Mastery Problems Budgeting Learno Learno 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 2002, 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 Learno 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. Learno 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, Leamco Sales Budget For the Year Ending December 31, 2012 Unit Sales Unit Selling Total Product Volume Price Sales 58 1.288,000 Basic Abacus Deluxe Abacus 432,000 Totals 72,000 5720,000 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, 2012 Units Basic Units Deluxe Expected units to be sold (from Sales Budget) Desired ending inventory, December 31, 2012 1,000 3,000 Total units available Estimated beginning inventory, January 1, 2012 (1,050) (2.100) Total units to be produced 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 Material Data Table and enter the units be produced from the Production Budget Arter scanning the direct materials purchases budget (which follows the Direct Materials Data Table), you observe that earns 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 Direct Materials Data Table Wood Pieces Beads Packages required per unit: Basic abacus 1 N Deluxe abacus N 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, 2012 Direct Materials Wood Pieces Beads Total Packages required for production: Basic abacus Deluxe abacus Desired Inventory, December 31, 2012 2,200 5,000 Total packages available (3,500) Estimated Inventory, January 1, 20Y2 Total packages to be purchased (4,500) Unit price (per package) X $ Total direct materials to be purchased $ $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 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 Learco has omitted quite a tew 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 0.10 0.20 $11 Deluxe abacus Labor hourly rate: Gluing Assembly Units to be produced (from Production Budget): Basic abacus $17 Deluxe abacus LearnCo Direct Labor Cost Budget For the Year Ending December 31, 2012 Gluing Assembly Hours required for production: Total Basic abacus Deluxe abacus Total Hourly rate X $ Total direct labor cost $266,710 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 Learn Co 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, 2012 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, 2012 Finished goods Inventory, January 1, 2012 $9,870 Work in process inventory, January 1, 2012 $2,010 Direct materials Direct materials inventory, January 1, 2012 $1,000 Direct materials purchases Cost of direct materials available for us Direct materials inventory, December 31, 2012 (1.440) $2,010 Work in process inventory, January 1, 2012 Direct materials Direct materials inventory, January 1, 2012 Direct, materials purchases Cost of direct materials available for use Direct, materials Inventory, December 31, 2012 Cost of direct materials placed in production Direct labor Factory overhead (1.250) 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 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. Learnca han 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 Seling 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 Olice rent expense 26,000 Omice supplies expense 6,400 Miscellaneous administrative expenses 1,800 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 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 collar Ruterms Budgeted Income Statement Data Table Interest revenue for the year $2,000 Interest expense for the year $1,500 LearnCo's income tax rate 40% 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 II 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 cach question separately, assuming that all other data remains the same, including the level of production of each model 1. Learco believes that sales of the Deluxe Abacus model may decrease in 2012. If Deluxe abacus sales are nero, what will be the effect on Learnco's income before Income tax? For simplicity, Ignore any change in Cost of Goods Sold a. If LeamCo sells zero Deluxe Abacus units in 2012, it will break even (te, the company will have zero income before income tax). b. Learnco will have a net loss before income tax it sells zero Deluxe Abacus units in 2012 c. Learnce will still have positive Income before income tax if it sells zero Deluxe Abacus units in 2012 2. LeamCo's vender for bead packages is expected to double its price per package of beads. If this occurs, what will be the effect on Learnos income before Income . If the price for bead packages doubles, Lance will break even the company will have zero income before income tax) b. LearnCo will have a lost before income tax if the price for bead packages doubles c. tamco will still have positive Income before income tax if the price for bead packages doubles. 3. Learno 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 cours, what will be the effect on Learno's income before income tax Leance will still have positive income before income taxi Gluing labor costs increase to $15.00 per hour D. Ir Gluing labor costs increase to $15.00 per hour, Leanca will break even (le, the company will have income before income tax 3. Learco 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?: LearnCo wit still have positive Income before income tax ir Gluing labor costs increase to $15.00 per hour b. 17 Gluing labor costs increase to $15.00 per hour, LearnCo wil break even (.., the company will have zero income before income tax). c. LeamCo will have a loss before income tax it Gluing tabor costs increase to $15.00 per hour 4. Learco's controller believes that the company can decrease itselling expenses by 10% and its administrative expenses by 15%. How much would income before Income tax increase of these expense cuts are implemented Round your answer to the nearest dollar