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Chapter 22 Mastery (Mastery) Mastery Problem: Budgeting LearnCo LeamCo 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 seling 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 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 Total Product Volume > Price Sales $8 36,000 $288,000 Basic Abacus 36,000 12 432,000 Deluxe Abacus 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 Desired ending inventory, December 31, 2012 1,000 3,000 Total units available 36,000 x 36,000 x Estimated beginning inventory, January 1, 20Y2 (1,050) (2,100) Total units to be produced 34,950 X 33,900 x > Feedback Check My Work Be sure to include the xpected 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 Direct Materials Purchases Budget 1 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 2 Deluxe abacus Cost per package: Wood pieces $0.20 Beads $0.20 Units to be produced (from Production Budget): Basic abacus 34,950 X Deluxe abacus 33,900 X LearnCo Direct Materials Purchases Budget For the Year Ending December 31, 20Y2 Direct Materials Wood Pieces Beads 2 3 Total - Packages required for production: LearnCo Direct Materials Purchases Budget For the Year Ending December 31, 20Y2 Direct Materials Wood Pieces Beads Total 2,200 5,000 Packages required for production: Basic abacus Deluxe abacus Desired Inventory, December 31, 20Y2 Total packages available Estimated inventory, January 1, 20Y2 Total packages to be purchased Unit price (per package) Total direct materials to be purchased (3,500) (4,500) $58,310 Feedback Check My Work Direct Labor Cost Budget Direct labor needs from the direct labor cost budget should be coordinated between the production and personnel departments so that here 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 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 Gluing Assembly 0.10 0.10 Hours required per unit: Basic abacus Deluxe abacus Labor hourly rate: 0.10 0.20 Gluing $13 $19 Assembly Units to be produced (from Production Budget): Basic abacus Deluxe abacus LearnCo Direct Labor Cost Budget For the Year Ending December 31, 20Y2 Gluing Assembly Total Hours required for production: Total LearnCo Direct Labor Cost Budget For the Year Ending December 31, 20Y2 Gluing Assembly Hours required for production: Basic abacus Deluxe abacus Total Hourly rate Total direct labor cost $303,230 Feedback Check My Work 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, Leamco 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 drnet Rudnet LearnCo Factory Overhead Cost Budget For the Year Ending December 31, 20Y2 Indirect factory wages $5,400 Power and light Depreciation of plant and equipment 1,450 Total factory overhead cost $18,100 Feedback Check My Work 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, 2012 Finished goods inventory, January 1, 2012 $9,870 Work in process inventory, January 1, 2012 $2,010 Direct materials: Direct materials inventory LAHATV 1 208 (1 600 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, 2082 $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, 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 0:00 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 experises 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 funneter Income Statement Data Tahle then complete the hudated Income statement that follows the 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 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 Income before income tax Income tax Net Income 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 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, LearnCo will break even (l.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. 4. LearnCo's 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 Check My Work 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