Retro Vinyl Inc. Case Summary: Production, Materials, Labor, Overhead, and Capital Spending

Production Policy

RV must fulfill customer orders within ten business days of receipt, so it maintains a modest finished goods inventory. For budgeting purposes, the company plans to produce enough cabinets each quarter so that ending finished goods inventory equals 10% of the next quarter’s projected unit sales.

Direct Materials

Each cabinet requires approximately 10 board feet of heart of pine wood. The direct materials cost is $31.00 per board foot.

To support production, RV also maintains raw material inventory. The case indicates that the company procures wood so that ending raw materials inventory equals a planned portion of future production needs, and supplier payments follow a credit-based pattern for cash disbursements.

Cash payments for raw material purchases occur at:

• 30% in the quarter of purchase
• 70% in the following quarter

This timing is based on supplier terms commonly seen in the industry.

Direct Labor

Each cabinet requires 2.5 direct labor hours. Direct labor is paid at $18 per hour. These assumptions are used to budget both labor hours and total direct labor cost by quarter.

Manufacturing Overhead

Variable manufacturing overhead is estimated at $5.00 per direct labor hour. Fixed manufacturing overhead is $7,500 per quarter before any new capital investment. This fixed overhead includes $3,500 of depreciation expense per quarter once production begins in the first quarter of 2023.

Capital Assets

RV will complete building renovations in April, adding a warehouse to the north end of the building. The renovation cost is $450,000 and will be paid in cash. Depreciation on the warehouse is treated as a period cost.

In July, RV will purchase accounting and logistics software for $35,000, also paid in cash. Depreciation on newly acquired assets is recorded as an end-of-quarter adjustment for the quarter in which the asset is placed into service, with a full month of depreciation recorded for April and July.

The warehouse is depreciated using the straight-line method over 15 years, and the software is depreciated using the straight-line method over 5 years.

Selling and Administrative Expenses

Variable selling and administrative expense is $2 per cabinet. Fixed quarterly selling and administrative costs include:

• $30,000 executive salaries
• $15,000 advertising
• $3,000 insurance

All selling and administrative expenses are paid in full during the quarter incurred.

Why These Assumptions Matter for the Master Budget

These assumptions drive the production budget, direct materials purchases budget, cash disbursements for materials, direct labor budget, manufacturing overhead budget, ending inventory schedules, operating expense budget, and cash budget for capital expenditures.