Budgets for production and direct manufacturing labor

(CMA, adapted) Roletter Company makes and sells artistic frames for pictures of weddings, graduations, and other special events. Bob Anderson, the controller, is responsible for preparing Roletter's master budget and has accumulated the following information for 2015:

In addition to wages, direct manufacturing labor-related costs include pension contributions of $0.50 per hour, worker's compensation insurance of $0.20 per hour, employee medical insurance of $0.30 per hour, and Social Security taxes. Assume that as of January 1, 2015, the Social Security tax rates are 7.5% for employers and 7.5% for employees. The cost of employee benefits paid by Roletter on its employees is treated as a direct manufacturing labor cost.
Roletter has a labor contract that calls for a wage increase to $13 per hour on April 1, 2015. New labor- saving machinery has been installed and will be fully operational by March 1, 2015. Roletter expects to have 17,500 frames on hand at December 31, 2014, and it has a policy of carrying an end-of-month inventory of 100% of the following month's sales plus 50% of the second following month's sales.

Required:
1. Prepare a production budget and a direct manufacturing labor budget for Roletter Company by month and for the first quarter of 2015. You may combine both budgets in one schedule. The direct manufacturing labor budget should include labor-hours and show the details for each labor cost category.
2. What actions has the budget process prompted Roletter's management to take?
3. How might Roletter's managers use the budget developed in requirement 1 to better manage the company?

Roletter Company
Budget for Production and Direct Manufacturing Labor
for the Quarter Ended March 31, 2015

January February March Quarter
Budgeted sales (units) 10,000 14,000 7,000 31,000
Add target ending finished goods
inventorya (units) 17,500 11,000 12,000 12,000
Total requirements (units) 27,500 25,000 19,000 43,000
Deduct beginning finished goods
inventory (units) 17,500 17,500 11,000 17,500
Units to be produced 10,000 7,500 8,000 25,500
Direct manufacturing labor-hours
(DMLH) per unit × 2.0 × 2.0 ? 1.5
Total hours of direct manufacturing
labor time needed 20,000 15,000 12,000 47,000
Direct manufacturing labor costs:
Wages ($12.00 per DMLH) $240,000 $180,000 $144,000 $564,000
Pension contributions
($0.50 per DMLH) 10,000 7,500 6,000 23,500
Workers' compensation insurance
($0.20 per DMLH) 4,000 3,000 2,400 9,400
Employee medical insurance
($0.30 per DMLH) 6,000 4,500 3,600 14,100
Social Security tax (employer's share)
($12.00 ? 0.075 = $0.90 per DMLH) 18,000 13,500 10,800 42,300
Total direct manufacturing
labor costs $278,000 $208,500 $166,800 $653,300

a100% of the first following month's sales plus 50% of the second following month's sales.
Note that the employee Social Security tax of 7.5% is irrelevant. Such taxes are withheld from employees' wages and paid to the government by the employer on behalf of the employees; therefore, the 7.5% amounts are not additional costs to the employer.

2. The budget process would prompt Roletter's management to look for ways to reduce finished goods inventories, the manufacturing labor hours needed to produce each unit both before and after installing new labor-saving machinery; some of the other costs such as Social Security tax and workers' compensation insurance may be fixed by law, while pension contributions and medical insurance might be features that make Roletter an attractive employer.

3. We already see one example of a decision that Roletter's management took based on the budgeted expenses—installing labor-saving machines ahead of wage increases. Roletter's management should also continue to work with employees to increase labor productivity.