Question

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 2017. 1. Sales: quarter 1, 29,800 bags; quarter 2,42,400 bags. Selling price is $62 per bag. 2. Direct materials: each bag of Snare requires 5 pounds of Gumm at a cost of $3.8 per pound and 6 pounds of Tarr at $1.50 per pound. 3. Desired inventory levels: Type of Inventory January 1 April 1 July 1 Snare (bags) 8,100 12,100 18,100 Gumm (pounds) 9,500 10,300 13,100 Tarr (pounds) 14,100 20,100 25,200 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 $179,000 per quarter. 6. Interest expense is $100,000. 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 $303,000 in quarter 1 and $422,500 in quarter 2.

Answer 1

COOK FARM SUPPLY COMPANY
Sales Budget
For The Six Month Ending June 30, 2017
	Quarter 1		Six Months
	1	2
Expected unit sales    (a)	29,800	42,400	72,200
Unit selling price      (b)	$62	$62	$62
Total sales                 (a) x (b)	$1,847,600	$2,628,800	$4,476,400

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COOK FARM SUPPLY COMPANY
Production Budget
For The Six Month Ending June 30, 2017
	Quarter 1		Six Months
	1	2
Expected unit sales	29,800	42,400
Add: Desired Ending Finished Goods Units	12,100	18,100
Total Required Units	41,900	60,500
Less: Beginning Finished Goods Units	8,100	12,100
Required Production Units	33,800	48,400	82,200

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COOK FARM SUPPLY COMPANY
Direct Material Budget - Gumm
For The Six Month Ending June 30, 2017
	Quarter 1		Six Months
	1	2
Units to be produced     [Refer production budget]      (a)	33,800	48,400
Direct Materials per Unit         (In pounds)                 (b)	5	5
Total Pounds Needed for Production                       (a x b)	169,000	242,000
Add: Desired Ending Direct Materials (pounds)	10,300	13,100
Total Materials Required	179,300	255,100
Less: Beginning Direct Materials (pounds)	9,500	10,300
Direct Materials Purchases                                     (c)	169,800	244,800
Cost per Pound                                                        (d)	$3.80	$3.80
Total Cost of Direct Materials Purchases        (c x d)	$645,240	$930,240	$1,575,480

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COOK FARM SUPPLY COMPANY
Direct Labor Budget
For The Six Month Ending June 30, 2017
	Quarter 1		Six Months
	1	2
Units to be produced     [Refer production budget]                                     (a)	33,800	48,400
Direct Labor Time (hours) per Unit           (15 x 1 hour) / 60 minutes)      (b)	0.25	0.25
Total Required Direct Labor Hours                                                            (c = a x b)	8,450	12,100
Direct Labor Cost per Hour                                                                         (d)	16	16
Total Direct Labor Cost                                                                           (c x d)	135,200	193,600	328,800

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COOK FARM SUPPLY COMPANY
Selling and Administrative Expense Budget
For The Six Month Ending June 30, 2017
	Quarter 1		Six Months
	1	2
Budgeted Sales in Units	29,800	42,400	72,200
Variable Cost   [15% of sales]    (a)	$277,140	$394,320	$671,460
Fixed Cost                                    (b)	$179,000	$179,000	$358,000
Total                                             (a + b)	$456,140	$573,320	$1,029,460

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COOK FARM SUPPLY COMPANY
Budgeted Income Statement
For The Six Month Ending June 30, 2017
Sales                                       [Refer sales budget]	$4,476,400
Cost of Goods Sold                [Refer working note 1 below]	$2,671,400
Gross Profit                           [Sales - Cost of goods sold]	$1,805,000
Selling and Administrative Expenses	$1,029,460
Income from operatations      [Gross profit - Selling and Administrative Expenses]	$775,540
Interest expense	$100,000
Income before Income Taxes    [Income from operations - Interest expense]	$675,540
Income Tax Expense                 [Income before income taxes x 30%]	$202,662
Net Income / (Loss)	$472,878

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Working note 1 - Computation of Cost of Goods Sold
	Quarter 1	Quarter 2	6 months
Number of snare bags sold                                        (a)	29,800	42,400
Total cost per unit [Refer working note 2]                  (b)	37.00	37.00
Cost of Goods Sold                                                       (a x b)	$1,102,600	$1,568,800	$2,671,400

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Working note 2 - Computation of Cost per unit
Direct materials:
Gumm                                 (5 pounds x $3.80 per pound)	19.00
Tarr                                     (6 pounds x $1.50 per pound)	9.00	28.00
Direct labor                                (0.25 hours x $16 per hour)		4.00
Manufactured overhead budget   [Direct labor cost x 125% = $4 x 125%]		5.00
Cost per unit		37.00