TAG Industries manufactures four products for use in heavy construction (S-Class, M-Class,
X-Class, and XL-Class). TAG offers four options that customers can purchase in conjunction
with their primary product. Customers can purchase in any combination of the offered
options or none. The components are individually priced so that the product’s selling price
is dependent not only which primary product the customer selects but also on the options
chosen i.e., semi-customization.
The options consist: 1) of a finish upgrade, 2) a product training program, 3) an extended
warranty package and 4) delivery. Although the customer has complete flexibility with their
option purchases, historically 100% of the customers have chosen to include TAG’s delivery
service with their purchase.
TAG is highly committed to the design and marketing of its primary products. TAG does not
see manufacturing as one of its strengths. As a result, TAG simplifies manufacturing by
purchasing three components (Chassis Kit, Electrical Kit, and Powertrain) from third parties
and assembling them into primary products. Therefore, TAG carries inventory of its primary
products’ assembly kits and finished goods. In addition, TAG relies exclusively on third
parties to deliver its options. TAG pays the option’s third-party provider a pre-negotiated fee
for each product or service they provide. Therefore, TAG does not carry any inventory or
incur any presale costs associated with their options. To account for the inventory that TAG
does carry it uses FIFO and process accounting. TAG also uses absorption cost accounting.
TAG’s focus on outsourcing allows the company to organize leanly outside the factory as well
with just three support departments (Administration, Research & Development and
TAG uses the following assumptions for its next year’s budget (Year 1)
Unit Sales/Connectivity S – Class M – Class L – Class XL – Class
Primary Products 1,000 1,000 900 800
Finish Upgrade* 10% 20% 40% 80%
Training 50% 50% 30% 10%
Warranty 30% 40% 40% 60%
Delivery 100% 100% 100% 100%
*Note: this means, for example, that 10% of the S-Class sales will include the sale of a Finish
Upgrade. In industry this concept is often referred to as connectivity or connection rates.
Selling Prices S – Class M – Class L – Class XL – Class
Primary Products $1,000 $2,000 $3,000 $4,000
Finish Upgrade $200 $220 $250 $370
Training $75 $85 $110 $120
Warranty $200 $400 $600 $800
Delivery $100 $200 $300 $400
Direct Materials – Year 1
X32 Chassis (variable) $100
X48 Chassis (variable) $250
Base Electrical Kit (variable) $200
Deluxe Electrical Kit (variable) $350
Powertrain (variable) $150
Direct Materials Units – Usage
X32 Chassis 1 1 –
X48 Chassis – – 1 1
Base Electrical Kit 1 1 – –
Deluxe Electrical Kit – – 1 1
Powertrain 1 1 2 2
Direct Materials Inventory
Beginning Units 150 135 200 190 480
Beginning Cost $14,250 $32,400 $40,000 $62,700 $72,000
Ending Budgeted – Units 200 150 200 150 500
Direct Labor (Hours)
S – Class 8 hours
M – Class 16 hours
X – Class 30 hours
XL – Class 44 hours
Direct Labor Cost = $35 per hour (Variable)
Cost of Options (per unit) S – Class M – Class L – Class XL – Class
Finish Upgrade $100 $110 $120 $180
Training 70 70 70 70
Warranty 160 320 480 640
Delivery 90 180 270 360
Indirect OH (Fixed) $109,300 CAB = number of Powertrains installed
Indirect OH (Variable) $1,041,840 CAB = direct labor hours
Total Indirect/Overhead Costs $1,151,140
Finished Goods Inventory S – Class M – Class L – Class XL – Class
Beginning Units 85 70 60 100
Beginning Cost $68,000 $84,000 $141,000 $298,500
Ending Budgeted – Units 100 100 90 80
Support Department Assumptions
OPEX Allocation Procedures
1) Trace direct cost and apply line item allocations to each of the three support
departments using the indicated CABs next to the expense
2) Allocate the Administration costs to R&D and Marketing using HC as your CAB
3) After allocating administration costs to R&D, use direct allocation to allocate R&D
costs to the products using the total cost of the current periods production as your CAB
4) After allocating administration costs to Marketing, use direct allocation to allocate
marketing costs to each product using the total sales as your CAB
Instructions (hint also use this as a final check list):
Administrative Guidelines (note if not followed I will return for correction and deduct 1 point).
Due Date: Before the start of class – section 17
1. Submit your project by the due date to me via email: firstname.lastname@example.org
2. Copy everyone in your group on the email.
3. The Subject line of your email should read: Budget Section # & Group # e.g. Budget
Section 2-Group B
4. Must use Excel Spreadsheet and the spreadsheet must be labeled: Budget Section # &
Group # e.g. Budget Section 2-Group B
Three Support Departments’ Costs Amount
Administration 3 HC F
Research & Development 7 HC F
Marketing 6 HC F
Salary (total per department)
Administration $200,000 F
Research & Development $300,000 F
Marketing $300,000 F
Expense to be allocated to Support Departments
Fringe Benefits: CAB salary $100,000 F
Facilities: CAB HC $80,000 V
Travel: CAB HC (Admin/Marketing Only) $60,000 V
Miscellaneous: CAB HC $120,000 V
Adverts: CAB (5% of total advert to admin/95% to ma $100,000 V
Training: CAB HC $32,000 V
Bonuses: CAB Salary $80,000 V
5. Every sheet on your spreadsheet should be labeled (feel free to use 1 sheet for assumptions
or notes) all other sheets should correspond directly to the budget submission. I encourage
1 sheet for each budget deliverable.
6. All calculations must be easy for me to read, so that I can differentiate typos from a lack
7. As in business neatness counts. Each schedule should have a professional appearance such
as you expect to find when you go to work.
a. Therefore, handwritten documents will not be accepted.
b. Sloppy or disjointed schedules will result in a grade reduction. Nevertheless, do not
include anything beyond a base Excel spreadsheet, no graphics, or other types of
presentations. Just financial schedules.
c. Do not use “Solve” or any other macro you do not understand. You must be able to
explain your calculations and I must be able to see them.
d. Where practical describe your calculations e.g., (price * units).
e. When dealing with fractions of dollars round two places or to the nearest cent e.g.
Warning every year student groups lose points because they fail to follow administrative
instructions as well as the ones pertaining to deliverables. If it is not clear, ask.
Required Budget Deliverables:
1. Sales (revenue) schedule. Include revenue by product and by component of each product
i.e., primary product and each option. Calculate total revenue, total revenue by product and
average selling prices by product and in total.
2. Production schedule. This schedule should show the number of units, by product, and total
of finished goods to be manufactured to meet the budget requirements.
3. Direct Material Usage schedule. This schedule should show the number of units of each
raw material (Chassis Kit, Electrical Kit, and Powertrain) that will be used to build the
production plan developed above. This schedule must also calculate the costs of the
material used in total and by unit.
4. Direct Material Purchases schedule. This schedule should calculate the number of units for
each raw material that must be purchased to meet the budget requirements along with the
total cost of purchases.
5. Direct Labor hours & Costs Schedule. This schedule should show the labor hours and cost
per unit for each primary product as well as the total labor cost for each product and the
total costs for all products.
6. Overhead Allocations Schedule. This schedule should show the overhead (indirect cost)
allocation rate calculations and the application of overhead to each product and in total.
7. Cost of Goods Available for Sale Schedule. This schedule should show detailed costs
calculations (by parts, labor, etc.) of each primary product (and totals) to determine the cost
of goods available for sale. Cost available for sale should then be allocated to ending
inventory and costs of goods sold (COGS).
8. Support Department (Cost Center) Schedule. This schedule should provide the following:
a. Trace direct cost and apply line item allocations to each of the three support
departments using the indicated CABs next to the expense. Each line item should
b. Allocate the Administration costs to R&D and Marketing using HC as your CAB
c. After allocating administration costs to R&D, use direct allocation to allocate R&D
costs to the products using the total cost of the current periods manufacturing costs
as your CAB
d. After allocating administration costs to Marketing, use direct allocation to allocate
marketing costs to each product using the total sales (revenue) as your CAB
9. Allocated Profit & Loss Schedule. Provide an allocated P&L by primary product and in
total. Use a simple format (Sales – COGS = GM – R&D – Marketing = Profit). Note
administration is included with R&D and Marketing.
10. Allocated Profit & Loss Schedule with Variable Costing. Provide an allocated P&L similar
to the one using absorption costing by primary product. Your schedule should show how
you calculate the P&L and provide a reconciliation schedule that reconciles the absorption
allocated P&L with the variable cost allocated P&L. For this purpose, assume that
beginning finished goods inventory uses the same per unit OH allocation as is used for the
current period budget.
Recommendation: Wherever feasible I recommend you explain your calculations e.g. (Total Cost
= Unit Cost * Number of Units. This action will help demonstrate your understanding in case of
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