Question

Cook Farm Supply Company manufactures and sells a pesticide called Snare. The following data are available for preparing budgets for Snare for the first 2 quarters of 2020.

1.		Sales: quarter 1, 28,000 bags; quarter 2, 43,000 bags. Selling price is $61 per bag.
2.		Direct materials: each bag of Snare requires 5 pounds of Gumm at a cost of $3.80 per pound and 6 pounds of Tarr at $1.75 per pound.
3.		Desired inventory levels:

Type of Inventory		January 1		April 1		July 1
Snare (bags)		8,100		12,400		18,400
Gumm (pounds)		9,200		10,400		13,500
Tarr (pounds)		14,400		20,300		25,300

4.		Direct labor: direct labor time is 15 minutes per bag at an hourly rate of $16 per hour.
5.		Selling and administrative expenses are expected to be 15% of sales plus $177,000 per quarter.
6.		Interest expense is $100,000.
7.		Income taxes are expected to be 30% of income before income taxes.

Your assistant has prepared two budgets: (1) the manufacturing overhead budget shows expected costs to be 125% of direct labor cost, and (2) the direct materials budget for Tarr shows the cost of Tarr purchases to be $302,000 in quarter 1 and $427,500 in quarter 2.

(Note: Do not prepare the manufacturing overhead budget or the direct materials budget for Tarr.)

1- Prepare the sales budget.

2- Prepare the production budget.

3- Prepare the direct materials budget. (Round Cost per pound answers to 2 decimal places, e.g. 52.70.)

4- Prepare the direct labor budget. (Enter Direct labor time per unit in proportion to hours, e.g. for 45 minutes the proportion will be 0.75.)
5- Prepare the selling and administrative expense budget.
6- Prepare the budgeted multiple-step income statement for the first 6 months. (Round intermediate calculations to 2 decimal places and final answer to 0 decimal places, e.g. 1,255.)

Answer 1

Solution:

COOK FARM SUPPLY COMPANY

Sales Budget

For the six month Ending June 30, 2020

sales budget	Quarter 1	Quarter 2	Total
Expected sales (Units)	28,000	43,000	71,000
Unit selling price	$61	$61	$61
Total sales(expected sales units X selling price)	$1,708,000	$2,623,000	$4,331,000

COOK FARM SUPPLY COMPANY

Production Budget

For the six month Ending June 30, 2020

	Quarter 1	Quarter 2	Total
Expected sales(Units)	28,000	43,000	71,000
Add: Desired Ending Finished Goods	12,400	18,400	30,800
Total Units Required(Expected sales units + ending Finished goods)	40,400	61,400	101,800
Less:Beginning Inventory	- 8,100	-12,400	-20,500
Required Production units(Total units required - Beginning Inventory)	32,300	49,000	81,300

COOK FARM SUPPLY COMPANY

Direct Materials Budget

For the six month Ending June 30, 2020

	Quarter 1	Quarter 2	Total
Units Produced	32,300	49,000	81,300
Direct Material pound per unit	5	5	5
Total pounds needed(Units produced X direct material pound per unit)	161,500	245,000	406,500
Add: Desired Ending Inventory	10,400	13,500	23,900
Total Gumm material needed(Total pounds needed +Desired ending inventory)	171,900	258,500	430,400
Less:Beginning Inventory	-9,200	-10,400	-19,600
Direct material Purchases(Total Gumm material needed - Beginning Inventory)	162,700	248,100	410,800
Cost per pound	$3.8	$3.8	$3.8
Total Cost direct materials Gumm(Direct material purchase X cost per pound)	618,260	942,780	1,561,040

Given : Tarr Direct Materials Cost

302,000

427,500

729,500

COOK FARM SUPPLY COMPANY

Direct Labour Budget

For the six month Ending June 30, 2020

	Quarter 1	Quarter 2	Total
Units produced	32,300	49,000	81,300
Direct labour per unit(15min/60min)	0.25hrs	0.25hrs	0.25
Total Hours Required(units produced X direct labour per unit)	8075	12,250	20325
Direct labour cost per hour	$16	$16	$16
Total Direct labour cost(Total hours required X Direct labour cost per hour)	129,200	196,000	325,200

COOK FARM SUPPLY COMPANY

  Selling and administration Budget

For the six month Ending June 30, 2020

	Quarter 1	Quarter 2	Total
Variable costs	$256,200 (1,708,000 X 15%)	$393,450 (2,623,000 X 15%)	$649,650
Fixed costs	$177,000	$177,000	$354,000
Total	$433,200	$570,450	$1,003,650

COOK FARM SUPPLY COMPANY

Budgeted Income statement

For the six month Ending June 30, 2020

Particulars	Amount($)
Sales (Refer sales Budget)	43,31,000
Cost of goods sold (Refer working note 1 and 2)	2,733,500
Gross profit (43,31,000 - 2,733,500)	1,597,500
Selling and administration Expenses(Refer sales and administration Budget)	1,003,650
Income from operations (1,597,500-1,003,650)	5,93,850
Interest expense	100,000
Income before Income taxes (593,850-100,000)	493,850
Income tax expense (493,850 X 30%)	148,155
Net Income(493,850-148,155)	345,695

Working note 1:

Computation of cost per unit

Direct materials

Gumm = 5pounds X$ 3.80 = $19

Tarr = 6Pounds X$ 1.75 = $10.5

Direct Labour = 0.25hrs X $16 =$4

Manufacturing overhead Budget = $5

(Direct labour cost X 125%

(4 X 125%)

Cost per unit = $19+$10.5+$4+$5 = $38.5

Working note -2

Computation of cost of goods sold

	Quarter 1	Quarter 2	Total
Number of snare bags sold	28,000	43,000	71,000
Total cost per unit (refer working note 1)	$38.5	$38.5	$38.5
Cost of goods sold	$1,078,000	$1,655,500	$2,733,500