Question

Problem 23-1A

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 2017.

1.		Sales: quarter 1, 28,000 bags; quarter 2, 43,300 bags. Selling price is $63 per bag.
2.		Direct materials: each bag of Snare requires 4 pounds of Gumm at a cost of $3.8 per pound and 6 pounds of Tarr at $1.50 per pound.
3.		Desired inventory levels:

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

4.		Direct labor: direct labor time is 15 minutes per bag at an hourly rate of $14 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 $300,000 in quarter 1 and $424,500 in quarter 2.

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

Prepare a sales sheet.

Prepare a production sheet.

Prepare Direct Materials budget.

Prepare the direct labor budget.

Prepare the selling and administrative expense budget.

Prepare the budgeted multiple-step income statement for the first 6 months.

Answer 1

SOLUTION

A. Sales budget

	Quarter 1	Quarter 2	Total
Expected units sales	28,000	43,300	71,300
Unit selling price	$63	$63	$63
Total sales	1,764,000	2,727,900	4,491,900

B. Production budget

	Quarter 1	Quarter 2	Total
Expected units sales	28,000	43,300	71,300
Add: Desired ending finished goods units	12,500	18,400	30,900
Total required units	40,500	61,700	102,200
Less: Beginning finished goods units	(8,400)	(12,500)	(20,900)
Required production units	32,100	49,200	81,300

C. Direct Materials budget

	Quarter 1	Quarter 2	Total
Units to be produced	32,100	49,200	81,300
Direct materials per unit	4	4	4
Total pounds needed for production	128,400	196,800	325,200
Add: Desired ending direct materials	10,300	13,400	23,700
Total materials required	138,700	210,200	348,900
Less: Beginning direct material	(9,500)	(10,300)	(19,800)
Direct materials purchases	129,200	199,900	329,100
Cost per pound	$3.8	$3.8	$3.8
Total cost of direct materials purchases	490,960	759,620	1,250,580

D. Direct Labor budget

	Quarter 1	Quarter 2	Total
Units to be produced	32,100	49,200	81,300
Direct labor time (hours) per unit	1/4	1/4	1/4
Total required direct labor hours	8,025	12,300	20,325
Direct labor cost per hour	$14	$14	$14
Total direct labor cost	112,350	172,200	284,550

E. Selling and administrative expense budget

	Quarter 1	Quarter 2	Total
Budgeted units sales	28,000	43,300	71,300
Unit selling price	$63	$63	$63
Total sales	1,764,000	2,727,900	4,491,900
Variable (15% * sales)	264,600	409,185	673,785
Fixed	177,000	177,000	354,000
Total	441,600	586,185	1,027,785

E. Budgeted Income Statement

Particulars	Amount ($)
Sales	4,491,900
Cost of goods sold (71,300 * $32.075)	2,286,947
Gross profit	2,204,953
Selling and administrative expenses	1,027,785
Interest expense	100,000
Income from operations	1,077,168
Income tax expense (30%)	323,150
Net income	754,018

* (4*$3.8) + (6*$1.50) + ($14*1/4) + (125%*3.5) = 32.075