Question

P24.1A (LO 2, 3) 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 2020. 1. Sales: quarter 1, 40,000 bags; quarter 2, 56,000 bags. Selling price is $60 per bag. 2. Direct materials: each bag of Snare requires 4 pounds of Gumm at a cost of $3.80 per pound and 6 pounds of Tarr at $1.50 per pound. 3. Desired inventory levels: Type of Inventory Snare (bags) Gumm (pounds) Tarr (pounds) January 1 8,000 9,000 14,000 April 1 15,000 10,000 20,000 July 1 18,000 13,000 25,000 4. Direct labor: direct labor time is 15 minutes per bag at an hourly rate of $16 per hour. 5. Selling and administrative expenses are expected to be 15% of sales plus $175,000 per quarter, 6. Interest expense is $100,000 for the two quarters. 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 $297,000 in quarter 1 and $439,500 in quarter 2. Instructions Prepare the budgeted multiple-step income statement for the first 6 months and all required operating budgets by quarters. (Note: Use variable and fixed in the selling and administrative expense budget.) Do not prepare the manufacturing overhead budget or the direct materials budget for Tarr.

Answer 1

		Sales budget
					Quarter 1	Quarter 2
Sales in bags				a	40000	56000
Selling price				b	60	60
Sales in $				c=a*b	2400000	3360000
		Production budget
					Quarter 1	Quarter 2
Sales in bags					40000	56000
Add:Ending inventory of snare					15000	18000
Total bags required					55000	74000
Less: Beginning inventory of snare					8000	15000
Bags to be produced					47000	59000
		Direct materials budget-Gumm
					Quarter 1	Quarter 2
Bags to be produced				a	47000	59000
Gumm required per bag (in pounds)				b	4	4
Gumm required for production				c=a*b	188000	236000
Add:Ending inventory of Gumm					10000	13000
Total gumm required					198000	249000
Less: Beginning inventory of Gumm					9000	10000
Gumm to be purchased				d	189000	239000
Cost per pound				e	3.8	3.8
Total cost				d*e	718200	908200
		Direct labor budget
					Quarter 1	Quarter 2
Bags to be produced				a	47000	59000
Direct labor time per bag in hours			(15/60)	b	0.25	0.25
Total direct labor hours				c=a*b	11750	14750
Hourly rate				d	16	16
Direct labor cost				c*d	188000	236000
		Manufacturing overhead budget
					Quarter 1	Quarter 2
Direct labor cost				a	188000	236000
Manufacturing overhead				a*125%	235000	295000
		Selling and administrative expenses budget
					Quarter 1	Quarter 2
Sales in $				a	2400000	3360000
Variable				b=a*15%	360000	504000
Fixed				c	175000	175000
Total				b+c	535000	679000
		Multiple-step income statement
					$	$
Sales revenue			(2400000+3360000)			5760000
Less: Cost of goods sold				(Note:1)		3187200
Gross profit						2572800
Less: Operating expenses
Selling and administrative expenses			(535000+679000)			1214000
Operating income						1358800
Less: Interest expenses						100000
Income before tax						1258800
Less: Tax at 30%						377640
Net income						881160
Note:1
Cost of goods sold=Bags sold*Cost per bag
Cost per bag:
				$
Direct materials:
Gumm			(4*3.80)	15.2
Tarr			(6*1.50)	9
Direct labor			(15/60)*16	4
Manufacturing overhead			(4*125%)	5
Total				33.2
Cost of goods sold=(40000+56000)*33.2=96000*33.2=$ 3187200
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