Budgeting Question - please help!!

The Magician

Hi there,

I am really stuck on the following question and hope someone can help provide workings as to how I answer this fiendish question....


JK has budgeted sales for next year of 24,000 units and inventory levels are expected to remain constant throughout the year. Each unit produced will require 3 labour hours and the budgeted labour rate will be $15.00. It is estimated that 10% of units produced will be wasted.

It is expected that 15% of the total hours worked will be paid at overtime rates. 10% of the total hours will be paid at the basic rate plus an overtime premium of 50% of the basic rate. 5% of the hours will be paid at the basic rate plus an overtime premium of 100% of the basic rate.

The labour cost budget for next year is:

A: $1,350,000
B: $1,306,800
C: $1,188.000
$1,320,000


The correct answer is D. The exam paper merely states the answer and does not provide any indication of how they arrived at this answer.

If someone well versed in budgeting could show me how to answer this, I would be unbelievably grateful.


Thank you very much.

Dave.

SandyHood

Dear The Magician

I hope the attached calculation makes sense.
I recommend taking the total hours and multiplying by the basic rate
Then find the premium paid for overtime (the extra amount per hour over and above the basic rate)
And multiply each premium by the number of hours worked when that premium was applicable
In this case repeat the process for the other premium
Then add up all the labour costs to find the total

The Magician

Thanks so much for taking the time to show me this.

It was actually from CIMA P1.

Much appreciated.

SandyHood

CIMA P1 would probably allocate 2 marks to this question, so you need to allocate a maximum of 3.6 minutes. You can't do it during the reading time so wait until the exam starts. When it does draw up the table, put the hours in the first column, the rate in the second and then do the 3 multipication sums and the add. I think you will be inside the time.
For CIMA definitely use this approach.
There is a "payroll type" approach which people use on AAT Costs and Revenues but it sometimes leaves them needing to rework the sums if they then have to allocate to direct labour and production overheads.

The Magician

Thanks very much for this, Sandy.

Admittedly, It does look like an easy question at face-value and yes, it is worth two marks!

It is really hard going self-studying though.


Hopefully this will be okay as a method of working, I do not want to get into overtime premiums. I have not looked at that since the old AAT standards, unit 6 (ECR).
Even from when I did AAT L4 BGT, I always found the wastage allowance really weird.

Workings:

24,000 units x 3 labour hours = 72,000 labour hours

Add wastage:

72,000 x 10/90 = 8,000 units
72,000 + 8,000 = 80,000 Total Labour hours required.

Basic Rate:
(80,000 x 0.85) 68,000 at $15.00 = $1,020,000

Overtime Rate:
(80,000 x 0.15) 12,000 hours overtime.

Time and a half: (80,000 x 0.10) 8,000 x $22.50 = $180,000
Double Time: (80,000 x 0.05) 4,000 x $30.00 = £120,000

Total Labour Cost Budget = $1,320,000

Mercifully, this will be the last exam for me at Operational. Then I'm onto level six, fun times!

Many Thanks for this.