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, 2011, and is planning for 2012, 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 Learnco in preparing the 2012 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 Learnco'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, 2012 Unit Sales Unit Selling Product Volume Price Basic Abacus $7 Deluxe Abacus 465,000 Totals 72,000 3720,000 Total Sales $252,000 Production Budget Printem 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, 2012 Units Deluxe Expected units to be sold (from Sales Budget) Desired ending inventary, December 31, 2012 Units Basic 1,000 3,000 Total units available (1,050) (2.100) Estimated beginning inventory, January 1, 2012 Total units to be produced Direct Materials Purchases Budget The direct materiale 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. Alter scanning the direct materials purchases budget (which follows the Direct Material Data Tole), 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 Dute Table, or from the sales budget and production budget you prepared. When required, round your answers to the nearest collen Direct Materials Data Table Wood Places Beads Packages required per unit 1 2 Direct Materials Data Table Wood Pieces Beads Packages required per unit: Basic abacus 2 Deluxe abacus 3 Cost per package: Wood pieces $0.20 Beads $0.20 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 Pieces Beads Packages required for production: Basic abacus Deluxe abacus Desired inventory, December 31, 20Y2 2,200 5,000 Total packages available Estimated inventory, January 1, 2012 (3,500) (4,500) Total packages to be purchased Total Total packages available (3,500) (4,500) Estimated Inventory, January 1, 2012 Total packages to be purchased Unit price (per package) Total direct materials to be purchased XS $58,310 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 tabor 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 Gluing Assembly Hours required per unit 0.10 0.10 0.10 0.20 $13 Basic abacus Deluxe abacus Labor hourly rate: Gluing Assembly Units to be produced (from Production Budget): Basic abacus $19 11 Deluxe abacus Budget): Basic abacus Deluxe abacus LearnCo Direct Labor Cost Budget For the Year Ending December 31, 2012 Gluing Assembly Hours required for production: Basic abacus Total Deluxe abacus Total Hourly rate Total direct labor cost $303,230 Factory Overhead Cost Budget The factory overhand 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 fived and variable costs so that department managers may monitor and evaluate costs during the year. For simplicity, camco has not separated costs in this manner After reviewing the following factory overhead cost budget, you note that Luanco has completed the budget with the exception of one amount. Put in the missing amount LearnCo Factory Overhead Cost Budget For the Year Ending December 31, 2012 Indirect factory wages $5,400 $9,870 $2,010 LearnCo Cost of Goods Sold Budget For the Year Ending December 31, 20Y2 Finished goods inventory, January 1, 2072 Work in process inventory, January 1, 2012 Direct materials: Direct materials inventory, January 1, 2012 $1,600 Direct materials purchases Cost of direct materials available for use Direct materials inventory, December 31, 2012 (1,440) 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, 2012 Cost of goods manufactured Cost of finished goods available for sale Finished goods inventory, December 31, 2012 Cost of goods sold (1,250) (1.500) Selling/Admin Expenses Budget 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, 2012 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 $55,000 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 5219,400 Budgeted Income Statement The budgeted Income statement is prepared by integrating the sales budget, cost of goods sold budget and setting 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 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 LearnCo's income tax rate LearnCo Budgeted Income Statement For the Year Ending December 31, 2012 $1,500 40% 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 expenses 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 sa including the level of production of each model. 1. Learnco belleves that sales of the Deluxe Abacus model may decrease in 2012. I 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. a. If Learnco sells zero Deluxe Abacus units in 2012, it will break even (le, 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 2012. C. LeamCo will still have poukive Income before Income tax if it cells zero Deluxe Abacus units in 2012. 2. Learnco's vender 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? a. If the price for bead packages doubles, LearnCo will break even (le, the company will have zero income before income tax). b. Learnce 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. Learn Co 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 Learnco's Income before income tax? 2. LearnCo will still have positive Income before income tax it Gluing labor costs increase to $15.00 per hour