Question

Port Inc. is preparing its annual budgets for the year ending December 31, 2018. Accounting assistants furnish the data shown below.

	Product A	Product B
Sales budget:
Anticipated volume in units	300,000	400,000
Unit selling price	$10	$15
Production budget:
Desired ending finished goods units	20,000	10,000
Beginning finished goods units	15,000	5,000
Direct materials budget:
Direct materials per unit (pounds)	4	2
Desired ending direct materials pounds	20,000	15,000
Beginning direct materials pounds	30,000	10,000
Cost per pound	$2	$3
Direct labor budget:
Direct labor time per unit	0.3	0.5
Direct labor rate per hour	$10	$10
Budgeted income statement:
Total unit cost (DM+DL+MOH)	$8	$12

An accounting assistant has prepared the detailed manufacturing overhead budget and the selling and administrative expense budget. The latter shows selling, general and administrative expenses: variable 5% of sales, fixed $100,000 for product A and B.

Required: (support your answers with an explanation)

1. Prepare the following budgets for the year. Show data for each product. You do not need to pre- pare quarterly budgets.

1. Sales
2. Production
3. Direct materials
4. Direct labor
5. Income statement

2. What are the primary benefits of budgeting?

3. How does a budget add to good organization?

Answer 1

a.)	Sales Budget:-
		Product A	Product B
	Sales in Units	300,000	400,000
	x unit selling Price	10	15
	Budgeted Sales in $	3,000,000	6,000,000
b.)	Production Budget:-
		Product A	Product B
	Sales in Units	300,000	400,000
	Add: Desired ending finished goods	20,000	10,000
	Total Needs	320,000	410,000
	Less: Beginning finished goods	15,000	5,000
	Budgeted Production in Units	305,000	405,000
c.)	Direct Materials
	Budgeted Production in Units	305,000	405,000
	x Direct Material per unit	4	2
	Production Need of direct materials	1,220,000	810,000
	Add: Desired ending materials pounds	20,000	15,000
	Total Needs	1,240,000	825,000
	Less: Beginning direct materials pounds	30,000	10,000
	Budgeted Purchases of pounds in Units	1,210,000	815,000
	x cost per pound	2	3
	Budgeted Purchases of pounds in $	24,20,000	2,445,000
d.)	Direct Labor
	Budgeted Production in Units	305,000	405,000
	x direct labor time per unit	0.3	0.5
	Total Direct labor hours required	91,500	2,02,500
	x direct labor rate per unit	10	10
	Budgeted Direct Labor cost	915,000	2,025,000
e.)	Income Statement:-
		Product A	Product B	Total
	Sales	3,000,000	6,000,000	9,000,000
	Less: Cost of Goods Sold
	Unit Cost of goods sold	2,400,000	4,800,000	7,200,000
	Gross Profit	600,000	1,200,000	1,800,000
	Less: Selling , general & Administrative Expenses
	Variable	150,000	300,000	450,000
	Fixed			100,000
	Net Income			1,250,000
	Primary Benefit of Budgeting:-
(i)	Budget helps the management to focus on key areas to be monitored.
(ii)	It provides a means of controlling Revenue & Expenditure.
(iiI)	It helps in defining reponsibility of various departments of the organization.
(iv)	It helps the management of the organization to co-ordinate with various functional activities.
	Budget add to good organization by setting reponsibility of various department which will ensure better performance of each department which enables the overall goods performance of the organization in terms of cost reduction as well as revenue generation.