Question

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 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, 20Y2
Product	Unit Sales Volume	Unit Selling Price	Total Sales
Basic Abacus		$6	$216,000
Deluxe Abacus			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)
Desired ending inventory, December 31, 20Y2	1,000	3,000
Total units available
Estimated beginning inventory, January 1, 20Y2	(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 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	2
Deluxe abacus	2	3
Cost per package:
Wood pieces	$0.25
Beads	$0.25
Units to be produced (from Production Budget):
Basic abacus
Deluxe abacus

LearnCo Direct Materials Purchases Budget For the Year Ending December 31, 20Y2
	Direct Materials
	Wood Pieces	Beads	Total
Packages required for production:
Basic abacus
Deluxe abacus
Desired inventory, December 31, 20Y2	2,200	5,000
Total packages available
Estimated inventory, January 1, 20Y2	(3,500)	(4,500)
Total packages to be purchased
Unit price (per package)	× $	× $
Total direct materials to be purchased	$	$	$72,888

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 purchase 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
Deluxe abacus	0.10	0.20
Labor hourly rate:
Gluing	$12
Assembly	$17
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:
Basic abacus
Deluxe abacus
Total
Hourly rate	× $	× $
Total direct labor cost	$	$	$273,995

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.

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

Answer 1

LearnCo
Sales Budget
For the Year Ending December 31, 20Y2
Product	Unit Sales Volume	Unit Selling Price	Total Sales
Basic Abacus	36000	$                       6.00	216000
Deluxe Abacus	36000	$                     14.00	504000
Totals	72000		720000
LearnCo
Production Budget
For the Year Ending December 31, 20Y2
	Units Basic	Units Deluxe
Expected units to be sold (from Sales Budget)	36000	36000
Desired ending inventory, December 31, 20Y2	1000	3000
Total units available	37000	39000
Estimated beginning inventory, January 1, 20Y2	-1050	-2100
Total units to be produced	35950	36900
LearnCo
Direct Materials Purchases Budget
For the Year Ending December 31, 20Y2
	Direct Materials
	Wood Pieces	Beads	Total
Packages required for production:
Basic Abacus (35950 x 1);(35950 x 2)	35950	71900
Deluxe Abacus (36900 x 2);(36900 x 3)	73800	110700
Desired inventory, December 31, 20Y2	2200	5000
Total packages available	111950	187600
Estimated inventory, January 1, 20Y2	-3500	-4500
Total packages to be purchases	108450	183100
Unit price (per package)	x $0.25	x $0.25
Total direct materials to be purchased	27113	45775	72888
LearnCo
Direct Labor Cost Budget
For the Year Ending December 31, 20Y2
	Gluing	Assembly	Total
Hours required for production:
Basic Abacus (35950 x 0.10);(35950 x 0.10)	3595	3595
Deluxe Abacus (36900 x 0.10);(36900 x 0.20)	3690	7380
Total	7285	10975
Hourly rate	x $12	x $17
Total direct labor cost	87420	186575	273995

LearnCo
Factory Overhead Cost Budget
For the Year Ending December 31, 20Y2
Indirect factory wages	5400
Power and light	11250
Depreciation of plant and equipment	1450
Total factory overhead cost	18100