Problem 14 - Accounting

Question

Levi Strauss \& Co. manufactures slacks and jeans under a variety of brand names, such as Dockers \({ }^{8}\) and 501 Jeans \(^{\circledR}\). Slacks and jeans are assembled by a variety of different sewing operations. Assume that the sales budget for Dockers and 501 Jeans shows estimated sales of 24,700 and 53,600 pairs, respectively, for January 2010. The finished goods inventory is assumed as follows: \begin{tabular}{lcc} & Dockers & \(\mathbf{5 0 1}\) Jeans \\ \hline January 1 estimated inventory & 1,110 & 1,490 \\ January 31 desired inventory & 410 & 1,890 \end{tabular} Assume the following direct labor data per 10 pairs of Dockers and 501 Jeans for four different sewing operations: \begin{tabular}{lll} & \multicolumn{2}{c}{ Direct Labor per \(\mathbf{1 0}\) Pairs } \\ \cline { 2 - 3 } & Dockers & \(\mathbf{5 0 1}\) Jeans \\ \hline Inseam & 18 minutes & 12 minutes \\ Outerseam & 22 & 15 \\ Pockets & 7 & 9 \\ Zipper & \(\underline{10}\) & \(\frac{6}{42}\) minutes \end{tabular} a. Prepare a production budget for January. Prepare the budget in two columns: Dockers \(^{2}\) and 501 Jeans \(^{\otimes}\). b. Prepare the January direct labor cost budget for the four sewing operations, assuming a \(\$ 12.50\) wage per hour for the inseam and outerseam sewing operations and a \(\$ 16\) wage per hour for the pocket and zipper sewing operations. Prepare the direct labor cost budget in four columns: inseam, outerseam, pockets, and zipper.

Step-by-Step Solution

Answer

Dockers require 24,000 pairs, and 501 Jeans require 54,000 pairs to be produced in January. Total direct labor cost is \$30,880 for Dockers and \$51,900 for 501 Jeans.

Step 1: Calculate Required Production: Dockers

To calculate the production requirements for Dockers, we use the formula: \( \text{Estimated Sales} + \text{Desired Ending Inventory} - \text{Beginning Inventory} = \text{Production Required} \).For Dockers: \[ 24,700 + 410 - 1,110 = 24,000 \textrm{ pairs} \]

Step 2: Calculate Required Production: 501 Jeans

Similarly, for 501 Jeans, apply the same formula: \[ 53,600 + 1,890 - 1,490 = 54,000 \textrm{ pairs} \]

Step 3: Convert Pairs to Batches

Since the direct labor data is given for 10 pairs, convert the production requirement to batches of 10 pairs. For Dockers: \[ \frac{24,000}{10} = 2,400 \textrm{ batches} \] For 501 Jeans: \[ \frac{54,000}{10} = 5,400 \textrm{ batches} \]

Step 4: Calculate Total Labor Hours: Dockers

For each operation in Dockers:- **Inseam:** \(2,400 \times 18 \div 60 = 720 \) hours- **Outerseam:** \(2,400 \times 22 \div 60 = 880 \) hours- **Pockets:** \(2,400 \times 7 \div 60 = 280 \) hours- **Zipper:** \(2,400 \times 10 \div 60 = 400 \) hours

Step 5: Calculate Total Labor Hours: 501 Jeans

For each operation in 501 Jeans:- **Inseam:** \(5,400 \times 12 \div 60 = 1,080 \) hours- **Outerseam:** \(5,400 \times 15 \div 60 = 1,350 \) hours- **Pockets:** \(5,400 \times 9 \div 60 = 810 \) hours- **Zipper:** \(5,400 \times 6 \div 60 = 540 \) hours

Step 6: Compute Total Direct Labor Cost

Calculate the total direct labor cost for each operation using the hourly wages:For Inseam and Outerseam, wages are \\(12.50 per hour:- **Dockers:** \((720 + 880) \times 12.50 = \\)20,000\)- **501 Jeans:** \((1,080 + 1,350) \times 12.50 = \\(30,300\)For Pockets and Zipper, wages are \\)16 per hour:- **Dockers:** \((280 + 400) \times 16 = \\(10,880\)- **501 Jeans:** \((810 + 540) \times 16 = \\)21,600\)

Key Concepts

Direct Labor Costs

Direct labor costs are a crucial part of manufacturing, particularly in the production of clothing items like slacks and jeans. Uniquely, they refer to the expenses of employees who are directly involved in converting raw materials into finished products.
In this context, Levi Strauss & Co. employs direct labor for several sewing operations involved in assembling jeans. The direct labor cost is determined by considering the time spent by workers in different operations and the respective hourly wages.

The company needs to calculate precise labor hours for each sewing task like inseam, outerseam, pocket sewing, and zipper attachment. By multiplying these hours with the labor rates, we can assess the total direct labor expenses for producing Dockers and 501 Jeans. Understanding direct labor costs assists in tracking how labor expenses contribute to the overall product costs and ultimately planning for profitability.
The equation to calculate a specific operation's direct labor cost would be:
\[ \text{Direct Labor Cost} = \left(\text{Total Labor Hours} \times \text{Hourly Wage}\right)\]

Finished Goods Inventory

Managing finished goods inventory is key to production budgeting as it affects both production planning and cash flow management. Levi Strauss & Co. predicts the number of slacks and jeans they expect to have at the beginning and end of January. This involves estimating both the quantity of current inventory and the desired inventory levels at month-end.
Knowing how much inventory to maintain involves looking at sales forecasts and ensuring there is enough stock to meet demand without overproducing.

For this exercise, the finished goods inventory involves operational planning by calculating how much more to produce based on desired ending inventories and expected sales. Here's the formula used to determine production needs:
\[ \text{Production Requirements} = \left(\text{Estimated Sales} + \text{Desired Inventory} - \text{Beginning Inventory}\right)\]
By using this formula, companies can align their production levels with sales expectations and desired inventory levels, ensuring supply chain efficiency.

Wage Calculation

Wage calculation is another vital component in ensuring accurate production budgeting, especially in labor-intensive operations like sewing. To calculate labor wages accurately, you need to know the number of labor hours required for various sewing operations and the pay rate per hour.
This exercise involves different hourly wages based on the complexity of these tasks. For instance, inseam and outerseam operations are paid at $12.50 per hour, and more intricate tasks like pockets and zippers earn a higher rate of $16 per hour.

To compute the total wages:

• Determine labor hours for each operation based on batches produced.
• Multiply these hours by their specific hourly wages to ascertain total compensation.

This way, precise wage calculation helps manage overall labor costs and ensures fair compensation to employees, aligning with business budgets.

Sewing Operations

In producing clothing like slacks and jeans, sewing operations involve various detailed steps that require skilled labor. Levi Strauss & Co. outlines specific sewing tasks, including inseam, outerseam, pocket sewing, and zipper setting. Each task demands a unique amount of time and labor, impacting overall production efficiency and costs.
Each operation not only differs in complexity but also in labor time required per batch. For instance, the inseam of Dockers takes 18 minutes per 10 pairs, while a more complex task like sewing pockets takes less time at 7 minutes.

Understanding these details can help better plan the labor allocation and machinery requirements. Employing the right amount of labor and scheduling effectively avoids bottlenecks and maximizes productivity.
Furthermore, knowing the times and resources each operation requires aids in forming a production budget being crucial for cost savings and meeting desired output levels.