This answer results from two errors: (1) adjusting the fixed costs for the increased level of production and (2) keeping the setup costs constant at $880,000. The problem tells us that fixed costs are unchanged within a production range of 200,000 to 300,000 units per month, so fixed costs for September should remain at $1,210,000 for a volume of 260,000 units. The batch setup cost will increase for September, as the additional units to be produced in September will require an additional setup. Using 50,000 as the number of units per batch, we will need 4.4 batches in August (rounded up to 5 batches) and 5.2 batches in September (rounded up to 6 batches). The September batch setup cost should be calculated by dividing the August setup cost by 5 and multiplying that by the 6 batches required in September.
The calculation of the variable and fixed costs is correct, but the cost used for setup cost in September is the same as August's setup cost. Because the number of units produced increases from August to September, the number of batches will also increase and therefore the cost of batch setups will increase in total. During August, 220,000 ÷ 50,000, or 4.4 batches were planned. In September, 260,000 ÷ 50,000, or 5.2 batches were planned. Obviously, it is not possible to set up a partial batch for a fraction of the cost of setting up a full batch. Therefore, the budgeted batch setup cost for August would include 5 batch setups while the budgeted batch setup cost for September would include 6 batch setups. The September batch setup cost should be calculated by dividing the August setup cost by 5 and multiplying that by the 6 batches required in September.
The normal batch size is 50,000 units, and the company plans production to minimize the total number of batches. Therefore, in budgeting we will use 50,000 units per batch, not the lower amounts the company has historically produced in some months. For September, 260,000 units are scheduled to be produced, which will require six batches (260,000 ÷ 50,000 = 5.2). It is not possible to set up a fraction of a batch, so we round up to 6. To find the budgeted setup cost per batch for September, we use the August amounts given in the problem. 220,000 units were budgeted for August at a total batch setup cost of $880,000. 220,000 ÷ 50,000 units per batch = 4.4 batches. So five batches would have been set up, and the setup cost per batch budgeted in August was $880,000 ÷ 5, or $176,000 per batch. Thus, the total batch setup cost for September will be budgeted at $176,000 × 6 batches, or $1,056,000. Total budgeted costs for September are: Variable cost: 260,000 units × $6.40 = $1,664,000. Fixed cost: given in the problem as $1,210,000 for August when production was budgeted at 220,000 units. The problem says that the fixed costs are unchanged within a production range of 200,000 to 400,000, so the August fixed cost also applies to a production level of 260,000 units for September. Setup cost is $1,056,000, as calculated above. The total budgeted production cost for September is $1,664,000 + $1,210,000 + $1,056,000 = $3,930,000.
This answer results from multiplying the total budgeted cost per unit for August ($15.90) by the 260,000 units to be produced in September. Because the fixed costs will be constant for both months (fixed for the range of 200,000 to 300,000 units), the total fixed cost in September should be the same as the total fixed cost in August. Also, the cost of the batch setups will differ on a per unit basis, because it is not possible to set up a fraction of a batch at a fraction of the batch setup cost. The batch setup cost is the same per batch regardless of how many units are in the batch, which will cause a slight variation in the per unit cost from one month month to the next. See the correct answer for a full explanation.
|
