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 This topic has 4 replies, 2 voices, and was last updated 8 years ago by John Moffat.

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September 20, 2014 at 9:24 pm #195708gabbi08
 Topics: 135
 Replies: 181
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Dear Sir
Trying to answer the below question I have got stuck when came across to allowance calculation.
Question one:
Budgeted sale of X for December are 18000 units. At the end of the production process for X 10% of production units are scrapped as defective. Opening inventories of X for December are budgeted to be 15000 units and closing inventories will be 11400 units. All inventories of finished goods must have successfully passed the quality control check. What is the production budget for X for December?
Working
Budgeted sales 18000
Budgeted reduction in finished goods (3600) = 1500011400
Budgeted production of completed units 14400
Allowance for defective units
(10%of output=1/9 of Input) 1600Production budget 16000
Could you please explain what does the statement mean when saying 10% of output is equal to 1/9 of input?)
I have calculated the allowance as 10% of 14400 but obviously is not correct. Could you please help me to understand. I would like not to learn by heard but being able to work out the question with my understanding.
Question 2
A company manufactures a single product M. Budgeted production output of product M during August is 200 units. Each unit of product M requires 6 labor hours for completion and PR Co anticipates 20% idle time. Labor is paid $7 per hour. What is the direct labor hour cost budget per August
Working
Active hours require for production 200*6 1200
Allowance for idle time (20% of total time = 25% of active time 300
Total hours to be paid 1500x $7 per hour
Direct labor cost budget 10500
Even in this question I have a concern how the allowance has been calculated. Myself I would have applied 20% on total time, but of course it looks like being incorrect.
Could you kindly explain why and what does the statement mean for: 20% of total time is equal to 25% of active time
Thank you very much for your help
Gabbi
September 21, 2014 at 9:03 am #195749John MoffatKeymaster Topics: 57
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Question 1:
Whoever typed the answer has mistyped it!
If they produce 100 units, then reject 10%, they will end up with 90 ‘good ones’.
So to end up with 90, then need to have produced 100.
So…to end up with 14,400, then need to have made 14,400 x 100/90 = 16,000
September 21, 2014 at 9:04 am #195750John MoffatKeymaster Topics: 57
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Question 2:
For every 100 hours paid for, then will be idle for 20 hours and will therefore work for 80 hours.
If a product needs 6 hours of work therefore, they will need to pay for 6 x 100/80 hours.
September 21, 2014 at 9:44 am #195763gabbi08 Topics: 135
 Replies: 181
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Dear Mr Moffat
Thank a lot for your help. Now I understood.
Gabbi
September 21, 2014 at 5:26 pm #195787John MoffatKeymaster Topics: 57
 Replies: 50594
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You are welcome 🙂

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