Question
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
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 20Y2.
You have been asked to assist the controller of LearnCo in preparing the 20Y2 budgets.
Sales Budget
The sales budget often uses the prior years 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 years sales and has prepared the following sales budget.
After reviewing LearnCos sales budget, you note that three numbers have been omitted. The companys 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 | Unit Selling Price | Total Sales |
Basic Abacus | $6.00 | $216,000 | |
Deluxe Abacus | 504,000 | ||
Totals | 72,000 | $720,000 |
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 LearnCo 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 | ||
Gluing | Assembly | |
Hours required per unit: | ||
Basic abacus | 0.10 | 0.10 |
Deluxe abacus | 0.10 | 0.20 |
Labor hourly rate: | ||
Gluing | $12.00 | |
Assembly | $17.00 | |
Units to be produced (from Production Budget): | ||
Basic abacus | ||
Deluxe abacus |
LearnCo | |||
Direct Labor Cost Budget | |||
For the Year Ending December 31, 20Y2 | |||
Gluing | Assembly | Total | |
Hours required for production: | |||
Basic abacus | |||
Deluxe abacus | |||
Total hours required | |||
Hourly rate | x | x | |
Total direct labor cost | $273,995 |
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 | $5,400 |
Power and light | |
Depreciation of plant and equipment | 1,450 |
Total factory overhead cost | $18,100 |
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 | $ | ||
Less 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 | $ | ||
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 | 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 in 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 |
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 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 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.
If LearnCo sells zero Deluxe Abacus units in 20Y2, it will break even (i.e., the company will have zero income before income tax).
LearnCo will still have positive income before income tax if it sells zero Deluxe Abacus units in 20Y2.
LearnCo will have a net loss 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?
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.
LearnCo will have a loss 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?
LearnCo will have a loss before income tax if Gluing labor costs increase to $15.00 per hour.
LearnCo will still have positive income before income tax if Gluing labor costs increase to $15.00 per hour.
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).
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.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started