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 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. Learn Co 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. Learn Co Sales Budget For the Year Ending December 31, 2042 Unit Sales Unit Selling Product Volume Price Total Sales Basic Abacus 36,000 $6 $216,000 36,000 Deluxe Abacus 14 504,000 Totals 72,000 $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) 36,000 36,000 1,000 3,000 Desired ending inventory, December 31, 2012 Total units available Estimated beginning inventory, January 1, 20Y2 37,000 39,000 (1,050) (2,100) Total units to be produced 35,950 36,900 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 Pieces Beads Packages required per unit: Basic abacus 1 Deluxe abacus 2 3 Cost per package: Wood pieces $0.25 Beads $0.25 Units to be produced (from Production Budget): Basic abacus 35,950 Deluxe abacus 36,900 > 2 Total LearnCo Direct Materials Purchases Budget For the Year Ending December 31, 20Y2 Direct Materials Wood Pieces Beads Packages required for production: Basic abacus 35,950 71,900 Deluxe abacus 73,800 110,700 Desired Inventory, December 31, 2,200 5,000 20Y2 Total packages available 111,950 187,600 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 > 0.10 $17 Gluing Assembly Hours required per unit: Basic abacus 0.10 Deluxe abacus 0.10 0.20 Labor hourly rate: Gluing $11 Assembly Units to be produced (from Production Budget): Basic abacus 35,950 Deluxe abacus 36,900 Learn Co Direct Labor Cost Budget For the Year Ending December 31, 20Y2 Gluing Assembly Hours required for production: Basic abacus 3,595 3,595 Total Deluxe abacus 3,690 7,380 Total 7,285 10,975 Hourly rate 11 X. $ 17 Total direct lahor net 80.135 5 186.575 $266.7110 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, Learn Co has not separated costs in this mannen 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 11,250 Depreciation of plant and equipment 1.450 Total factory overhead cost $18,100 Feedback 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, 2012 $2,010 Direct materials: Direct materials inventory, January 1, 20Y2 $2,000 Direct materials purchases 72,888 Cost of direct materials available for use 74,888 Direct materials inventory, December 31, 2012 (1,800) Cost of direct materials placed in production 73,088 Direct labor Factory overhead 18,100 s (1,250) Total manufacturing costs Total work in process during period Work in process inventory, December 31, 20Y2 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, 2012 Selling expenses: $45,000 Sales salaries expense Advertising expense 15,000 Travel expense 5,400 $65,400 $85,000 35,000 26,000 Total selling expenses Administrative expenses: Officers salaries expense Office salaries expense Office rent expense Office supplies expense Miscellaneous administrative expenses Total administrative expenses Total selling and administrative expenses Budgeted Income Statement 6,400 1,600 154,000 $219,400 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 Learn Co's income tax rate 40% 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 Learn Co's income tax rete 40% LearnCo Budgeted Income Statement For the Year Ending December 31, 20Y2 Revenue from sales 720,000 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. Learn Co 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. 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. LearnCo will still have positive income before income tax if it sells zero Deluxe Abacus units in 2012. b 2. Learn Co's vendor for bead packages is expected to double its price per package of beads. If this occurs, what will be the effect on Learn Co's income before income tax? 2. If the price for bead packages doubles, LearnCo will break even (.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. Learn Co 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? 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, Learn Co 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. Learn Co's controller believes that the company can decrease its selling expenses by 10% and its administrative expenses by 1596. How much would income before income tax increase if these expense cuts are implemented? Round your answer to the nearest dollar