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.

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.

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 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.

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.

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.

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 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

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 rate	40%

LearnCo Sales Budget For the Year Ending December 31, 20Y2 Unit Sales Unit Selling Product Volume Price Basic Abacus 36,000 $8 Total Sales $288,000 Deluxe Abacus 36,000 12 432,000 Totals 72,000 $720,000 Units Deluxe 36,000 LearnCo Production Budget For the Year Ending December 31, 2012 Units Basic Expected units to be sold (from Sales Budget) 36,000 Desired ending inventory, December 31, 20Y2 1,000 Total units available 37,000 Estimated beginning inventory, January 1, 20Y2 (1,050) Total units to be produced 35,950 3,000 39,000 (2,100) 36,900 Direct Materials Data Table Wood Pieces Beads Packages required per unit: Basic abacus 1 2 2 3 Deluxe abacus Cost per package: Wood pieces $0.20 Beads $0.20 Units to be produced (from Production Budget): Basic abacus 35,950 Deluxe abacus 36,900 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 Total Desired inventory, December 31, 20Y2 2,200 5,000 Total packages available 111,950 187,600 Estimated inventory, January 1, 20Y2 (3,500) (4,500) Total packages to be purchased 108,450 183,100 Unit price (per package) XS 0.2 x $ 0.2 Total direct materials to be purchased S 21,690 $ 36,620 $58,310 Direct Labor Data Table Gluing Assembly Hours required per unit: Basic abacus Deluxe abacus 0.10 0.10 0.10 0.20 $11 Labor hourly rate: Gluing Assembly Units to be produced (from Production Budget): $17 Basic abacus 35,950 Deluxe abacus 36,900 LearnCo 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 V Total 7,285 10,975 Hourly rate X $ 11 X $ 17 Total direct labor cost $ 80,135 $ 186,575 $266,710 Learn Co Factory Overhead Cost Budget For the Year Ending December 31, 2012 Indirect factory wages $5,400 Power and light 11,250 Depreciation of plant and equipment 1,450 Total factory overhead cost $18,100 $9,870 $2,010 Cost of Goods Sold Budget For the Year Ending December 31, 2012 Finished goods inventory, January 1, 2012 Work in process inventory, January 1, 20Y2 Direct materials: Direct materials inventory, January 1, 2012 $1,600 Direct materials purchases Cost of direct materials available for use (1,440) Direct materials inventory, December 31, 20Y2 Cost of direct materials placed in production $ 0 Direct labor Factory overhead Total manufacturing costs Total work in process during period Work in process inventory, December 31, 20Y2 Cost of goods manufactured (1,250) Cost of finished goods available for sale Finished goods inventory, December 31, 20Y2 (1,500) Cost of goods sold Learn Co 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