Question 5

Mastery Problem: Budgeting

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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 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, note that three numbers have been omitted. The company's controller has told 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, 20Y2
Product	Unit Sales Volume	Unit Selling Price	Total Sales
Basic Abacus	fill in the blank 32d1a1f7d061ff7_1	$8	$288,000
Deluxe Abacus	fill in the blank 32d1a1f7d061ff7_2	fill in the blank 32d1a1f7d061ff7_3	432,000
Totals	72,000		$720,000

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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.

Note that LearnCo has omitted six numbers from the following production budget and fill in the missing amounts. May need to use numbers from the sales budget prepared.

LearnCo Production Budget For the Year Ending December 31, 20Y2
	Units Basic	Units Deluxe
Expected units to be sold (from Sales Budget)	fill in the blank 8ab9a2fa1fc8004_1	fill in the blank 8ab9a2fa1fc8004_2
Desired ending inventory, December 31, 20Y2	1,000	3,000
Total units available	fill in the blank 8ab9a2fa1fc8004_3	fill in the blank 8ab9a2fa1fc8004_4
Estimated beginning inventory, January 1, 20Y2	(1,050)	(2,100)
Total units to be produced	fill in the blank 8ab9a2fa1fc8004_5	fill in the blank 8ab9a2fa1fc8004_6

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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 make any changes to the budget, 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), observe that LearnCo has omitted quite a few numbers from the budget. Fill in the missing amounts. May need to use numbers from the Direct Materials Data Table, or from the sales budget and production budget prepared. When required, round answers to the nearest dollar.

Direct Materials Data Table
	Wood Pieces	Beads
Packages required per unit:
Basic abacus	1	2
Deluxe abacus	2	3
Cost per package:
Wood pieces	$0.20
Beads	$0.20
Unitstobeproduced (from Production Budget):
Basic abacus	fill in the blank 33960a04e019fdc_1
Deluxe abacus	fill in the blank 33960a04e019fdc_2

LearnCo Direct Materials Purchases Budget For the Year Ending December 31, 20Y2
	Direct Materials
	Wood Pieces	Beads	Total
Packages required for production:
Basic abacus	fill in the blank 33960a04e019fdc_3	fill in the blank 33960a04e019fdc_4
Deluxe abacus	fill in the blank 33960a04e019fdc_5	fill in the blank 33960a04e019fdc_6
Desired inventory, December 31, 20Y2	2,200	5,000
Total packages available	fill in the blank 33960a04e019fdc_7	fill in the blank 33960a04e019fdc_8
Estimated inventory, January 1, 20Y2	(3,500)	(4,500)
Total packages to be purchased	fill in the blank 33960a04e019fdc_9	fill in the blank 33960a04e019fdc_10
Unit price (per package)	$fill in the blank 33960a04e019fdc_11	$fill in the blank 33960a04e019fdc_12
Total direct materials to be purchased	$fill in the blank 33960a04e019fdc_13	$fill in the blank 33960a04e019fdc_14	$58,310

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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 make any changes to the budget, 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), observe that LearnCo has omitted quite a few numbers from the budget. Fill in the missing amounts. May need to use numbers from the Direct Labor Data Table, or from the sales budget, production budget, and direct materials purchases budget prepared. When required, round answers to the nearest dollar.

Direct Labor Data Table
	Gluing	Assembly
Hours required per unit:
Basic abacus	0.10	0.10
Deluxe abacus	0.10	0.20
Labor hourly rate:
Gluing	$11
Assembly	$18
Units to be produced (from Production Budget):
Basic abacus	fill in the blank 801851fe5ff2f8d_1
Deluxe abacus	fill in the blank 801851fe5ff2f8d_2

LearnCo Direct Labor Cost Budget For the Year Ending December 31, 20Y2
	Gluing	Assembly	Total
Hours required for production:
Basic abacus	fill in the blank 801851fe5ff2f8d_3	fill in the blank 801851fe5ff2f8d_4
Deluxe abacus	fill in the blank 801851fe5ff2f8d_5	fill in the blank 801851fe5ff2f8d_6
Total	fill in the blank 801851fe5ff2f8d_7	fill in the blank 801851fe5ff2f8d_8
Hourly rate	$fill in the blank 801851fe5ff2f8d_9	$fill in the blank 801851fe5ff2f8d_10
Total direct labor cost	$fill in the blank 801851fe5ff2f8d_11	$fill in the blank 801851fe5ff2f8d_12	$277,685

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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, 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	fill in the blank 1a53f10d0f89f9e_1
Depreciation of plant and equipment	1,450
Total factory overhead cost	$18,100

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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, 20Y2		$2,010
Direct materials:
Direct materials inventory, January 1, 20Y2	$1,600
Direct materials purchases	fill in the blank cdcc4efa9fa5fab_1
Cost of direct materials available for use	$fill in the blank cdcc4efa9fa5fab_2
Direct materials inventory, December 31, 20Y2	(1,440)
Cost of direct materials placed in production	$fill in the blank cdcc4efa9fa5fab_3
Direct labor	fill in the blank cdcc4efa9fa5fab_4
Factory overhead	fill in the blank cdcc4efa9fa5fab_5
Total manufacturing costs		fill in the blank cdcc4efa9fa5fab_6
Total work in process during period		$fill in the blank cdcc4efa9fa5fab_7
Work in process inventory, December 31, 20Y2		(1,250)
Cost of goods manufactured			fill in the blank cdcc4efa9fa5fab_8
Cost of finished goods available for sale			$fill in the blank cdcc4efa9fa5fab_9
Finished goods inventory, December 31, 20Y2			(1,500)
Cost of goods sold			$fill in the blank cdcc4efa9fa5fab_10

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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 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
LearnCo's income tax rate	40%

LearnCo Budgeted Income Statement For the Year Ending December 31, 20Y2
Revenue from sales		$fill in the blank 122ae90b8fb6fc8_1
Cost of goods sold		fill in the blank 122ae90b8fb6fc8_2
Gross profit		$fill in the blank 122ae90b8fb6fc8_3
Selling and administrative expenses:
Selling expenses	$fill in the blank 122ae90b8fb6fc8_4
Administrative expenses	fill in the blank 122ae90b8fb6fc8_5
Total selling and administrative expenses		fill in the blank 122ae90b8fb6fc8_6
Operating income		$fill in the blank 122ae90b8fb6fc8_7
Other revenue and expense:
Interest revenue	$fill in the blank 122ae90b8fb6fc8_8
Interest expense	fill in the blank 122ae90b8fb6fc8_9	fill in the blank 122ae90b8fb6fc8_10
Income before income tax		$fill in the blank 122ae90b8fb6fc8_11
Income tax		fill in the blank 122ae90b8fb6fc8_12
Net income		$fill in the blank 122ae90b8fb6fc8_13

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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. LearnCo believes that sales of the Deluxe Abacus model may decrease in 20Y2. 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 20Y2, it will break even (i.e., 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 20Y2.

c. LearnCo will still have positive income before income tax if it sells zero Deluxe Abacus units in 20Y2.

abc

2. LearnCo's vendor 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 (i.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. LearnCo will still have positive income before income tax if the price for bead packages doubles.

abc

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 (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.

abc

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 answer to the nearest dollar.

$fill in the blank e4b1ecfb106600e_4