Chapter 8, Problem 3PA

Budgeted income statement and supporting budgets

The budget director of Birding Homes & Feeders Inc., with the assistance of the controller, treasurer, production manager, and sales manager, has gathered the following data for use in developing the budgeted income statement for January:

Estimated sales for January:

Estimated inventories at January 1:

Desired inventories at January 31:

Direct materials used in production:

Anticipated cost of purchases and beginning and ending inventory of direct materials:

Direct labor requirements:

Estimated factory overhead costs for January:

Estimated operating expenses for January:

Estimated other revenue and expense for January:

Estimated tax rate: 25%

Instructions

Prepare a sales budget for January.

Prepare a production budget for January.

Prepare a direct materials purchases budget for January.

Prepare a direct labor cost budget for January.

Prepare a factory overhead cost budget for January.

Prepare a cost of goods sold budget for January. Work in process at the beginning of January is estimated to be $9,000, and work in process at the end of January is estimated to be $10,500.

Prepare a selling and administrative expenses budget for January.

Prepare a budgeted income statement for January.

To determine

Prepare the sales budget for the month ending January 31.

Explanation of Solution

Budgeting is a process to prepare the financial statement by the manager to estimate the organization’s future actions. It is also helpful to satisfy the everyday activities.

The following table shows the sales budget.

Company B Sales Budget For the Month Ending January 31
Product and Area	Unit Sales Volume	Unit Selling Price ($)	Total Sales ($)
	(A)	(B)	$\left(\text{A}\right)\text{×}\left(\text{B}\right)$
Birdhouse	15,000	$25.00	$375,000
Bird feeder	40,000	$15.00	$600,000
Total Revenue from Sales			$975,000

Table (1)

To determine

Prepare the production budget for the month ending January 31.

Explanation of Solution

Production Budget shows the quantities of units that a company must produce to meet the budgeted sales and inventory.

The following table shows the production budget.

Company B Production Budget For the Month Ending January 31
Details	Units
	Birdhouse	Bird Feeder
Expected Units to be Sold	15,000	40,000
Add: Desired Inventory, January 31	1,500	3,000
Total Units Required	16,500	43,000
Less: Estimated Inventory, January 1	(1,000)	(2,500)
Total Units to be Produced	15,500	40,500

Table (2)

To determine

Prepare the direct materials purchase budget for the month ending January 31.

Explanation of Solution

The following table shows the direct materials purchase budget.

Company B Direct Materials Purchase Budget For the Month Ending January 31
Details	Units
	Wood	Plastic
Required units for production:
Birdhouse	12,400 (1)	3,020 (2)
Bird Feeder	8,100 (3)	3,345 (4)
Add: Desired inventory, January 31	500	210
Total units required	21,000	43,300
Less: Estimated inventory, January 1	(600)	(1,000)
Total units to be purchased (A)	20,400	42,300
Unit price (B)	$2.50	$0.80
Total $\left(\text{A}\times \text{B}\right)$	$51,000	$33,840
Total direct materials to be purchased	84,840

Table (3)

Working Note (1):

Calculate the direct material (wood) for birdhouse.

$\begin{array}{c}\text{Direct material (wood) cost for birdhouse}\text{=}15,500\times 0.80\text{ft}\text{.}\\ =12,400\text{ft}\text{.}\end{array}$

Working Note (2):

Calculate the direct material (plastic) for birdhouse.

$\begin{array}{c}\text{Direct material (plastic) cost for birdhouse}\text{=}15,500\times 0.10\text{lbs}\\ =1,550\text{lbs}\end{array}$

Working Note (3):

Calculate the direct material (wood) for bird feeder.

$\begin{array}{c}\text{Direct material (wood) cost for bird feeder}\text{=}40,500\times 0.20\text{ft}\text{.}\\ =8,100\text{ft}\text{.}\end{array}$

Working Note (4):

Calculate the direct material (plastic) for bird feeder.

$\begin{array}{c}\text{Direct material (plastic) cost for bird feeder}\text{=}40,500\times 1.00\text{lbs}\\ =40,500\text{lbs}\end{array}$

To determine

Prepare the direct labor cost budget of Company B.

Explanation of Solution

The following table shows the direct labor cost budget for fabrication and assembly department.

Company B
Direct Labor Cost Budget
For the Month Ending January 31
Particulars	Fabrication Department	Assembly Department
Hours Required for Production:
Birdhouse	6,200 (5)	3,100 (6)
Bird feeder	10,125 (7)	4,050 (8)
Total Hours Required (A)	16,350	7,150
Hourly Rate (B)	$18	$12
Total Cost $\left(\text{A}\times \text{B}\right)$	$293,850	$85,800
Total Direct Labor Cost	$379,650

Table (4)

Working Note (5):

Calculate the hours required for the production of birdhouse in fabrication department.

$\begin{array}{c}\text{Hours required for production}\text{=}15,500\times 0.40\text{hr}\\ =6,200\text{hrs}\end{array}$

Working Note (6):

Calculate the hours required for the production of birdhouse in assembly department.

$\begin{array}{c}\text{Hours required for production}\text{=}15,500\times 0.20\text{hr}\\ =3,100\text{hrs}\end{array}$

Working Note (7):

Calculate the hours required for the production of bird feeder in fabrication department.

$\begin{array}{c}\text{Hours required for production}\text{=}40,500\times 0.25\text{hr}\\ =10,125\text{hrs}\end{array}$

Working Note (8):

Calculate the hours required for the production of bird feeder in assembly department.

$\begin{array}{c}\text{Hours required for production}\text{=}40,500\times 0.10\text{hr}\\ =4,050\text{hrs}\end{array}$

To determine

Prepare a factory overhead cost budget of Company B.

Explanation of Solution

The following table shows the factory overhead cost budget.

Company B
Factory Overhead Cost Budget
For the Month Ending January 31
Particulars	Amount ($)
Indirect factory wages	40,000
Depreciation of plant and equipment	20,000
Power and light	10,000
Insurance and property tax	5,000
Total	75,000

Table (5)

To determine

Prepare the cost of goods sold budget of Company B.

Explanation of Solution

The following table shows the cost of goods sold budget.

B Company
Cost of Goods Sold Budget
For the month ending January 31
Particulars	Amount ($)	Amount ($)	Amount ($)
Finished goods inventory, January 1			35,000 (9)
Work-in-process inventory, January 1		9,000
Direct material:
Direct materials inventory, January 1	2,300(10)
Direct materials purchases	84,840
Cost of direct materials available for use	87,140
Less: Direct materials inventory, January 31	(2,250) (11)
Cost of direct materials placed in production	84,890
Direct labor	379,650
Factory overhead	75,000
Total manufacturing cost		539,540
Total work-in-process during the period		548,540
Less: Work-in-process inventory, January 30		(10,500)
Cost of goods manufactures			538,040
Cost of finished goods available for sale			573,040
Less: Finished goods inventory, January 30			(64,500) (12)
Cost of Goods Sold			526,540

Table (6)

Working Note (9):

Calculate the beginning finished goods inventory.

$\begin{array}{c}\text{Beginning finished goods inventory}=\left(1,000\times \$15\right)+\left(2,500\times 8\right)\\ \text{=}\text{\$15,000}\text{+}\text{\$20,000}\\ \text{=}\text{\$35,000}\end{array}$

Working Note (10):

Calculate the beginning direct material.

$\begin{array}{c}\text{Beginning}\text{direct mateial purchased}\text{=}\left(600\times \$2.50\right)+\left(1,000\times \$0.80\right)\\ \text{=}\text{\$1,500}\text{+}\text{\$800}\\ \text{=}\text{\$2,300}\end{array}$

Working Note (11):

Calculate the ending direct material.

$\begin{array}{c}\text{Ending}\text{direct mateial purchased}\text{=}\left(500\times \$2.50\right)+\left(1,250\times \$15\right)\\ \text{=}\text{\$1,250}\text{+}\text{\$1,000}\\ \text{=}\text{\$2,250}\end{array}$

Working Note (12):

Calculate the ending finished goods inventory.

$\begin{array}{c}\text{Ending finished goods inventory}=\left(1,500\times \$15\right)+\left(3,000\times \$8\right)\\ \text{=}\text{\$22,500}\text{+}\text{\$24,000}\\ \text{=}\text{\$46,500}\end{array}$

To determine

Prepare the selling and administrative expenses budget of Company B.

Explanation of Solution

The following table shows the selling and administrative expenses budget.

Company B
Selling and Administrative Budget
For the Month Ending January 31
Particulars	Amount ($)	Amount ($)
Selling expense:
Sales salaries expense	125,000
Advertising expense	80,000
Travel expense	25,000
Total selling expense		230,000
Administrative expense:
Office salaries expense	40,000
Depreciation expense – office equipment	4,000
Office supplies expense	2,500
Miscellaneous administrative expense	3,500
Total administrative expenses		50,000
Total Operating Expenses	280,000

Table (7)

To determine

Prepare the budgeted income statement of Company B.

Explanation of Solution

Prepare the budgeted income statement of Company B.

Company B
Budgeted Income Statement
For the Month Ending January 31
Particulars	Amount ($)	Amount ($)
Revenue from sales		975,000
Less: Cost of goods sold		(526,540)
Gross profit		448,460
Operating expenses:
Selling expenses	230,000
Administrative expenses	50,000
Total operating expenses		(280,000)
Income from operations		168,460
Other revenue and expenses:
Interest revenue	4,540
Interest expense	(3,300)	1,540
Income before income tax		170,000
Income tax expense (30%)		(42,500)
Net Income	127,500

Table (7)