Solved: Xerxes Manufacturing Company manufactures blue

rugs using wool and dye

Xerxes Manufacturing Company manufactures blue rugs using wool and dye

Xerxes Manufacturing Company manufactures blue rugs, using wool and dye as direct
materials. All other materials are indirect. At the beginning of the year Xerxes has an inventory
of 349,000 skeins of wool at a cost of $715,450 and 5,000 gallons of dye at a cost of $24,850.
Target ending inventory of wool and dye is zero. Xerxes uses the FIFO inventory cost flow
method.

One blue rug is budgeted to use 30 skeins of wool at a cost of $2 per skein and 1/2 gallon of
dye at a cost of $5 per gallon. Xerxes blue rugs are very popular and demand is high, but
because of capacity constraints the firm will produce only 100,000 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. Xerxes 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 over head is allocated to product based on direct manufacturing labour-hours
(DMLH). Dyeing overhead is allocated to product based on machine-hours (MH). There is no
direct manufacturing labour cost for dyeing. Xerxes budgets 56 direct manufacturing labour-
hours to weave a rug at a budgeted rate of $15 per hour. It budgets 0.15 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:

REQUIRED

1. Prepare a direct material 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 revenue budget for blue rugs for the year, assuming Xerxes sells

(a) 100,000

(b) 95,000 blue rugs (that is, 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.

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 Xerxes Manufacturing Company manufactures blue rugs using wool and dye

ANSWER
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