LearnCo LearnCo manufactures and sells one product, an abacus for classroom use, with two models, the Basic model and the Deluxe model. The company began operations on January 1, 20Y1, and is planning for 20Y2, its second year of operations, by preparing budgets from its master budget. The company is trying to decide how many units to manufacture, how much it might spend on direct materials and direct labor, and what their factory overhead expenses might be. In addition, the company is interested in budgeting for selling and administrative costs, and in creating a budgeted income statement showing a prediction of net income for 2012. You have been asked to assist the controller of Learn Co in preparing the 20Y2 budgets. Sales Budget The sales budget often uses the prior year's sales as a starting point, and then sales quantities are revised for various factors such as planned advertising and promotion, projected pricing changes, and expected industry and general economic conditions. LearnCo has completed reviewing its prior year's sales and has prepared the following sales budget. After reviewing Learn Co's sales budget, you note that three numbers have been omitted. The company's controller has told you that the units sold for the Basic and Deluxe models are expected to be the same. Fill in the missing amounts. LearnCo Sales Budget For the Year Ending December 31, 20Y2 Product Unit Sales Volume Basic Abacus Deluxe Abacus Totals 72,000 Unit Selling Price Total Sales $7.00 $252,000 468,000 $720,000 Production Budget The production budget should be integrated with the sales budget to ensure that production and sales are kept in balance during the year. The production budget estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels. You note that LearnCo has omitted six numbers from the following production budget and fill in the missing amounts. You may need to use numbers from the sales budget you prepared. LearnCo Production Budget For the Year Ending December 31, 20Y2 Units Basic Units Deluxe Expected units to be sold (from Sales Budget) Plus desired ending inventory, December 31, 20Y2 Total units required 1,000 3,000 Less estimated beginning inventory, January 1, 20Y2 Total units to be produced 1,050 2,100 X Direct Materials Purchases Budget The direct materials purchases budget should be integrated with the production budget to ensure that production is not interrupted during the year. This budget estimates the quantities of direct materials to be purchased to support budgeted production, along with desired inventory levels of direct materials. Before you make any changes to the budget, you review the information in the following Direct Materials Data Table and enter the units to be produced from the Production Budget panel. After scanning the direct materials purchases budget (which follows the Direct Materials Data Table), you observe that LearnCo has omitted quite a few numbers from the budget. Fill in the missing amounts. You may need to use numbers from the Direct Materials Data Table, or from the sales budget and production budget you prepared. When required, round your answers to the nearest dollar. Direct Materials Data Table Wood Pieces Beads Packages required per unit: Basic abacus Deluxe abacus Cost per package: Wood pieces Beads Units to be produced (from Production Budget): Basic abacus Deluxe abacus Packages required for production: Basic abacus Deluxe abacus 1 2 2 3 $0.25 $0.25 LearnCo Direct Materials Purchases Budget For the Year Ending December 31, 20Y2 Direct Materials Wood Pieces Beads Total Plus desired ending inventory, December 31, 20Y2 2,200 5,000 Total packages required Less estimated beginning inventory, January 1, 20Y2 3,500 4,500 Total packages to be purchased Unit price (per package) Total direct materials to be purchased x $ $ x $ S $72,888 Direct Labor Cost Budget Direct labor needs from the direct labor cost budget should be coordinated between the production and personnel departments so that there will be enough labor available for production. Before you make any changes to the budget, you review the information in the following Direct Labor Data Table and enter the units to be produced from the Production Budget panel. After scanning the Direct Labor Cost Budget (which follows the Direct Labor Data Table), you observe that Learn Co has omitted quite a few numbers from the budget. Fill in the missing amounts. You may need to use numbers from the Direct Labor Data Table, or from the sales budget, production budget, and direct materials purchases budget you prepared. When required, round your answers to the nearest dollar. Direct Labor Data Table Hours required per unit: Basic abacus Deluxe abacus Labor hourly rate: Gluing Assembly Units to be produced (from Production Budget): Basic abacus Deluxe abacus Hours required for production: Basic abacus Deluxe abacus Gluing Assembly 0.10 0.10 0.10 0.20 $13.00 $17.00 LearnCo Direct Labor Cost Budget For the Year Ending December 31, 20Y2 Gluing Assembly Total Total hours required Hourly rate x $ x $ Total direct labor cost $ $ $281,280 Factory Overhead Cost Budget The factory overhead cost budget should be integrated with the production budget to ensure that production is not interrupted during the year. This budget may be supported by departmental schedules, which normally separate factory overhead costs into fixed and variable costs so that department managers may monitor and evaluate costs during the year. For simplicity, LearnCo has not separated costs in this manner. After reviewing the following factory overhead cost budget, you note that LearnCo has completed the budget with the exception of one amount. Fill in the missing amount. LearnCo Factory Overhead Cost Budget For the Year Ending December 31, 20Y2 Indirect factory wages Power and light $5,400 Depreciation of plant and equipment 1,450 Total factory overhead cost $18,100 w 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 Learn Co, using information that follows provided by the controller, and using the previous budgets you have prepared. Finished goods inventory, January 1, 20Y2 LearnCo Cost of Goods Sold Budget For the Year Ending December 31, 20Y2 Work in process inventory, January 1, 20Y2 Direct materials: Direct materials inventory, January 1, 20Y2 Direct materials purchases $2,000 Cost of direct materials available for use $ Less direct materials inventory, December 31, 20Y2 1,800 Cost of direct materials placed in production $ Direct labor Factory overhead Total manufacturing costs $9,870 $2,010 Total work in process during period $ Less work in process inventory, December 31, 20Y2 1,250 Cost of goods manufactured Cost of finished goods available for sale Less finished goods inventory, December 31, 20Y2 Cost of goods sold 1,500 X 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. Learn Co has prepared its selling and administrative expenses budget as follows. This budget is merely reviewed by you for use in the budgeted income statement LearnCo Selling and Administrative Expenses Budget For the Year Ending December 31, 20Y2 Selling expenses: Sales salaries expense Advertising expense Travel expense Total selling expenses Administrative expenses: $45,000 15,000 5,400 $65,400 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 in 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. Enter interest expense as a negative number. Enter all other amounts as positive numbers. Budgeted Income Statement Data Table Interest revenue for the year Interest expense for the year Learn Co's income tax rate $2,000 $1,500 40% 1 Revenue from sales 2 Cost of goods sold 3 Gross profit 4 Selling and administrative expenses: Learn Co Budgeted Income Statement For the Year Ending December 31, 20Y2 5 Selling expenses 6 Administrative expenses 7 Total selling and administrative expenses 8 Income from operations 9 Other revenue and expense: 10 Interest revenue 11 Interest expense 12 Income before income tax 13 Income tax 14 Net income Final Questions Budgeting affects the planning, directing, and controlling functions of management. Learn Co wishes to determine the sensitivity of some of its budget values to changes in the economy. Using the information on the completed budget panels, 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 2012. If Deluxe abacus sales are zero, what will be the effect on LearnCo's income before income tax? For simplicity, ignore any change in Cost of Goods Sold. LearnCo will still have positive income before income tax if it sells zero Deluxe Abacus units in 20Y2. If LearnCo sells zero Deluxe Abacus units in 2012, it will break even (i.e., the company will have zero income before income tax). LearnCo will have a net loss before income tax if it sells zero Deluxe Abacus units in 2012. 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 LearnCo's income before income tax? LearnCo will have a loss before income tax if the price for bead packages doubles. If the price for bead packages doubles, LearnCo will break even (i.e., the company will have zero income before income tax). 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 Learn Co's income before income tax? 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). LearnCo will still have positive income before income tax if Gluing labor costs increase to $15.00 per hour. LearnCo will have a loss before income tax if Gluing labor costs increase to $15.00 per hour. 4. LearnCo's 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. $