,000 × 0.1) = 50,100 units; period 2 = 51,000 + (52,000 × 0.1) − (51,000
× 0.1) = 51,100 units.
Then find DMs needed for both periods (multiply number of units to be produced by 5 lbs.). Getting period
1 DM needs 250,500 lbs. and period 2 DM needs of 255,500 lbs. To find DM purchases for period 1, take
period 1 DM needed + desired ending DM inventory of 38,325 pounds (255,500 lbs. × 15%) less beginning
DM inventory of 37,575 (250,500 × 15%) and get 251,250 pounds.
1B5-LS11
Using the information from Exhibit A, what is budgeted direct labor cost for February?
$384,000.
$381,000.
$422,250.
$344,250.
The number of units to be produced in February (budgeted production = budgeted sales + ending
inventory - beginning inventory) = 5,100 units + 530 units (10% of 5,300) − 510 units (10% of 5,100) = 5,120
units. Each unit requires $75 of direct labor. 5,120 units × $75/unit = $384,000.
1B5-LS20
The direct materials budget is often broken down into:
a direct materials mix budget and a direct materials yield budget.
a direct materials usage budget and a direct materials purchase budget.
a direct materials mix budget and a direct materials purchase budget.
a direct materials yield budget and a direct materials usage budget.
The direct usage budget plus the direct materials purchase budget equals the direct materials budget.
1B5-LS21
Which of the following correctly describes the materials purchase budget calculation?
(Sales forecast (in units) × direct materials per unit × direct materials cost) + desired ending direct
materials inventory − beginning direct materials inventory.
(Sales forecast (in units) × direct materials per unit × direct materials cost) + beginning direct materials
inventory − desired ending direct materials inventory.
(Number of units to be produced × direct materials per unit × direct materials cost) + beginning direct
materials inventory − desired ending direct materials inventory.
(Number of units to be produced × direct materials per unit × direct materials cost) + desired ending
direct materials inventory − beginning direct materials inventory.
The direct materials usage budget specifies the direct materials needed to meet production demands.
Therefore, one must begin with the number of units to be produced (not the number of units forecast in
sales). Since beginning inventory is already on hand, it is subtracted while desired ending inventory must
be met with production needs.
1B5-LS25
The pro forma statement of employee benefit costs, a budget schedule that is prepared as part of an
organization's annual profit plan, would include costs related to:
* Source: Retired ICMA CMA Exam Questions.

company-paid benefits and company-paid payroll taxes.
employees' gross wages and salaries and the related company-paid benefits.
all payroll related deductions withheld from employees and company-paid benefits.
employees' net wages and salaries and the related company-paid benefits.
Using a pro forma statement of employee benefit costs allows a company to view the cost associated
with company-paid benefits and company-paid payroll taxes.
1B5-LS27
A company that manufactures furniture is establishing its budget for the upcoming year. All of the following
items would appear in the overhead budget except for the:

overtime paid to the workers who perform production scheduling.
fringe benefits paid to the production supervisor.
freight charges paid for the delivery of raw materials to the company.
cost of glue used to secure the attachment of the legs to the tables.
The overhead budget includes those items that can not be directly traced back to the product itself;
therefore, items such as overtime paid to the workers who perform production scheduling, cost of glue
used to secure the attachment of the legs to the tables, and fringe benefits paid to the production
supervisor are all inclusive overhead costs.
Question 14 (1C1-LS25)
1C1-LS25
Which one of the following statements is correct concerning a flexible budget cost formula? Variable costs are
stated:

in total and fixed costs are stated in total.
per unit and fixed costs are stated per unit.

per unit and fixed costs are stated in total.
in total and fixed costs are stated per unit.
In the flexible budget cost formula, variable costs are stated per unit and fixed costs are stated in total.
Question 15 (tb.pc.bud.001_1805)
tb.pc.bud.001_1805
Which of the following items is correctly paired with its location?
Units to be produced – Direct materials budget
Unit selling price – Production budget
Total required units – Sales budget
Total sales – Direct materials budget
The units to be produced appears in the production budget, direct materials budget, and direct labor
budget. The direct materials budget includes the units to be produced, the materials required per unit,
and the purchase price of materials. Therefore, this is the correct answer.
tb.pc.bud.002_1805
Which of the following items is correctly paired with its location?
Beginning direct materials – Production budget
Expected unit sales – Production budget
Total required units – Direct materials budget
Desired ending finished goods units – Sales budget
The expected unit sales appears in the sales budget and the production budget. The production budget
includes expected units to be sold, expected beginning inventory, and targeted ending inventory.
Therefore, this is the correct answer.
tb.pc.bud.003_1805
How are a company's direct materials budget and direct labor budget related to each other?
They are both calculated based on the number of units to be sold.
They are both calculated based on machine hours.
They are both calculated based on the number of units to be produced.

They are both calculated based on overhead costs.
The direct materials budget includes the number of units to be produced, the expected materials
required per unit, and the expected purchase price of materials. The direct labor budget includes the
number of units to be produced, the expected labor hours required per unit, and the expected hourly
wage rate. This means the number of units to be produced is used in the direct materials budget and the
direct labor budget. Therefore, this is the correct answer.
tb.pc.bud.004_1805
Jackie and Carolyn are working together to develop the production budgets. If Jackie is working on the direct
materials budget and Carolyn is working on the direct labor budget, what common information will they both
need to complete their budgets?
The number of units to be sold each period.
The selling price of each unit.
The machine hours used to produce each unit.
The number of units to be produced each period.
The direct materials budget is based on the number of units expected to be produced, the expected
amount of materials to be used in each finished unit, and the expected price to pay for materials. The
direct labor budget is based on the number of units expected to be produced, the expected amount of
labor hours required to complete each finished unit, and the expected hourly wage to be paid. Both
require the number of units expected to be produced each period. Therefore, this is the correct answer.
tb.pc.bud.005_1805
How does the selling and administrative expense budget differ from the direct labor budget?
The direct labor budget is based on the number of units to be produced, whereas the selling and
administrative expense budget is based on the number of units the company expects to sell.
The direct labor budget is based on the number of units the company expects to sell, whereas the selling
and administrative expense budget it based on the number of units to be produced.
The direct labor budget is based on labor hours, whereas the selling and administrative expense budget
is based on machine hours.
The direct labor budget is based on machine hours, whereas the selling and administrative expense
budget is based on labor hours.
The selling and administrative budget details the expected amount to be paid for selling and
administrative expenses. It is based on the expected units to be sold and the expected variable and
selling administrative expenses. The direct labor budget details the amount of labor needed and the
expected amount to be paid in wages to direct labor workers. It is based on the number of units expected
to be produced, the expected amount of labor hours required to complete each finished unit, and the
expected hourly wage to be paid. Therefore, this is the correct answer.
tb.pc.bud.007_1805
Philip is a manager who oversees raw materials ordering, inventory levels, employee efficiency and
productivity, and assembly line maintenance. Which of the following budgets would Philip most likely help
develop?
Selling and administrative expense budget
Sales budget
Manufacturing overhead budget
Capital expenditure budget
The manufacturing overhead budget details the expected amount to be paid for manufacturing overhead
expenses in a period. It is based on expected usage of the allocation base and expected variable and fixed
manufacturing overhead expenses. Raw materials ordering, inventory levels, employee efficiency and
productivity, and assembly line maintenance are all related to the production and manufacturing
processes. As such, Philip is likely to be involved in the development of budgets related to the
manufacturing process. These include the production budget, the direct materials budget, the direct
labor budget, and the manufacturing overhead budget. Therefore, this is the correct answer.
tb.pc.bud.008_1805
Ellen is a manager who helps develop sales promotions, targets customers for upselling, and searches for
potential new customers. Which of the following budgets would Ellen most likely help develop?
Selling and administrative expense budget
Manufacturing overhead budget
Cash budget
Sales budget
The sales budget details the expected amount of revenue to be generated in a period. It is based on the
expected units to be sold and the expected selling price per unit sold. Since sales promotions, upselling,
and acquiring new customers are all likely to impact the expected units to be sold and the expected
selling price received per unit, Ellen would most likely help develop the sales budget. Therefore, this is
the correct answer.
tb.pc.bud.009_1805
Fukui Electronics is preparing its budgeted production for the coming quarter. The company plans to produce
6,000 units and will require 18,000 pounds of direct materials for production. The total materials required for
the quarter are 19,800 pounds. What are the direct materials per unit?
3 pounds.
3.3 pounds.
0.33 pounds.
1.1 pounds.
The total materials required to be purchased for the quarter is calculated as “Materials needed for
Production + Desired Ending Inventory − Expected Beginning Inventory.” Materials needed for production
is calculated as “Expected Production × Direct Materials per Unit.” Rearranging this results in direct
materials per unit being calculated as “Materials Needed for Production ÷ Expected Production.” In this
example the direct materials per unit is 3.0 pounds (18,000 ÷ 6,000). Therefore, this is the correct answer.
tb.pc.bud.010_1805
Cara's Wedding Designs makes and sells bridal dresses, bridesmaids’ dresses, tuxedos, and suits. The company
plans to produce 60 dresses during the next month and will require 390 yards of fabric for production. The total
fabric required for the month is 429 yards. What are the direct materials per dress?
0.15 yards.
6.5 yards.
7.15 yards.
1.1 yards.
The total materials required to be purchased for the quarter is calculated as “Materials needed for
is calculated as “Expected Production × Direct Materials per Unit.” Rearranging this results in direct
materials per unit being calculated as “Materials Needed for Production ÷ Expected Production.” In this
example the direct materials per unit is 6.5 years (390 ÷ 60). Therefore, this is the correct answer.
tb.pc.bud.011_1805
B&R Tax Services is preparing its direct labor budget for the first quarter of the year. The total direct labor
budget for the first quarter is $55,500. The firm expects to prepare 300 small returns which take 1 hour each,
200 medium returns which take 1.75 hours each, and 100 complicated returns which take 2.75 each. What is
B&R's direct labor cost per hour?
$92.50
$52.86
$60.00
$33.64
The total direct labor budget is calculated as “Expected Hours Needed × Direct Labor Cost Per Hour.”
Rearranging this results in direct labor per hour being calculated as “Total Direct Labor Budget ÷
Expected Hours Needed.” In this example 300 hours are needed for small returns (300 × 1 hour), 350 hours
for medium returns (200 × 1.75), and 275 hours for complicated returns (100 × 2.75). This sums to 925 total
hours. Since the total direct labor budget is $55,500, the direct labor cost per hour is $60.00 ($55,500 ÷
925). Therefore, this is the correct answer.
tb.pc.bud.012_1805
Casteel Lawn Service is preparing its direct labor budget for the first quarter of the year. The firm provides a
variety of mowing, clean-up, and planting services. The total direct labor budget for the first quarter is $22,200.
The firm expects 300 small jobs which take 1 hour each, 200 medium jobs which take 1.75 hours each, and 100
large jobs which take 2.75 each. What is Casteel's direct labor cost per hour?
$37.00
$21.15
$13.46
$24.00
The total direct labor budget is calculated as “Expected Hours Needed × Direct Labor Cost Per Hour.”
Rearranging this results in direct labor per hour being calculated as “Total Direct Labor Budget ÷
Expected Hours Needed.” In this example 300 hours are needed for small jobs (300 × 1 hour), 350 hours
for medium jobs (200 × 1.75), and 275 hours for large jobs (100 × 2.75). This sums to 925 total hours. Since
the total direct labor budget is $22,200, the direct labor cost per hour is $24.00 ($22,200 ÷ 925). Therefore,
this is the correct answer.
tb.pc.bud.013_1805
In their “off” months, Sanford Accountants employs five full-time accountants who each work 40 hours per
week. However, during tax season, Sanford hires additional accountants to help prepare tax returns for clients.
In the month of March, Sanford will need to log 3,500 labor hours to complete tax returns. How many
additional accountants does Sanford need to hire? Assume March has 22 work days.
15
14
16
12
To get 3,500 labor hours in March, approximately 159 hours are needed each day (3,500 ÷ 22). To get 159
hours each day, approximately 20 workers are needed each day (159 ÷ 8). Since the company already has
5 full-time workers, 15 more are needed. Therefore, this is the correct answer.
tb.pc.bud.014_1805
From July to December, Healing Hands Massage employs six full-time massage therapists, who each work 40
hours per week. However, they are busier from January to June as people redeem gift certificates that they
received at Christmas and as people pamper themselves after school is out or before a wedding. In order to fill
all their massage requests, they require 750 direct labor hours per week. How many more full-time massage
therapists does Healing Hands need to hire for the period from January to June?
12
13
10
15
To get 750 labor hours per week, approximately 19 massage therapists are needed each week (750 ÷ 40).
Since the company already has 6 full-time massage therapists, 13 more are needed. Therefore, this is the
correct answer.
tb.pc.bud.015_1805
At the Progressa Company, the required June production is 44,000 units. To make one unit of finished product,
three pounds of direct material Z are required. Actual beginning and desired ending inventories of direct
material Z are 100,000 and 110,000 pounds, respectively. How many pounds of direct material Z must be
purchased?
122,000
132,000
142,000
54,000
The total materials required to be purchased for a period is calculated as “Materials needed for
is calculated as “Expected Production × Direct Materials per Unit.” In this example 132,000 pounds are
needed for production (44,000 × 3 pounds per unit). This means that the company needs to purchase
142,000 pounds of materials (132,000 + 110,000 − 100,000). Therefore, this is the correct answer.
tb.pc.bud.016_1805
Rose Company is preparing its direct labor budget for May. Projections for the month are that 8,350 units are to
be produced and that direct labor time is three hours per unit. If the labor cost per hour is $9, what is the total
budgeted direct labor cost for May?
$217,350
$221,400
$243,000
$225,450
Expected direct labor cost is calculated as “Expected Production x Hours Needed per Unit x Expected
Hourly Wage.” In this example it is 8,350 units × 3 hours per unit × $9 per hour. This results in expected
direct labor cost of $225,450. Therefore, this is the correct answer.
tb.pc.bud.017_1805
Sarah is trying to prepare the manufacturing budgets. She believes that the manufacturing overhead budget
will be the most complicated, so she decides to tackle it first before the direct materials and direct labor
budgets. Do you think this is the best way to prepare the budgets? Why or why not?
No, because the manufacturing overhead budget depends on the direct labor budget, so the direct labor
budget needs to be prepared first.
No, because the manufacturing overhead budget depends on the direct materials budget, so the direct
materials budget needs to be prepared first.
Yes, because the manufacturing overhead budget only depends on the sales budget, which should
already be complete.
Yes, because the manufacturing overhead budget does not depend on any other budget, so it can be
prepared at any time.
The manufacturing overhead budget details expected spending for manufacturing overhead. The
variable component of the budget is often based on direct labor hours as direct labor is used to allocate
variable manufacturing overhead; consequently, the direct labor budget needs to be prepared prior to
the manufacturing overhead budget. This is the correct answer.
tb.pc.bud.018_1805
Abernathy Enterprises expects to produce and sell 14,286 units in February. Each unit costs $12.42 to produce
and sells for $23.50. Abernathy sells its products to retail stores in sets of six. Each set of six costs Abernathy
$1.25 to ship. In addition, sales commissions equal 5% of the gross profit for each unit. What will Abernathy's
total selling and administrative variable expenses be for February?
$7,914.44
$177,432.12
$25,771.94
$10,890.69
Variable selling and administrative expenses consist of shipping costs and sales commissions. There will
be a total of 2,381 shipments (14,286 units ÷ 6 units per shipment). If each costs $1.25, total shipping costs
will be $2,976.25. Sales commissions are 5% of gross profit. Gross profit is selling price less production
costs, or $11.08 per unit ($23.50 − $12.42). The commission is therefore $0.554 per unit ($11.08 × 5%) for a
total of $7,914.44. The total variable selling and administrative expenses will be $10,890.69 ($2,976.25 +
$7,914.44). Therefore, this is the correct answer.
tb.pc.bud.019_1805
Whiting Industries expects to produce and sell 3,180 units in May. Each unit costs $3.47 to produce and sells for
$8.59. Whiting sells its products to retail stores in sets of four. Each set of four costs Whiting $1.00 to ship. In
addition, sales commissions equal 3% of the gross profit for each unit. What will Whiting's total selling and
administrative variable expenses be for May?
$1,283.45
$3,668.45
$11,034.60
$795.00
Variable selling and administrative expenses consist of shipping costs and sales commissions. There will
be a total of 795 shipments (3,180 units ÷ 4 units per shipment). If each shipment costs $1.00, total
shipping costs will be $795.00. Sales commissions are 3% of gross profit. Gross profit is selling price less
production costs, or $5.12 per unit ($8.59 − $3.47). The commission is therefore $0.1536 per unit ($5.12 ×
3%) for a total of $488.45. The total variable selling and administrative expenses will be $1,283.45 ($795 +
$488.45). Therefore, this is the correct answer.
tb.pc.bud.020_1805
The managerial accountant for Arbortree Pots has put together the following standard costing estimates for
the company's line of cast iron flower pots based on a manufacturing budget of 12,500 pots:
Total direct labor $28,500

Total direct material $16,400
Total factory overhead $32,750
Advertising expense $6,500
Marketing expense $8,250
Office depreciation $7,500

Depreciation on delivery trucks $18,000
What is Arbortree's standard overhead rate per direct labor dollar, assuming all overhead shown above is
variable?
$1.72
$1.15
$0.87
$2.56
The standard overhead rate is calculated as “Budgeted Manufacturing Overhead ÷ Budgeted Allocation
Base.” Manufacturing overhead refers to manufacturing costs that are not directly traceable to products
and it does not include non-manufacturing costs. In this example only “total factory overhead” of $32,750
qualifies as manufacturing overhead. The allocation base is total direct labor dollars. This results in a
standard overhead rate of $1.15 per direct labor dollar ($32,750 ÷ $28,500). This is the correct answer.
tb.pc.bud.021_1805
Doodle Company's manufacturing overhead budget for July is presented below.
July
Direct labor cost $124,600
Variable overhead cost 105,910
Fixed overhead cost 131,990
Total budgeted manufacturing overhead 237,900
Depreciation 15,200
Total cash costs ?
What is Doodle Company's variable overhead rate?
$1.18 per direct labor dollar
The variable overhead rate is calculated as “Variable Manufacturing Overhead ÷ Allocation Base.”
Manufacturing overhead refers to manufacturing costs that are not directly traceable to products. The
allocation base is direct labor cost. In this example the variable manufacturing overhead rate is $0.85 per
direct labor dollar ($105,910 ÷ $124,600). Therefore, this is the correct answer.
tb.pc.bud.022_1805
Major Brands Inc. a clothing manufacturer, is planning to produce 8,700 jackets and sell 9,000 jackets during
February. Each jacket requires 4.4 yards of fabric at $4.00 per yard and 0.25 direct labor hours at $12 per hour.
Manufacturing overhead is applied at 110% of direct labor costs. Major Brands has 39,000 yards of fabric in
beginning inventory and wants 45,000 yards in ending inventory. What is the total amount of budgeted
manufacturing overhead for February?
$114,840
$29,700
$505,296
$28,710
Manufacturing overhead refers to manufacturing costs that are not directly traceable to products. In this
example manufacturing overhead is allocated as 110% of direct labor dollars. This means that overhead
will be $1.10 for every $1.00 in direct labor. To produce 8,700 jackets, 2,175 hours of direct labor will be
required. At a wage rate of $12 per hour, budgeted total direct labor dollars would be $26,100 (2,175 ×
$12). This results in budgeted manufacturing overhead of $28,710 ($26,100 × 110%). Therefore, this is the
correct answer.
tb.pc.bud.023_1805
Natural Beauty, a cosmetic manufacturer, is planning to produce 60,900 lipsticks and sell 63,000 lipsticks
during November. Each lipstick requires 4.4 ounces of raw material at $0.28 per ounce and 0.25 direct labor
hours at $12 per hour. Manufacturing overhead is applied at 110% of direct labor costs. Natural Beauty has
273,000 ounces of raw material in beginning inventory and wants 315,000 ounces in ending inventory. What is
the total amount of budgeted manufacturing overhead for November?
$200,970
$803,880
$207,900
$3,537,072
In this example manufacturing overhead is allocated as 110% of direct labor dollars. This means that
overhead will be $1.10 for every $1.00 in direct labor. To produce 60,900 lipsticks, 15,225 hours of direct
labor will be required. At a wage rate of $12 per hour, budgeted total direct labor dollars would be
$182,700 (15,225 × $12). This results in budgeted manufacturing overhead of $200,970 ($15,225 × 110%).
tb.pc.bud.024_1805
Gulfcoast Shrimp Packaging supplies frozen shrimp to grocery chains. It expects production of 380 tons and
sales of 400 tons of shrimp in the next quarter. Each ton requires 50 direct labor hours and employees are paid
$15 per hour. Manufacturing overhead is applied at 120% of direct labor costs. What is the total amount of
budgeted manufacturing overhead for the quarter?
$360,000
$342,000
$6,840
$702,000
example, overhead will be $1.20 for every $1.00 in direct labor. To produce 380 tons, 19,000 hours of
direct labor will be required. At a wage rate of $15 per hour, budgeted total direct labor dollars would be
$285,000. This results in budgeted manufacturing overhead of $342,000 ($285,000 × 120%). Therefore, this
is the correct answer.
tb.pc.bud.025_1805
PB Popcorn manufactures gourmet caramel corn, cheese corn, and other flavors of popcorn. It expects
production of 266 cartons and sales of 280 cartons of popcorn in the next quarter. Each carton requires 5 direct
labor hours and employees are paid $18 per hour. Manufacturing overhead is applied at 120% of direct labor
cost. What is the total amount of budgeted manufacturing overhead for the quarter?
$30,240
$23,940
$28,728
$58,968
example manufacturing overhead is allocated as 120% of direct labor dollars. This means that overhead
will be $1.20 for every $1.00 in direct labor. To produce 266 cartons, 1,330 hours of direct labor will be
required. At a wage rate of $18 per hour, budgeted total direct labor dollars would be $23,940 (1,330 ×
$18). This results in budgeted manufacturing overhead of $28,728 ($23,940 × 120%). Therefore, this is the
correct answer.
tb.pc.bud.026_1805
Malloy Metals has the following overhead costs per quarter:
Variable Costs
Indirect materials $1.20/hour
Indirect labor $1.60/hour
Utilities $0.25/hour
Maintenance $0.15/hour
Fixed Costs
Supervisory salaries $15,000
Depreciation $2,400
Property taxes/insurance $6,500
Maintenance $4,700
If Malloy expects to have 4,000 labor hours in the first quarter, 4,500 in the second quarter, 5,000 in the third
quarter, and 5,500 in the fourth quarter, what will their total manufacturing overhead budget be?
$60,800
$114,400
$89,400
$175,200
example variable manufacturing overhead is budgeted to be $3.20 per direct labor hour ($1.20 + $1.60 +
$0.25 + $0.15). With a total of 19,000 labor hours budgeted for the year, total variable manufacturing
overhead is budgeted to be $60,800 (19,000 × $3.20). Fixed manufacturing overhead is budgeted to be
$28,600 per quarter ($15,000 + $2,400 + $6,500 + $4,700) and $114,400 annually ($28,600 × 4). This results
in total budgeted manufacturing overhead of $175,200 ($60,800 + $114,400). Therefore, this is the correct
answer.
tb.pc.bud.027_1805
Parham Beauty Products has the following overhead costs per quarter:
Variable Costs
Indirect materials $1.60/hour
Indirect labor $1.80/hour
Utilities $0.19/hour
Maintenance $0.10/hour
Fixed Costs
Supervisory salaries $22,500
Depreciation $3,600
Property taxes/insurance $4,800
Maintenance $3,200
If Parham expects to have 8,000 labor hours in the first quarter, 9,000 in the second quarter, 10,000 in the third
quarter, and 9,000 in the fourth quarter, what will they need to budget for their total manufacturing overhead?
$269,240
$166,940
$132,840
$136,400
example variable manufacturing overhead is budgeted to be $3.69 per direct labor hour ($1.60 + $1.80 +
$0.19 + $0.10). With a total of 36,000 labor hours budgeted for the year, total variable manufacturing
overhead is budgeted to be $132,840 (36,000 × $3.69). Fixed manufacturing overhead is budgeted to be
$34,100 per quarter ($22,500 + $3,600 + $4,800 + $3,200) and $136,400 annually ($34,100 × 4). This results
in total budgeted manufacturing overhead of $269,240 ($132,840 + $136,400). Therefore, this is the
correct answer.
tb.pc.bud.028_1805
PB Popcorn manufactures gourmet caramel corn, cheese corn, and other flavors of popcorn. It expects sales of
280 cartons of popcorn in the next quarter and it plans to produce 266 cartons during the same quarter. Each
carton requires 5 direct labor hours and employees are paid $18 per hour. Manufacturing overhead is applied
at 120% of direct labor costs. How much is the total amount of budgeted direct labor for the quarter?
$25,200
$28,728
$23,940
$49,140
Budgeted direct labor is defined as the expected amount to be paid for direct labor to produce the
budgeted number of units. It is based on budgeted production, the budgeted amount of direct labor
hours required to produce one unit, and the budgeted wage rate to be paid. It is calculated as “Budgeted
Production × Budgeted Hours per Unit × Budgeted Wage Rate.” PB would budget $23,940 for direct labor
to produce the budgeted production of 266 cartons (266 × 5 × $18). Therefore, this is the correct answer.
tb.pc.bud.029_1805
Gulfcoast Shrimp Packaging supplies frozen shrimp to grocery chains. It expects sales of 400 tons of shrimp in
the next quarter and it plans to produce 380 tons during the same quarter. Each ton requires 50 direct labor
hours and employees are paid $15 per hour. Manufacturing overhead is applied at 120% of direct labor costs.
How much is the total amount of budgeted direct labor for the quarter?
$300,000
$342,000
$585,000
$285,000
hours required to produce one unit, and the budgeted wage rate to be paid. It is calculated as “Budgeted
Production × Budgeted Hours per Unit × Budgeted Wage Rate.” Gulfcoast would budget $285,000 for
direct labor to produce the budgeted production of 380 tons (380 × 50 × $15). Therefore, this is the correct
answer.
tb.pc.bud.030_1805
Katie's Cleaning Service has cleaning contracts for 15 apartments, 45 family homes, and 25 office buildings.
She estimates that an apartment takes 4 hours to clean, a home takes 6 hours to clean, and an office building
takes 10 hours to clean. Katie pays her cleaning staff $12.50/hour. If each location is cleaned once per week,
how much does Katie need to budget for direct labor each month? Assume there are four weeks per month.
$29,000
$7,250
$28,333
$7,083
hours required to produce one unit, and the budgeted wage rate to be paid. Katie's would require 60
hours to clean apartments (15 × 4), 270 to clean family homes (45 × 6), and 250 hours to clean office
buildings (25 × 10) per week. This translates to 2,320 hours per month. Katie's would budget $29,000 for
direct labor for these 2,320 hours (2,320 × $12.50). Therefore, this is the correct answer.
tb.pc.bud.031_1805
James Company determines that 13,500 pounds of direct materials are needed for production in July. There
are 800 pounds of direct materials on hand at July 1 and the desired ending inventory is 700 units. If the cost
per unit of direct materials is $3, what is the budgeted total cost of direct materials purchases?
$42,600
$40,200
$40,800
$40,500
The total materials required to be purchased for a period is calculated as “Materials needed for
Production + Desired Ending Inventory − Expected Beginning Inventory.” James needs to purchase
13,400 pounds of materials in July (13,500 + 700 − 800). At a cost of $3 per pound, James should budget to
spend $40,200 in July to purchase direct materials (13,400 × $3). Therefore, this is the correct answer.
tb.pc.bud.032_1805
Paradise Inc. is preparing its annual direct labor budget. The company's total budgeted direct labor cost is
$616,000. Each unit requires 4 direct labor hours at $10 per direct labor hour. How many units is the company
budgeting to produce?
61,600
154,000
15,400
6,160
Total budgeted direct labor cost is calculated as “Budgeted Production × Budgeted Hours per Unit ×
Budgeted Wage Rate.” Rearranging the figures results in budgeted production as “Total Budgeted Direct
Labor Cost ÷ (Budgeted Hours per Unit × Budgeted Wage Rate).” Based on these figures, Paradise
budgeted to produce 15,400 units ($616,000 ÷ (4 × $10)). Therefore, this is the correct answer.
tb.pc.bud.033_1805
Electra Manufacturing is preparing its annual direct labor budget. The company's total budgeted direct labor
cost is $739,200. Each unit requires 2 direct labor hours at $10 per direct labor hour. How many units is the
company budgeting to produce?
147,840
73,920
369,600
36,960
Total budgeted direct labor cost is calculated as “Budgeted Production × Budgeted Hours per Unit ×
Budgeted Wage Rate.” Rearranging the figures results in budgeted production as “Total Budgeted Direct
Labor Cost ÷ (Budgeted Hours per Unit × Budgeted Wage Rate).” Based on these figures, Electra budgeted
to produce 36,960 units ($739,200 ÷ (2 × $10)). Therefore, this is the correct answer.
tb.pc.bud.034_1805
In early March, Percy's Pickled Snacks is preparing the budget for pickled beets for the upcoming quarter.
Budgeted sales are 12,000 jars for April, 16,000 jars for May, and 19,000 jars for June. Each jar requires 1.2
pounds of beets and sells for $15. Percy requires ending Finished Goods Inventory equal to 25% of the
following month's budgeted sales. If the price of beets is $2 per pound, what is Percy's budgeted cost for beets
for May?
$40,200
$33,500
$36,600
$30,500
Total budgeted direct material cost is calculated as “Budgeted Production × Budgeted Materials per Unit
× Budgeted Price.” Budgeted production is calculated as “Budgeted Sales + Desired Ending Inventory −
Budgeted Beginning Inventory.” The budgeted beginning inventory for May is 4,000 jars (16,000 × 25%)
and the desired ending inventory for May is 4,750 jars (19,000 × 25%). Based on these figures, Percy would
budget to produce 16,750 jars in May (16,000 + 4,750 – 4,000). It would need 20,100 pounds of beets to
produce these jars (16,750 × 1.2). At a price of $2 per pound, it would cost $40,200 to purchase these beets
(20,100 × $2). Overall, the budgeted cost for beets is $40,200 (16,750 × 1.2 × $2); therefore, this is the
correct answer.
tb.pc.bud.035_1805
In early February, Heavenly Swimwear is preparing the budget for swimsuits for the summer season. Budgeted
sales are 47,600 suits for May, 58,200 suits for June, and 43,500 suits for July. Each suit requires 1.3 yards of
fabric. Each swimsuit sells for $22. Heavenly Swimwear requires ending Finished Goods inventory equal to 30%
of the following month's budgeted sales. If the price of fabric is $2 per yard, what is Heavenly Swimwear's
budgeted cost for fabric for June?
$107,580
$139,854
$162,786
$125,220
× Budgeted Price.” Budgeted production is calculated as “Budgeted Sales + Desired Ending Inventory –
Budgeted Beginning Inventory.” The budgeted beginning inventory for June is 17,460 swimsuits (58,200 ×
30%) and the desired ending inventory for June is 13,050 swimsuits (43,500 × 30%). Based on these
figures, Heavenly would budget to produce 53,790 swimsuits in June (58,200 + 13,050 – 17,460). It would
need 69,927 yards of fabric to produce these swimsuits (53,790 × 1.3). At a price of $2 per yard, it would
cost $139,854 to purchase this fabric (69,927 × $2). Overall, the budgeted cost for fabric is $139,854
(53,790 × 1.3 × $2). Therefore, this is the correct answer.
tb.pc.bud.036_1805
LDM Co. is preparing its direct materials budget. The company has budgeted to purchase 126,400 yards of
direct materials. The desired ending inventory of direct materials is 96,000 yards and the total materials
required is 138,000 yards. Assuming there is no beginning inventory, what is the amount of total direct
materials needed for production?
11,600 yards
30,400 yards
42,000 yards
264,400 yards
The total materials needed for a period is calculated as “Materials for Production + Desired Ending
Inventory.” Rearranging these figures results in materials for production being calculated as “Total
Materials Needed for a Period – Desired Ending Inventory.” If a total of 138,000 yards are needed and
96,000 yards are needed for ending inventory, the other 42,000 yards must be for production (138,000 –
96,000). Therefore, this is the correct answer.
tb.pc.bud.037_1805
Cupid Manufacturing is preparing its direct materials budget. The company has budgeted to purchase 88,480
pounds of direct materials. The desired ending inventory of direct materials is 67,200 pounds and the total
materials required is 96,600 pounds. What is the amount of total direct materials needed for production?
8,120 pounds
21,280 pounds
185,080 pounds
29,400 pounds
The total materials needed for a period is calculated as “Materials for Production + Desired Ending
Inventory.” Rearranging these figures results in materials for production being calculated as “Total
Materials Needed for a Period – Desired Ending Inventory.” If a total of 96,600 pounds are needed and
67,200 yards are needed for ending inventory, the other 29,400 yards must be for production (96,600 –
67,200). Therefore, this is the correct answer.
tb.pc.bud.038_1805
Norma's Tack produces saddles for horseback riders. During October, November, and December, Norma
budgets for sales of 6,400 saddles, 8,200 saddles, and 10,300 saddles, respectively. Each saddle requires 1.80
yards of leather (including .25 yard for waste). The company requires an ending inventory of leather equal to
30% of the following month's production needs. How many yards of leather does Norma need to purchase in
November?
15,894 yards
13,626 yards
8,830 yards
20,322 yards
The total budgeted direct materials to be purchased is calculated as “Material Needed for Budgeted
Production + Desired Ending DM Inventory – Budgeted Beginning DM Inventory.” Materials needed for
budgeted production is calculated as “Budgeted Production × Materials Needed per Unit.” To produce
8,200 saddles in November, 14,760 yards of leather will be needed (8,200 × 1.8). The budgeted beginning
DM inventory for November would be 4,428 yards (14,760 × 30%) and the desired ending DM inventory for
November would be 5,562 yards (10,300 × 1.8 × 30%). Based on these figures, Norma needs to budget to
purchase 15,894 yards of leather in November (14,760 + 5,562 − 4,428). Therefore, this is the correct
answer.
tb.pc.bud.039_1805
Sports Enthusiasts manufactures skateboards. During May, June, and July, Sports Enthusiasts budgets for
sales of 12,300 skateboards, 10,800 skateboards, and 9,700 skateboards, respectively. Each skateboard
requires 4 wheels. The company requires an ending inventory of wheels equal to 20% of the following month's
production needs. How many wheels does Sports Enthusiasts need to purchase in June?
50,960 wheels
42,320 wheels
34,560 wheels
43,200 wheels
Production + Desired Ending DM Inventory − Budgeted Beginning DM Inventory.” Materials needed for
budgeted production is calculated as “Budgeted Production × Materials Needed per Unit.” To produce
10,800 skateboards in June, 43,200 wheels will be needed (10,800 × 4). The budgeted beginning DM
inventory for June would be 8,640 wheels (43,200 × 20%) and the desired ending DM inventory for June
would be 7,760 wheels (9,700 × 4 × 20%). Based on these figures, Sports needs to budget to purchase
42,320 wheels in June (43,200 + 7,760 − 8,640). Therefore, this is the correct answer.
tb.pc.bud.040_1805
Bake-Fine is planning its material purchase budget. During the month, it expects to sell 50,000 units, each of
which requires 1.5 pounds of flour. In addition, it projects a beginning inventory of 3,500 units and a closing
inventory of 5,500 units. If the standard material cost of flour is $1.35 per pound, how much is the company's
purchasing budget for flour for the month?
$97,200
$112,387.50
$105,300
$101,250
× Budgeted Price.” Budgeted production is calculated as “Budgeted Sales + Desired Ending Inventory –
Budgeted Beginning Inventory.” Based on the figures provided, Bake-Fine would budget to produce
52,000 units this month (50,000 + 5,500 − 3,500). It would need 78,000 pounds of flour to produce these
units (52,000 × 1.5). At a price of $1.35 per pound, it would cost $105,300 to purchase this flour (78,000 ×
$1.35). Overall, the budgeted cost to purchase flour for the month is $105,300 (52,000 × 1.5 × $1.35).
tb.pc.bud.041_1805
Boyd Industries had a beginning balance of $59,600 in its Raw Materials Inventory account. At the end of the
period, the ending balance in this account was $61,300. During the period, Boyd purchased $232,700 of
materials. What was the cost of raw materials used during the period?
$353,600
$111,800
$232,700
$231,000
Production + Desired Ending DM Inventory − Budgeted Beginning DM Inventory.” Rearranging these
figures results in materials used during the period being calculated as “Materials Purchased − Desired
Ending DM Inventory + Budgeted Beginning DM Inventory.” In this example, Boyd used $231,000 for
production this period ($232,700 − $61,300 + $59,600). Therefore, this is the correct answer.
tb.pc.bud.042_1805
Tim's Toys, a maker of high-end collectible teddy bears, had a beginning balance of $71,200 in its Raw
Materials Inventory account. At the end of the period, the ending balance in this account was $75,000. During
the period, Tim purchased $150,700 of materials. What was the cost of raw materials used during the period?
$146,900
$225,700
$75,700
$221,900
Production + Desired Ending DM Inventory − Budgeted Beginning DM Inventory.” Rearranging these
figures results in materials used during the period being calculated as “Materials Purchased − Desired
Ending DM Inventory + Budgeted Beginning DM Inventory.” In this example, Tim used $146,900 for
production this period ($150,700 − $75,000 + $71,200). This is the correct answer.
tb.pc.bud.043_1805
Firecracker Wings has budgeted the following costs for a month:
Wings, breading, and sauce $4,900

Direct labor (Variable) 3,500
Rent 1,100
Depreciation 900
Other fixed costs 400
If 24,000 wings are cooked and sold in this month, and each wing sells for $0.80, what is the budgeted variable
cost per unit?
$0.45
$0.35
$0.80
None of these answer choices is correct
Budgeted variable cost per unit is calculated as “Total Budgeted Variable Cost ÷ Budgeted Units.” Wings,
breading, and sauce and direct labor are variable costs as they will change in direct proportion to
changes in output. The two add up to $8,400. Rent, depreciation, and other fixed costs are fixed costs as
they do not change when output changes. Dividing the $8,400 by 24,000 budgeted units gives variable
cost per unit of $0.35 ($8,400 ÷ 24,000). Therefore, this is the correct answer.
tb.pc.bud.044_1805

Rent 1,100
Depreciation 900
If 24,000 wings are cooked and sold in this month, and they sell for $0.80 each, what is the budgeted total
variable cost?
$9,500
$10,400
$8,400
$10,800
Total variable costs change in direct proportion to changes in output. Wings, breading, and sauce and
direct labor are variable costs as they will change in direct proportion to changes in output. The two add
up to $8,400. Rent, depreciation, and other fixed costs are fixed costs as they do not change when output
changes. Therefore, this is the correct answer.
tb.pc.bud.045_1805

Direct labor (Variable) $3,500
Rent $1,100
Depreciation $900
Other fixed costs $400
If 24,000 wings are cooked and sold in this month, and each wing sells for $0.80, what is the budgeted total
fixed cost?
$7,300
$8,400
$10,800
$2,400
Total fixed costs do not change when output changes. Rent, depreciation, and other fixed costs are all
fixed costs and they add up to $2,400. Wings, breading, and sauce and direct labor are variable costs as
they will change in direct proportion to changes in output. Therefore, this is the correct answer.
tb.pc.bud.046_1805

Rent 1,100
Depreciation 900
If 24,000 wings are cooked and sold in this month, and each wing sells for $0.80, what is the budgeted fixed
cost per unit?
$0.10
$0.35
$0.80
$0.45
Budgeted fixed cost per unit is calculated as “Total Budgeted Fixed Cost ÷ Budgeted Units.” Total fixed
costs do not change when output changes. Rent, depreciation, and other fixed costs are all fixed costs
and they add up to $2,400. Dividing the $2,400 by 24,000 budgeted units gives fixed cost per unit of $0.10
($2,400 ÷ 24,000). This is the correct answer.
tb.pc.bud.047_1805
Determine the correct cost for Gabby's Gifts using the following information: materials, $4,200; labor cost,
$1,600; depreciation, $800; rent, $700; and other fixed costs, $500. The company produced 400 ceramic pots in
May.
The fixed cost per unit is $3.75.
The variable cost per unit is $14.50.
The fixed cost per unit is $19.50.
The total cost per unit is $14.50.
Budgeted variable cost per unit is calculated as “Total Budgeted Variable Cost ÷ Budgeted Units.”
Materials and labor are variable costs as they will change in direct proportion to changes in output. The
two add up to $5,800. The other costs are fixed costs as they do not change when output changes.
Dividing the $5,800 by 400 pots gives variable cost per unit of $14.50 per unit ($5,800 ÷ 400). Therefore,
this is the correct answer.
tb.pc.bud.048_1805
Nathan is working on the operating budgets for his company. He has already done the sales and production
budgets, and he is now working on the direct materials, direct labor, and manufacturing overhead budgets. He
decides to do the direct labor budget first, then the manufacturing overhead budget, then the direct materials
budget. Do you think this is an appropriate way to prepare the budgets? Why or why not?
Yes, because the direct materials budget depends on the direct labor and manufacturing overhead
budgets, so it should always be prepared last.
Yes, because the manufacturing overhead budget depends on the direct labor budget, but none of the
other budgets depend on the direct materials budget.
No, because the direct labor budget depends on the direct materials budget, so the direct materials
budget should be prepared first.
No, because the manufacturing overhead budget depends on the direct materials budget, so the direct
materials budget should be prepared second.
All three budgets are based on the production budget. The variable component of the manufacturing
overhead budget is often based on direct labor hours as direct labor is used to allocate variable
manufacturing overhead; consequently, the direct labor budget needs to be prepared prior to the
manufacturing overhead budget. The direct labor and manufacturing overhead budgets do not depend
on the direct materials budget, so the direct materials budget can be prepared independent of the other
two. Therefore, this is the correct answer.
tb.pc.bud.049_1809
Which of the following statements concerning a direct materials purchase budget is most correct?
The direct materials purchases budget is based on materials needed for production, beginning finished
goods inventory, and desired ending finished goods inventory.
The direct materials purchases budget is based on materials needed for production, beginning direct
materials inventory, and desired ending direct materials inventory.
The direct materials purchases budget is based on budgeted production, beginning finished goods
inventory, and desired ending finished goods inventory.
The direct materials purchases budget is based on budgeted production, beginning direct materials
inventory, and desired ending direct materials inventory.
Correct. A direct materials purchases budget is an estimate of the quantity and cost of direct materials to
be purchased in a period. The quantity to be purchased is based on materials needed for production,
beginning direct materials inventory, and desired ending direct materials inventory.
tb.pc.bud.050_1809
All of the following statements concerning a direct materials purchase budget are correct except:
As budgeted production increases, the amount of materials to purchase increases.
As desired ending direct materials inventory increases, the amount of materials to purchase increases.
As beginning direct materials inventory increases, the amount of materials to purchase increases.
As the amount of direct materials required per unit increases, the amount of materials to purchase
increases.
beginning direct materials inventory, and desired ending direct materials inventory. Materials needed
during a period come from beginning inventory of direct materials and material purchases. As beginning
direct materials inventory increases, the amount of materials to purchase decreases, not increases.
tb.pc.bud.051_1809
As budgeted production decreases, the amount of materials to purchase decreases.
As desired ending direct materials inventory increases, the amount of materials to purchase decreases.
As beginning direct materials inventory increases, the amount of materials to purchase decreases.
As the amount of direct materials required per unit decreases, the amount of materials to purchase
decreases.
beginning direct materials inventory, and desired ending direct materials inventory. As desired ending
direct materials inventory increases, the amount of materials needed for the period increases. As
materials needed for the period increases, the amount of materials to purchase increases, not decreases.
tb.pc.bud.052_1809
As budgeted production decreases, the amount of materials to purchase decreases.
As desired ending direct materials inventory deceases, the amount of materials to purchase decreases.
As beginning direct materials inventory decreases, the amount of materials to purchase decreases.
As the amount of direct materials required per unit decreases, the amount of materials to purchase
decreases.
beginning direct materials inventory, and desired ending direct materials inventory. Materials needed
during a period come from beginning inventory of direct materials and material purchases. As beginning
direct materials inventory decreases, the amount of materials to purchase increases, not decreases.
tb.pc.bud.053_1809
As budgeted production increases, the amount of materials to purchase increases.
As desired ending direct materials inventory decreases, the amount of materials to purchase increases.
As beginning direct materials inventory decreases, the amount of materials to purchase increases.
As the amount of direct materials required per unit increases, the amount of materials to purchase
increases.
Correct. As desired ending direct materials inventory decreases, the amount of materials needed for the
period decreases. As materials needed for the period decreases, the amount of materials to purchase
decreases, not increases.
tb.pc.bud.054_1809
Which of the following statements concerning the relationship between the manufacturing overhead budget
and production budget is correct?
As budgeted production increases, the total budgeted fixed manufacturing overhead increases.
As budgeted production decreases, the budgeted fixed manufacturing overhead per unit decreases.
As budgeted production increases, the budgeted total variable manufacturing overhead increases.
As budgeted production increases, the budgeted variable manufacturing overhead per unit increases.
Correct. A manufacturing overhead budget is an estimate of the total expected manufacturing overhead
costs to be incurred in a period. It is typically separated into variable and fixed components. The total
amount of variable manufacturing overhead increases as production increases as the definition of a
variable cost is a cost that changes in direct proportion to changes in activity.
tb.pc.bud.055_1809
Which of the following statements concerning a manufacturing overhead budget is correct?
A production budget must be prepared before a manufacturing overhead budget since the
manufacturing overhead budget is based on budgeted production.
A manufacturing overhead budget must be prepared before a production budget since the production
budget is based on budgeted manufacturing overhead.
A sales budget must be prepared before a manufacturing overhead budget since the manufacturing
overhead budget is based on budgeted sales.
A direct materials budget must be prepared before a manufacturing overhead budget since the
manufacturing overhead budget is based on budgeted direct materials.
Correct. A manufacturing overhead budget is an estimate of the total expected manufacturing overhead
costs to be incurred in a period. It is based on the number of units expected to be produced during the
period. As a result, a production budget must be prepared before a manufacturing overhead budget can
be prepared.
tb.pc.bud.056_1809
All of the following statements are correct except:
Total variable costs change in direct proportion to changes in volume.
Total fixed costs remain the same as volume changes.
Fixed cost per unit decreases as volume increases.
Variable costs per unit increases as production volume increases.
Correct. One type of cost is a variable cost. Examples include direct materials, direct labor, and sales
commissions. Total variable costs change in direct proportion to changes in volume. Since total variable
costs increase at the same rate as volume increases, the variable costs per unit stays the same when
volume increases. It does not increase.

CMA Budgeting For Production Costs

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8/25/2019 CMA Exam Review - Part 1

Budgeting for Production Costs

Upon completion of this lesson, candidates should be able to:

Separate costs into their fixed and variable components (1.B.5.k).

Prepare an overhead budget (1.B.5.l).

Budgeting for Production Costs

I. The Master Budget “Big Picture”

II. Direct Materials Budget

purchased. As a result, the relationship between production needs and materials to be

Production needs + Ending inventory − Beginning inventory = Materials to purchase

to determine the final direct material purchases budget.

IV. Manufacturing Overhead Budgets

2. It must, however, be understood that it is a significant challenge for management to build

policy of 40% needed to support production that month.

January beginning inventory = January production needs 48,000 parts × 40% + 100 = 19,300 pounds.

Budgeting for Production Costs

Budgeting for Production Costs

What are the three production cost budgets?

1. Multiply budgeted production volume by

Describe the process of creating a direct labor

Manufacturing overhead is separated into

Test Bank Questions

Budgeting for Production Costs

Jordan Auto has developed the following production plan.

How much raw material should Jordan Auto purchase in March?

The production requirement is 3 pounds of raw material per unit of output.

Jordan Auto has developed the following production plan.

Cost of goods sold for February = 0.4(February sales)

February projected ending inventory = (0.3)(0.4)(March sales)

The budgeted purchases for February = 0.40($650,000) + (0.3)(0.4)($700,000) − (0.3)(0.4)($650,000) =

Variable costs = (260,000 units)($6.40 per unit) = $1,664,000

Batch set-up costs:

260,000 units require a minimum of 6 batches.

In August, 220,000 units were produced in 5 batches for a total of $880,000.

The cost per batch was $880,000/5 = $176,000.

6 batches at $176,000 per batch = $1,056,000

September budgeted production costs = ($1,210,000) + ($1,664,000) + ($1,056,000) = $3,930,000

Production costs = direct materials + direct labor + manufacturing overhead

Direct materials = (1 lb. Steel)($5/lb.) + (1 lb. Copper)($15/lb.) = $5 + $15 = $20

Direct labor = (1 hour)($22/hour) = $22

Manufacturing overhead is calculated as follows:

Production of PHs = (expected sales) + (expected ending inventory) − (expected beginning

Production of laminated PHs = 2,000 + 60 − 60 = 2,000 units

Production of forged PHs = 8,200 + 100 − 300 = 8,000 units

Direct labor hours = (2,000 units)(1 hr/unit) + (8,000 units)(0.25 hrs/unit)

Direct labor hours = 2,000 hours + 2,000 hours = 4,000 hours

Cost of goods manufactured is calculated as follows:

Cost of goods manufactured = $25,000 + $400,000 − $10,000 = $415,000

Total manufacturing costs = (direct material) + (direct labor) + (manufacturing overhead)

$415,000 = $100,000 + direct labor + 2(direct labor)

$415,000 = $100,000 + 3(direct labor)

$315,000 = 3(direct labor)

Direct labor = $105,000

Compute the number of units that must be produced in period 1

(budgeted production = budgeted sales + ending inventory − beginning inventory):

a direct materials usage budget and a direct materials purchase budget.

a direct materials mix budget and a direct materials purchase budget.

a direct materials yield budget and a direct materials usage budget.

* Source: Retired ICMA CMA Exam Questions.

* Source: Retired ICMA CMA Exam Questions.

fringe benefits paid to the production supervisor.

* Source: Retired ICMA CMA Exam Questions.