Cost of Goods Sold Budget

The cost of goods sold budget integrates the direct materials purchases budget, direct labor cost budget, and factory overhead cost budget. Estimated and desired inventories for direct materials, work in process, and finished goods must also be integrated into the cost of goods sold budget.

Complete the preparation of the cost of goods sold budget for LearnCo, using information that follows provided by the controller, and using the previous budgets you have prepared.

LearnCo Cost of Goods Sold Budget For the Year Ending December 31, 20Y2
Finished goods inventory, January 1, 20Y2			$9,870
Work in process inventory, January 1, 20Y2		$2,010
Direct materials:
Direct materials inventory, January 1, 20Y2	$2,000
Direct materials purchases
Cost of direct materials available for use	$
Direct materials inventory, December 31, 20Y2	(1,800)
Cost of direct materials placed in production	$
Direct labor
Factory overhead
Total manufacturing costs
Total work in process during period		$
Work in process inventory, December 31, 20Y2		(1,250)
Cost of goods manufactured
Cost of finished goods available for sale			$
Finished goods inventory, December 31, 20Y2			(1,500)
Cost of goods sold			$

Selling/Admin. Expenses Budget

The sales budget is often used as the starting point for the selling and administrative expenses budget. For example, a budgeted increase in sales may require more advertising expenses. LearnCo has prepared its selling and administrative expenses budget as follows. This budget is merely reviewed by you for use on the budgeted income statement.

LearnCo Selling and Administrative Expenses Budget For the Year Ending December 31, 20Y2
Selling expenses:
Sales salaries expense	$45,000
Advertising expense	15,000
Travel expense	5,400
Total selling expenses		$65,400
Administrative expenses:
Officers' salaries expense	$85,000
Office salaries expense	35,000
Office rent expense	26,000
Office supplies expense	6,400
Miscellaneous administrative expenses	1,600
Total administrative expenses		154,000
Total selling and administrative expenses		$219,400

Budgeted Income Statement

The budgeted income statement is prepared by integrating the sales budget, cost of goods sold budget, and selling and administrative expenses budget. Additional information that may be helpful in preparing the budgeted income statement are on the following Budgeted Income Statement Data Table.

Review the Budgeted Income Statement Data Table, then complete the budgeted income statement that follows the table. Round the computed amount for income tax to the nearest whole dollar.

Budgeted Income Statement Data Table
Interest revenue for the year	$2,000
Interest expense for the year	$1,500
LearnCos income tax rate	40%

LearnCo Budgeted Income Statement For the Year Ending December 31, 20Y2
Revenue from sales		$
Cost of goods sold
Gross profit		$
Selling and administrative expenses:
Selling expenses	$
Administrative expenses
Total selling and administrative expenses
Operating income		$
Other revenue and expense:
Interest revenue	$
Interest expense
Income before income tax		$
Income tax
Net income		$

Final Questions

Budgeting affects the planning, directing, and controlling functions of management. LearnCo wishes to determine the sensitivity of some of its budget values to changes in the economy.

Using the information on the completed budgets, answer the following questions. Consider each question separately, assuming that all other data remains the same, including the level of production of each model.

1. LearnCo believes that sales of the Deluxe Abacus model may decrease in 20Y2. If Deluxe abacus sales are zero, what will be the effect on LearnCos income before income tax? For simplicity, ignore any change in Cost of Goods Sold.

a. If LearnCo sells zero Deluxe Abacus units in 20Y2, it will break even (i.e., the company will have zero income before income tax).

b. LearnCo will have a net loss before income tax if it sells zero Deluxe Abacus units in 20Y2.

c. LearnCo will still have positive income before income tax if it sells zero Deluxe Abacus units in 20Y2.

2. LearnCo's vendor for bead packages is expected to double its price per package of beads. If this occurs, what will be the effect on LearnCos income before income tax?

a. If the price for bead packages doubles, LearnCo will break even (i.e., the company will have zero income before income tax).

b. LearnCo will have a loss before income tax if the price for bead packages doubles.

c. LearnCo will still have positive income before income tax if the price for bead packages doubles.

3. LearnCo is aware that its labor prices for the Gluing part of the manufacturing process may increase to $15.00 per hour due to changes in minimum wage laws in its state. If this occurs, what will be the effect on LearnCos income before income tax?

a. LearnCo will still have positive income before income tax if Gluing labor costs increase to $15.00 per hour.

b. If Gluing labor costs increase to $15.00 per hour, LearnCo will break even (i.e., the company will have zero income before income tax).

c. LearnCo will have a loss before income tax if Gluing labor costs increase to $15.00 per hour.

4. LearnCos controller believes that the company can decrease its selling expenses by 10% and its administrative expenses by 15%. How much would income before income tax increase if these expense cuts are implemented? Round your answer to the nearest dollar.

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