Danner Farm Supply Company manufactures and sells a pesticide called Snare. The

Question

Danner 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 2009.
1. Sales: Quarter 1,28,000 bags; quarter 2, 42,000 bags. Selling price is $60 per bag.
2. Direct materials: Each bag of Snare requires 4 pounds of Gumm at a cost of $4 per pound and 6 pounds of Tarr at $1.50 per pound.
3. Desired inventory levels:
Type of Inventory 1-Jan 1-Apr 1-Jul
Snare (bags) 8,000 12,000 18,000
Gumm (pounds) 9,000 10,000 13,000
Tarr (pounds) 14,000 20,000 25,000
4. Direct labor: Direct labor time is 15 minutes per bag at an hourly rate of $14 per hour.
5. Selling and administrative expenses are expected to be 15% of sales plus $175,000 per quarter.
6. Income taxes are expected to be 30% of income from operations.

Your assistant has prepared two budgets: (1) The manufacturing overhead budget shows expected costs to be 150% of direct labor costs. (2) The direct materials budget for Tarr shows the costs of Tarr purchases to be $297.000 in quarter 1 and $439,500 in quarter 2.
Net income $600,250 Cost per bag $33.75
Instructions:
Prepare the budget income statement for the first 6 months and all required operating budgets by quarters. (note: use variable and fixed in the selling and adminstrative expense budget). Do not prepare the manufacturing overhead budget or the direct materials budget for Tarr.

Explanation / Answer

1st Quarter 2nd Quarter Sales (in Units ) 28,000.00 42,000.00 Sales Revenue 1,680,000.00 2,520,000.00 Cost of bags sold: Direct Material - Gumm-1St Quarter-128,000*4 512,000.00 2nd Quarter - 192,000*4 768,000.00 Tarr - 1st Quarter - 192,000 * 1.5 288,000.00 2nd Quarter -288,000 *1.5 432,000.00 Direct Labor : 1st Quarter- 32,000 * 0.25 * 14 112,000.00 2nd Quarter - 48,000 * 0.25 *14 168,000.00 Selling and Administrative Expenses : Fixed 175,000.00 175,000.00 Variable(15% of sales) 252,000.00 378,000.00 Total Cost of Bags sold 1,771,000.00 1,489,000.00 Net Income (91,000.00) 1,031,000.00 Taxes Payable 309,300.00 Net Income after Taxes 721,700.00 Working Notes : Number of Bags of Snare to be produced: Closing Inventory + Sales - Beginning Inventory P=12,000 + 28,000 - 8,000 P= 32,000 bags For producing 32,000 bags, Pounds of Gumm to be issued: 32,000 * 4 = 128,000 Pounds For producing 32,000 bags, Pounds of Tarr to be issued: 32,000 * 6 = 192,000 Pounds For the Second Quarter: Number of Bags of Snare to be produced: Closing Inventory + Sales - Beginning Inventory P = 18,000 + 42,000 - 12,000 P = 48,000 For producing 48,000 bags, Pounds of Gumm to be issued: 48,000 *4 = 192,000 Pounds For producing 48,000 bags, Pounds of Tarr to be issued: 48,000 *6 = 288,000Pounds

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