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Chapter 22: 1SE (page 1228)
Budgeting benefits List the three key benefits companies get from preparing a budget.
The key benefits companies get from preparing a budget isplanning, coordination and communication, and benchmarking.
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Question: Preparing an operating budget鈥攕ales, production, direct materials, direct labor, overhead, COGS, and S&A expense budgets
The Langley Batting Company manufactures wood baseball bats. Langley鈥檚 two primary products are a youth bat, designed for children and young teens, and an adult bat, designed for high school and college-aged players. Langley sells the bats to sporting goods stores, and all sales are on account. The youth bat sells for \(40; the adult bat sells for \)65. Langley鈥檚 highest sales volume is in the first three months of the year as retailers prepare for the spring baseball season. Langley鈥檚 balance sheet for December 31, 2018, follows:
Other data for Langley Batting Company for the first quarter of 2019:
a. Budgeted sales are 1,200 youth bats and 2,600 adult bats.
b. Finished Goods Inventory on December 31, 2018, consists of 300 youth bats at \(14 each and 950 adult bats at \)18 each.
c. Desired ending Finished Goods Inventory is 350 youth bats and 300 adult bats; FIFO inventory costing method is used.
d. Direct materials requirements are 48 ounces of wood per youth bat and 56 ounces of wood per adult bat. The cost of wood is \(0.25 per ounce.
e. Raw Materials Inventory of December 31, 2018, consists of 24,000 ounces of wood at \)0.25 per ounce.
f. Desired ending Raw Materials Inventory is 24,000 ounces (indirect materials are insignificant and not considered for budgeting purposes).
g. Each bat requires 0.7 hours of direct labor; direct labor costs average \(18 per hour. h. Variable manufacturing overhead is \)0.30 per bat.
i. Fixed manufacturing overhead includes \(1,300 per quarter in depreciation and \)20,140 per quarter for other costs, such as insurance and property taxes.
j. Fixed selling and administrative expenses include \(9,000 per quarter for salaries; \)2,500 per quarter for rent; \(1,000 per quarter for insurance; and \)200 per quarter for depreciation.
k. Variable selling and administrative expenses include supplies at 2% of sales.
Requirements
1. Prepare Langley鈥檚 sales budget for the first quarter of 2019.
2. Prepare Langley鈥檚 production budget for the first quarter of 2019.
3. Prepare Langley鈥檚 direct materials budget, direct labor budget, and manufacturing overhead budget for the first quarter of 2019. Round the predetermined overhead allocation rate to two decimal places. The overhead allocation base is direct labor hours.
4. Prepare Langley鈥檚 cost of goods sold budget for the first quarter of 2019.
5. Prepare Langley鈥檚 selling and administrative expense budget for the first quarter of 2019.
In a manufacturing company, what are the three types of budgets included in the master budget? Describe each type.
Budgeting types Consider the following budgets and budget types.
Cash Cost of Goods Sold
Flexible Master
Operational Sales
Static Strategic
Which budget or budget type should be used to meet the following needs?
a. Upper management is planning for the next five years.
b. A store manager wants to plan for different levels of sales.
c. The accountant wants to determine if the company will have sufficient funds to pay expenses.
d. The CEO wants to make companywide plans for the next year.
Using sensitivity analysis Holly Company prepared the following budgeted income statement for the first quarter of 2018:
Holly Company is considering two options. Option 1 is to increase advertising by \(700 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 45% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 30% per month rather than 20%.
Requirements
1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain \)8,000. Round all calculations to the nearest dollar.
2. Which option should Holly choose? Explain your reasoning.
What is the capital expenditures budget?
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