Mastery Problem: Budgeting

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 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

ProductUnit Sales VolumeUnit Selling PriceTotal Sales

Basic Abacus$7$252,000

Deluxe Abacus468,000

Totals72,000$720,000

Feedback

Review the preparation of the sales budget and use the information the controller provided.

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 BasicUnits Deluxe

Expected units to be sold (from Sales Budget)

Desired ending inventory, December 31, 20Y21,000 3,000

Total units available

Estimated beginning inventory, January 1, 20Y2(1,050)(2,100)

Total units to be produced

Feedback

Be sure to include the expected units to be sold for each model from the Sales Budget. Then review the preparation of the production budget and how the amounts are computed.

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.

Before you make any changes to the budget, you review the information on the following Direct Materials Data Table and enter the units to be produced from the Production Budget. 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 PiecesBeads

Packages required per unit:

Basic abacus12

Deluxe abacus23

Cost per package:

Wood pieces$0.25

Beads$0.25

Units to be produced (from Production Budget):

Basic abacus

Deluxe abacus

LearnCo Direct Materials Purchases Budget For the Year Ending December 31, 20Y2

Direct Materials

Wood PiecesBeadsTotal

Packages required for production:

Basic abacus

Deluxe abacus

Desired inventory, December 31, 20Y22,200 5,000

Total packages available

Estimated inventory, January 1, 20Y2(3,500)(4,500)

Total packages to be purchased

Unit price (per package) $ $

Total direct materials to be purchased$ $ $72,888

Feedback

Review an example of the direct materials purchases budget, and the computations for each part of the budget. You will need to use the information on the Direct Materials Data Table in your computations.

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 on the following Direct Labor Data Table and enter the units to be produced from the Production Budget. 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

GluingAssembly

Hours required per unit:

Basic abacus0.100.10

Deluxe abacus0.100.20

Labor hourly rate:

Gluing$12

Assembly$19

Units to be produced (from Production Budget):

Basic abacus

Deluxe abacus

LearnCo Direct Labor Cost Budget For the Year Ending December 31, 20Y2

GluingAssemblyTotal

Hours required for production:

Basic abacus

Deluxe abacus

Total

Hourly rate $ $

Total direct labor cost$$$295,945

Feedback

Review an example of the direct labor cost budget, and the computations for each part of the budget. You will need to use the information on the Direct Labor Data Table in your computations.

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 equipment1,450

Total factory overhead cost$18,100

Feedback

You can back into the missing number by computing from the total along with the other two values.

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$

Feedback

Review the format and the flow of the cost of goods sold budget. In particular, note amounts that come from prior budgets that have been prepared.

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 expense15,000

Travel expense5,400

Total selling expenses$65,400

Administrative expenses:

Officers' salaries expense$85,000

Office salaries expense35,000

Office rent expense26,000

Office supplies expense6,400

Miscellaneous administrative expenses1,600

Total administrative expenses154,000

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 rate40%

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$

Feedback

Put together information from the Budgeted Income Statement Data Table, along with data from all the prior budgets that have been created. Dont forget to round the income tax amount to the nearest dollar.

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.

b

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.

c

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.

a

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.

$

Feedback

1. Consider the change in Deluxe abacus sales and its effect on the Sales Budget, then follow that change through the budget chain to the Budgeted Income Statement.

2. Consider the change in the cost of bead packages and its effect on the Direct Materials Purchases Budget, then follow that change through the budget chain to the Budgeted Income Statement.

3. Consider the change in the cost of gluing wages and its effect on the Direct Labor Cost Budget, then follow that change through the budget chain to the Budgeted Income Statement.

4. Consider the changes in selling and administrative expenses, and their effects on the Selling and Administrative Expenses Budget, then follow that change through the budget chain to the Budgeted Income Statement.

Feedback

Partially correct

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