EcoSacks manufactures cloth shopping bags. The controller is preparing a budget for the coming year and asks for your assistance. The following costs and other data apply to bag production:
Direct materials per bag 1.0 yard cotton at $4 per yard 0.2 yards canvas finish at $12 per yard Direct labor per bag 0.5 hour at $18 per hour Overhead per bag Total overhead per unit $3.40

You learn that equipment costs and building occupancy are fixed and are based on a normal production of 600,000 units per year. Other overhead costs are variable. Plant capacity is sufficient to produce 750,000 units per year.

Labor costs per hour are not expected to change during the year. However, the cotton supplier has informed EcoSacks that it will impose a 20 percent price increase at the start of the coming budget period. No other costs are expected to change.

During the coming budget period, EcoSacks expects to sell 540,000 bags. Finished goods inventory is targeted to increase from the current balance of 120,000 units to 210,000 units to prepare for an expected sales increase the year after next as a result of legislation in several states regarding plastic bags. Production will occur evenly throughout the year. Inventory levels for cotton and canvas are expected to remain unchanged throughout the year. There is no work-in-process inventory.

Required

Prepare a production budget and estimate the materials, labor, and overhead costs for the coming year.

ECOSACKS

Production  Budget

Sales                               540,000

closing inventory(FG)    210,000

                                        750,000

Opening Inventory(FG)  ( 120,000)

Production                         630,000

Materials Purchase budget

                                          cotton                    canvas

                                              yards                   yards

Material usage                 630,000                  126,000

Material purchase cost    $2,520,000            $1,512,000

                                       Labor Budget

labor hour(630,000*0.5)         315,000

Labour cost (315,000*18)       $5,670,000

                                       Overhead budget

Production unit                                630,000

Overhead cost ( 630,000*$3.40)      $2,142,000

Explanation:

A.

Full Year production plan = 630,000

And Monthly production = 630,000 / 12 = 52,500 units

B.

Total Material costs = $4,536,000

C.

Total Labor Costs = $5,670,000

D.

Overheads = $2,142,000

Explanation:

Ecosacks

Production plan

Opening Stock = 120,000

Planned sales volume = 540,000

Therefore production required to cover sales = sales plan minus Opening stock = 420,000 units

Expected closing stock = 210,000

We will have to produce additional 210,000 units to achieve this closing stock

= 420,000 + 210,000 = 630,000 units.

Production is expected to stay even all year through;

This implies monthly production = 630,000 / 12 = 52,500 units

B.

Material costs.

Cotton: 1 yard makes 1 bag and it is priced at 20% higher from last year ($4 x 120%) per yard

Cotton costs = 630,000units x 1yd x ($4 x 120%) = $3,024,000

Canvas Finish: 0.2 yard required for 1 bag and it is priced at $12 per yard

Canvas finish cost = 630,000 x 0.2 x 12 = $1,512,000

Total Material costs = $4,536,000

C.

Labor costs = 0.5hr per bag and it costs $18 per hour

Labour costs = 0.5 x 18 x 630,000

= $5,670,000

D.

Overhead costs = $3.40 x 630,000 = $2,142,000

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