Case: Head Start Audio Inc.: Breaking Down Budgets, One Headphone at a Time!

Welcome to Head Start Audio Inc., where the finest audio headphones are crafted with

premium materials and top$-$notch production. As our new budgeting analyst, you$$re responsible

for preparing budgets and analyzing variances over the first quarter. Use the information below

to guide your calculations and create accurate projections and variance analyses.

Deliverables:

$$ Master Budget by month and for the quarter.

$$ Flexible Budget using quarterly totals.

$$ Activity and Spending$/$Revenue Analysis.

$$ Variance calculations and explanations for Sales Revenue, DM$,$ and DL$.$

Phase $1$: Master Budget Preparation

$1.$ Sales and Production Budget:

o Forecasted Sales $($units$)$:

$$ January: $5,000$

$$ February: $5,500$

$$ March: $6,000$

o Desired Ending Inventory: $10\%$ of the following month$$s sales.

o Beginning Inventory $($January$)$: $500$ units.

o Calculate the production needs for each month, considering forecasted sales and

inventory.

$2.$ Direct Materials $($DM$)$ Budget:

o Material Requirement: $0\mathrm{.}75$ kg of plastic per headphone.

o Cost per kg of Plastic: $$4\mathrm{.}50.$

o Desired Ending DM Inventory: $10\%$ of next month$$s requirement.

o Beginning DM Inventory $($January$)$: $300$ kg$.$

o Determine the DM cost required for each month$$s production.

$3.$ Direct Labor $($DL$)$ Budget:

o Labor Requirement: $0\mathrm{.}25$ hours per headphone.

o Labor Rate: $$15$ per hour.

o Calculate monthly DL costs based on production needs.

$4.$ Overhead $($OH$)$ Budget:

o Variable OH Rate: $$3$ per direct labor hour.

o Fixed OH: $$10,000$ per month.

o Determine total OH $($variable and fixed$)$ for each month.

Note: Complete the monthly budgets for January, February, and March, and then total these for

quarterly figures.

Phase $2$: Quarterly Totals for Flexible Budget with Activity and Spending$/$Revenue

Analysis

After creating the Master Budget, use these quarterly totals to complete your Flexible Budget,

perform Activity Analysis, and conduct a Spending$/$Revenue Analysis:

$$ Sales Price per Unit: $$120$

$$ Total Units Sold: $16,500$ units

$$ Total DM Cost: $$55,687\mathrm{.}50$

$$ Total DL Cost: $$61,875$

$$ Total Variable OH: $$12,375$

$$ Total Fixed OH for Quarter: $$30,000$

Tasks:

$$ Activity Analysis: Adjust the budget based on actual production and sales levels.

$$ Spending$/$Revenue Analysis: Compare actual spending and revenue against the fle