Chapter 8, Problem 5BE

To determine

Prepare the cost of goods sold budget for Incorporation P.

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.

Cost of goods sold indicates the costs involved for the inventory sold by the business in a specific period of time. Its mathematical representation is as below:

Prepare the cost of goods sold budget.

Incorporation P
Cost of Goods Sold Budget
For the Month Ending December 31
Particulars	Amount ($)	Amount ($)	Amount ($)
Finished goods inventory, January 1			200,000
Work in process inventory, January 1		41,250
Direct materials:
Direct materials inventory, January 1        $\left(\text{16,000}\times \text{\$1}\text{.24}\right)$	19,840
Direct materials purchases (2)	604,035
Cost of direct materials available for use	23,875
Direct materials inventory, January 31 $\left(\text{12,500}\times \text{\$1}\text{.24}\right)$	-15,500
Cost of direct materials placed in production	608,375
Direct labor (4)	1,413,000
Factory overhead	300,000
Total manufacturing costs		2,321,375
Total work in process during period		2,362,625
Work in process inventory, January 31		-28,500
Cost of goods manufactured			2,334,125
Cost of finished goods available for sale			2,534,125
Finished goods inventory, January 31			-120,000
Cost of goods sold			2,414,125

Table (1)

Working note (1):

Calculate the pounds of wax required for production.

Budgeted production of candles = 785,000

Estimated inventory of wax = 16 ounces $\left(\frac{16,000\text{ pound}}{10,000\text{ pound}}\right)$

Wax are required for each candle = 10ounces

$\begin{array}{c}\begin{array}{l}\text{Pounds of wax}\\ \text{required for production}\end{array}\}\text{=}\left(\begin{array}{l}\text{Budgeted production of candles }\times \\ \frac{\text{Wax are requried to each candle}}{\text{Estimated inventory of wax}}\end{array}\right)\\ =\text{785,000}\text{candles×}\frac{\text{10}\text{ounces of wax}}{\text{16}\text{ounces of wax}}\\ =490,625\end{array}$

Note: 1 ounce = 10,000 pounds

Working note (2):

Calculate cost of direct material to be purchased in January.

P Incorporation Direct Materials Purchases Budget For the year ending January 31
Particulars	In pounds
Pounds required for production
Candles (1)	490,625
Add: Desired ending inventory, January 31	12,500
Total units available	503,125
Less: Estimated beginning inventory, January 1	(16,000)
Total Pounds To Be Purchased (A)	487,125
Unit price per pound (B)	$1.24
Total Direct Materials To Be Purchased in January $\left[\left(A\right)\times \left(B\right)\right]$	$604,035

Table (2)

Working note (3):

Calculate the minutes required for molding each candle.

Budgeted production of candles = 785,000

Minutes required for molding each candle = 6 minutes

$\begin{array}{c}\begin{array}{l}\text{Minutes required }\\ \text{for molding each candle}\end{array}\}\text{=}\left[\begin{array}{l}\text{Budgeted production of candles }\times \\ \text{Minutes required for molding each candle}\end{array}\right]\\ =\text{785,000}\text{×}\text{6}\text{minutes}\\ =4,710,000\text{minutes}\end{array}$

Working note (4):

Calculate the direct labor cost.

P Incorporation Direct Labor Cost Budget For the year ending January 31
Particulars
Hours required for assembly:
Candles (in minutes) (3) (A)	4,710,000 minutes
Convert minutes to hours (B)	60 minutes
Molding Hours $\text{C =}\left(\frac{\text{A}}{\text{B}}\right)$	78,500 hours
Hourly rate (D)	$18
Total direct labor cost $\text{E=}\left(\text{C × D}\right)$	$1,413,000

Table (3)