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Shady Shades, Inc., manufactures artistic frames for sunglasses. Talia Demarest, controller, is responsible for preparing the company’s master budget. In compiling the budget data for 20x1, Demarest has learned that new automated production equipment will be installed on March 1. This will reduce the direct labor per frame from 2.0 hour to 1.75 hours. Labor-related costs include pension contributions of $1.30 per hour, workers' compensation insurance of $1.00 per hour, employee medical insurance of $4 per hour, and employer contributions to Social Security equal to 5.00 percent of direct-labor wages. The cost of employee benefits paid by the company on its employees is treated as a direct-labor cost. Shady Shades, Inc., has a labor contract that calls for a wage increase to $21.00 per hour on April 1, 20x1. Management expects to have 21,800 frames on hand at December 31, 20x0, and has a policy of carrying an end-of-month inventory of 100 percent of the following month’s sales plus 40 percent of the second following month’s sales.

Problem 9-32 Production and Direct-Labor Budgets; Activity-Based overhead Budget (LO 9-3, 9-4, 9-5, 9-6) IThe following information applies to the questions displayed below.j Shady Shades, Inc., manufactures artistic frames for sunglasses. Talia Demarest, controller is responsible for preparing the companys master budget. In compiling the buciget data for 20x1, Demarest has learned that new automated production equipment will be installed on March 1. This will reduce the direct labor per frame from 2.0 hour to 1.75 hours. Labor-related costs include pension contributions of $1.30 per hour, workers compensation insurance of $1.00 per hour, employee medical insurance of $4 per hour, and employer contributions to Social Security equal to 5.00 percent of direct-labor wages. The cost of employee benefits paid by the company on its employees is treated as a direct-labor cost. Shady Shades, Inc., has a labor contract that calls for a wage increase to $21.00 per hour on April 1 20x1. Management expects to have 21,800 frames on hand at December 31, 20x0, and has a policy of carrying a end-of-month inventory of 100 percent of the following months sales plus 40 percent of the second following months sales. These and other data compiled by Demarest are summarized in the following table. April May January February March Direct labor hours per unit 2.0 2.0 75 1.75 1.75 19.00 19.00 19.00 21.00 21.00 Wage per direct-labor hour Estimated unit sales 15,000 17.000 13,000 14,000 14,000 56.00 53.50 53.50 53.50 53.50 Sales price per unit Production overhead 4.00 400 4.00 4.00 4.00 Shipping and handling (per unit sold) Purchasing, material handling, 5.00 5.00 5.00 5.00 and inspection (per unit produced) Other production overhead 700 700 700 700 700 (per direct labor hour)

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