| Module 6 – Budget Problem | |||||
| Country Cookin’ Inc. begins the budgeting process for the following year in the 1st quarter of the current year. With the information provided below, prepare the sales, production and direct materials budgets for the 1st quarter of next year. Also determine the budgeted manufacturing cost per unit and prepare the budgeted income statement for January of next year. | |||||
| Country Cookin’ Inc. sells the cooker/smokers they manufacture to various retailers for $130 each. Each cooker/smoker requires 11 ounces of raw material, which is purchased by Country Cookin’ Inc. for $8.00 per ounce. To prepare for next month’s production, Country Cookin’ Inc. likes to maintain an ending stock of raw material equal to 10% of the production requirements for the current month. The company would also like to maintain an ending stock of finished cooker/smokers equal to 20% of next month’s sales. | |||||
| Sales are projected to be 6,000 for January, 8,000 for February and 14,000 for March. | |||||
| Your Company expects to sell 12,000 cooker/smokers in April and needs 132,000 ounces of direct materials for production. | |||||
| 15% of sales from Country Cookin’ Inc. to retailers are cash sales, while the remaining 85% are sold on account. | |||||
| Additional budgeted information includes: | |||||
| Month | 1st Quarter | ||||
| Projections For Next Year | January | February | March | ||
| Direct labor | $ 24,000 | $ 34,500 | $ 51,000 | $ 109,500 | |
| Manufacturing overhead: | |||||
| Variable | $ 28,800 | $ 41,400 | $ 61,200 | $ 131,400 | |
| Fixed 1 | $ 41,000 | $ 41,000 | $ 41,000 | $ 123,000 | |
| Total operating expenses 2 | $ 71,000 | $ 74,000 | $ 95,000 | $ 240,000 | |
| Each cooker/smoker requires 0.25 of an hour of direct labor at the rate of $15.00 per hour. | |||||
| Country Cookin’ Inc. estimated at the beginning of the year that it would produce 307,500 cooker/smokers next year. | |||||
| Interest expense is budgeted at zero since the company has no outstanding debt. | |||||
| Income tax expense is budgeted at 35% of income before taxes. | |||||
| Based on the above information, the accountant has prepared the following budget for the first quarter of the coming year. | |||||
| 1 | Next year’s 1st quarter sales budget for Country Cookin’ Inc. | ||||
| Country Cookin’ Inc. | |||||
| Sales Budget | |||||
| For the Quarter Ended March 31 | |||||
| Month | 1st Quarter | ||||
| January | February | March | |||
| Unit sales | 6,000 | 8,000 | 14,000 | 28,000 | |
| Unit selling price | $130 | $130 | $130 | $130 | |
| Total sales revenue | $ 780,000 | $ 1,040,000 | $ 1,820,000 | $ 3,640,000 | |
| Type of Sale | |||||
| Cash sales | $ 117,000 | $ 156,000 | $ 273,000 | $ 546,000 | |
| Credit sales | 663,000 | 884,000 | 1,547,000 | 3,094,000 | |
| Total sales revenue | $ 780,000 | $ 1,040,000 | $ 1,820,000 | $ 3,640,000 | |
| 2 | Next year’s 1st quarter production budget for Country Cookin’ Inc. | ||||
| Country Cookin’ Inc. | |||||
| Production Budget | |||||
| For the Quarter Ended March 31 | |||||
| Month | 1st Quarter | ||||
| January | February | March | |||
| Unit sales | 6,000 | 8,000 | 14,000 | 28,000 | |
| Plus: Desired ending inventory | 1,600 | 2,800 | 2,400 | 6,800 | |
| Total needed | 7,600 | 10,800 | 16,400 | 34,800 | |
| Less: Beginning inventory | 1,200 | 1,600 | 2,800 | 5,600 | |
| Units to produce | 6,400 | 9,200 | 13,600 | 29,200 | |
| 3 | Next year’s 1st quarter direct materials budget for Country Cookin’. | ||||
| Country Cookin’ Inc. | |||||
| Direct Materials Budget | |||||
| For the Quarter Ended March 31 | |||||
| Month | 1st Quarter | ||||
| January | February | March | |||
| Units to be produced | 6,400 | 9,200 | 13,600 | 29,200 | |
| x Ounces of direct materials needed per unit | 11 | 11 | 11 | 11 | |
| Ounces needed for production | 70,400 | 101,200 | 149,600 | 321,200 | |
| Plus: Desired ending inventory of direct materials | 7,040 | 10,120 | 14,960 | 32,120 | |
| Total ounces needed | 77,440 | 111,320 | 164,560 | 353,320 | |
| Less: Beginning inventory of direct materials | 7,744 | 7,040 | 10,120 | 24,904 | |
| Ounces to purchase | 69,696 | 104,280 | 154,440 | 328,416 | |
| x Cost per ounce | $8.00 | $8.00 | $8.00 | $8.00 | |
| Total cost of direct materials purchases | $ 557,568 | $ 834,240 | $ 1,235,520 | $ 2,627,328 | |
| 4 | Next year’s budgeted manufacturing cost per unit for Country Cookin’ Inc. | ||||
| Country Cookin’ Inc. | |||||
| Budgeted Manufacturing Cost per Unit | |||||
| January | |||||
| Direct materials | $88.00 | ||||
| Direct labor | 3.75 | ||||
| Manufacturing overhead: | |||||
| Variable | 4.50 | ||||
| Fixed | 1.60 | hint: you must take into account total annualized fixed costs in relation to total expected units for the year | |||
| Cost of manufacturing each widget | $97.85 | ||||
| 5 | Next year’s budgeted income statement for the month ended January 31 for Country Cookin’ Inc. | ||||
| Country Cookin’ Inc. | |||||
| Budgeted Income Statement | |||||
| For the month ended January 31 | |||||
| Sales Revenue | $ 780,000 | ||||
| Less: Cost of goods sold | 587,100 | ||||
| Gross profit | 192,900 | ||||
| Less: Operating expenses | 71,000 | ||||
| Operating income | $121,900 | ||||
| Less: Interest expense | 0 | ||||
| Less: Income tax expense | 42,665 | ||||
| Net income | $79,235 |
| It is now the end of April and as Country Cookin’s management you are ready to evaluate its first quarter performance. Prepare a flexible budget for sales levels of 26,000, 28,000, and 30,000 smokers. | ||||||||||||||
| Next prepare a performance report based on the following actual results, flexible budget, and master budget. | ||||||||||||||
| Evaluate the first quarter performance of Country Cookin’. | ||||||||||||||
| Country Cookin’ Inc. | Country Cookin’ Inc. | |||||||||||||
| Flexible Budget | Performance Report | |||||||||||||
| For the Quarter Ended March 31 | For the Quarter Ended March 31 | |||||||||||||
| Units Sold | Actual | Variance | Flexible | Variance | Master | |||||||||
| 26,000 | 28,000 | 30,000 | Units Sold | 27,000 | 0 | 27,000 | (1,000) | 28000 | ||||||
| Sales Revenue | $130 | Sales | 130 | $ 3,830,000 | ||||||||||
| Direct Materials | 88 | Direct Materials | 88 | 2,476,000 | ||||||||||
| Direct Labor | 3.75 | Direct Labor | 3.75 | 98,000 | ||||||||||
| VOH | 4.5 | VOH | 4.5 | 125,600 | ||||||||||
| Total VC | $96 | V S&A | 3.12 | 83,000 | ||||||||||
| FOH | Contribution Margin | 31 | $ 1,047,400 | |||||||||||
| Total Costs | FOH | 41,000 | 41,000 | 41,000 | ||||||||||
| Gross Profit | F S&A | 50,923 | 50,923 | 50,923 | ||||||||||
| Operating Income | $ 955,477 | |||||||||||||
| Evaluation of the first quarter performance. |
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