Lane Products manufactures a popular kitchen utensil. The company recently expanded, and the controller believes that it will need to borrow cash to continue operations. It opened negotiations with the local bank for a one-month loan of $40,000 starting March 1. The bank would charge interest at the rate of 0.5 percent per month and require the company to repay interest and principal on March 31. In considering the loan, the bank requested a projected income statement and cash budget for March.The following information is available:The company budgeted sales at 12,000 units per month in February, April, and May and at 9,000 units in March. The selling price is $60 per unit.The company offers a 2 percent discount for cash sales. The company's experience is that bad debts average 1 percent of credit sales.The inventory of finished goods on February 1 was 2,400 units. The desired finished goods inventory at the end of each month equals 25 percent of sales anticipated for the following month. There is no work in process.The inventory of raw materials on February 1 was 2,280 pounds. At the end of each month, the raw materials inventory equals no less than 20 percent of production requirements for the following month. The company purchases materials in quantities of 250 pounds per shipment.Selling expenses are 6 percent of gross sales. Administrative expenses, which include depreciation of $750 per month on office furniture and fixtures, total $68,400 per month.The manufacturing budget for the utensil, based on normal production of 10,000 units per month, follows.Materials (½ pound per utensil, 5,000 pounds, $30 per pound)$ 150,000Labor120,000Variable overhead60,000Fixed overhead (includes depreciation of $20,000)120,000Total$ 450,000Required:a-1. Prepare schedules computing inventory budgets by months for production in units for February, March, and April.a-2. Prepare schedules computing inventory budgets by months for raw materials purchases in pounds for February and March.b. Prepare a projected income statement for March. Cost of goods sold should equal the variable manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period. Assume that 40 percent of sales are cash sales. **Budgeted Income Statement for the Year Ended December 31, Year 2****Revenue:**- Sales revenue: $1,430,000- Other income: $53,000- **Total revenue:** $1,483,000**Expenses:****Cost of goods manufactured and sold:**- Materials: $428,000- Direct labor: $413,000- Variable overhead: $251,000- Fixed overhead: $40,000- **Total current manufacturing costs:** $1,132,000- Beginning inventory: $152,000- **Total cost of goods manufactured:** $1,284,000- Ending inventory: $152,000- **Cost of goods sold total:** $1,132,000**Marketing:**- Salaries: $44,500- Commissions: $53,000- Promotions and advertising: $98,500- **Total marketing expenses:** $196,000**Administrative:**- Salaries: $46,000- Travel: $10,000This statement provides a comprehensive breakdown of the expected revenues and expenses for the year, detailing the costs associated with manufacturing and marketing, as well as administrative expenses. The income and expenditures are organized into categories for clarity and ease of analysis.

Production budget helps to indicate the number of units that is required to produce to meet the demand of customers. On the other hand, raw materials purchase budget indicates the quantity of raw materials that is needed to be purchased to meet the required production need. Income statement is a financial statement which reflects the profit or loss earned by a company during a particular year. The production schedule budget is prepared in the following manner:Formula: Result: The budgeted production for each of month is calculated by subtracting the beginning inventory from the total needs. Total needs are calculated by adding the budgeted sales and desired ending inventory. The raw materials purchase budget (pounds) is prepared in the below manner:Formula: Result:The number of shipment required is rounded to the next value. The budgeted purchase is calculated by multiplying the pounds purchased per shipment by the total shipment required. The projected income statement for March is prepared in the following manner:Formula:Result:The operating profit comes to $14,440 which is calculated by subtracting all the expenses incurred in March from the net sales revenue earned in March. Requirement a-1:Requirement a-2: Requirement b:

Answered: a-1. Prepare schedules computing…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Lane Products manufactures a popular kitchen utensil. The company recently expanded, and the controller believes that it will need to borrow cash to continue operations. It opened negotiations with the local bank for a one-month loan of $40,000 starting March 1. The bank would charge interest at the rate of 0.5 percent per month and require the company to repay interest and principal on March 31. In considering the loan, the bank requested a projected income statement and cash budget for March.

The following information is available:

The company budgeted sales at 12,000 units per month in February, April, and May and at 9,000 units in March. The selling price is $60 per unit.
The company offers a 2 percent discount for cash sales. The company's experience is that bad debts average 1 percent of credit sales.
The inventory of finished goods on February 1 was 2,400 units. The desired finished goods inventory at the end of each month equals 25 percent of sales anticipated for the following month. There is no work in process.
The inventory of raw materials on February 1 was 2,280 pounds. At the end of each month, the raw materials inventory equals no less than 20 percent of production requirements for the following month. The company purchases materials in quantities of 250 pounds per shipment.
Selling expenses are 6 percent of gross sales. Administrative expenses, which include depreciation of $750 per month on office furniture and fixtures, total $68,400 per month.
The manufacturing budget for the utensil, based on normal production of 10,000 units per month, follows.

Materials (½ pound per utensil, 5,000 pounds, $30 per pound)	$ 150,000
Labor	120,000
Variable overhead	60,000
Fixed overhead (includes depreciation of $20,000)	120,000
Total	$ 450,000

Required:

a-1. Prepare schedules computing inventory budgets by months for production in units for February, March, and April.

a-2. Prepare schedules computing inventory budgets by months for raw materials purchases in pounds for February and March.

b. Prepare a projected income statement for March. Cost of goods sold should equal the variable manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period. Assume that 40 percent of sales are cash sales.

**Budgeted Income Statement for the Year Ended December 31, Year 2**

**Revenue:**
- Sales revenue: $1,430,000
- Other income: $53,000
- **Total revenue:** $1,483,000

**Expenses:**

**Cost of goods manufactured and sold:**
- Materials: $428,000
- Direct labor: $413,000
- Variable overhead: $251,000
- Fixed overhead: $40,000
- **Total current manufacturing costs:** $1,132,000
- Beginning inventory: $152,000
- **Total cost of goods manufactured:** $1,284,000
- Ending inventory: $152,000
- **Cost of goods sold total:** $1,132,000

**Marketing:**
- Salaries: $44,500
- Commissions: $53,000
- Promotions and advertising: $98,500
- **Total marketing expenses:** $196,000

**Administrative:**
- Salaries: $46,000
- Travel: $10,000

This statement provides a comprehensive breakdown of the expected revenues and expenses for the year, detailing the costs associated with manufacturing and marketing, as well as administrative expenses. The income and expenditures are organized into categories for clarity and ease of analysis.

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