PA8-5 Preparing Operating Budget Components [LO 8-3f, g, h] Wesley Power Tools m

Question

PA8-5 Preparing Operating Budget Components [LO 8-3f, g, h] Wesley Power Tools manufactures a wide variety of tools and accessories. One of its more popular items is a cordless power handisaw. Each handisaw sells for $70. Wesley expects the following unit sales: 2,200 2,300 January February March April May 2,700 2,100 Wesley's ending finished goods inventory policy is 35 percent of the next month's sales. Suppose each handisaw takes approximately .55 hours to manufacture, and Wesley pays an average labor wage of $13.50 per hour. Each handisaw requires a plastic housing that Wesley purchases from a supplier at a cost of $5.00 each. The company has an ending raw materials inventory policy of 10 percent of the following month's production requirements. Materials other than the housing unit total $4.00 per handisaw. Manufacturing overhead for this product includes $72,000 annual fixed overhead (based on production of 24,000 units) and $.90 per unit variable manufacturing overhead. Wesley's selling expenses are 5 percent of sales dollars, and administrative expenses are fixed at $16,000 per month. Required 1. Compute the budgeted cost of goods sold for the first quarter. (Round direct material, direct labor and overhead costs per unit to 2 decimal places. Round final answers to the nearest dollar amount.) 2. Compute the budgeted selling and administrative expenses 3. Complete the budgeted income statement for the handisaw product for the first quarter. (Round direct material, direct labor and overhead costs per unit to 2 decimal places. Round final answers to the nearest dollar amount.)

Explanation / Answer

Solution:

Part 1 --- Calculation of Cost of Goods Sold for the first quarter

January

February

March

1st quarter total

Expected Sales Units (A)

2200

2300

2800

7300

Production Cost per unit (Refer note 1 (B)

$20.33

$20.33

$20.33

$20.33

Cost of Goods Sold (A*B)

$44,726

$46,759

$56,924

$148,409

Cost of Goods Sold for the first quarter = $148,409

Note 1 – Calculation of Production Cost per Handisaw

Cost per unit

Direct materials

$5.00

Direct labor cost per unit (0.55 hours x $13.50)

$7.43

Other material cost per unit

$4.00

Manufacturing Overhead Per Unit:

Variable Manufacturing Overhead Per Unit

$0.90

Fixed manufacturing overhead per unit

(72,000 / 24,000)

$3.00

Cost per Unit

$20.33

Part 2 – Budgeted Selling and Administrative Expenses

January

February

March

1st quarter total

Expected Sales Units

2200

2300

2800

7300

Unit Selling Price

$70

$70

$70

$70

Expected Sales in dollars (A)

$154,000

$161,000

$196,000

$511,000

Budgeted Selling and Administrative Expenses:

Selling Expenses (5% of Sales dollars)

$7,700

$8,050

$9,800

$25,550

Administrative Expenses (Fixed per month)

$16,000

$16,000

$16,000

$48,000

Total Budgeted Selling and Administrative Expenses

$23,700

$24,050

$25,800

$73,550

Part 3 --- Budgeted Income Statement

Since the format is not given for Budgeted Income statement. I am preparing the same as per the format of my understanding.

Budgeted Income Statement for first quarter

$$

Sales Revenue (from part 2)

$511,000

Less: Cost of Goods Sold (part 1)

$148,409

Gross Profit

$362,591

Less: Selling and Administrative Expenses (From part 2)

$73,550

Net Operating Income

$289,041

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

January

February

March

1st quarter total

Expected Sales Units (A)

2200

2300

2800

7300

Production Cost per unit (Refer note 1 (B)

$20.33

$20.33

$20.33

$20.33

Cost of Goods Sold (A*B)

$44,726

$46,759

$56,924

$148,409

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