Problems: Set B 1

PROBLEMS: SET B

P9-1B Mercer Farm Supply Company manufactures and sells a fertilizer called Basic II. Prepare budgeted income
The following data are available for preparing budgets for Basic II for the first 2 quarters statement and supporting
of 2017. budgets.

1. Sales: quarter 1, 40,000 bags; quarter 2, 50,000 bags. Selling price is $63 per bag. (LO 1, 2, 3), AP
2. Direct materials: each bag of Basic II requires 5 pounds of Crup at a cost of $3.80 per
pound and 10 pounds of Dert at $1.50 per pound.
3. Desired inventory levels:
Type of Inventory January 1 April 1 July 1
Basic II (bags) 10,000 15,000 20,000
Crup (pounds) 9,000 12,000 15,000
Dert (pounds) 15,000 20,000 25,000
4. Direct labor: direct labor time is 15 minutes per bag at an hourly rate of $12 per hour.
5. Selling and administrative expenses are expected to be 10% of sales plus $150,000 per
quarter.
6. Interest expense is $70,000.
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 100% of direct labor cost. (2) The direct materials budget for
Dert which shows the cost of Dert to be $682,500 in quarter 1 and $832,500 in quarter 2.
Net income $842,100
Instructions Cost per bag $40.00
Prepare the budgeted multiple-step income statement for the first 6 months of 2017 and
all required supporting budgets by quarters. (Note: Use variable and fixed in the selling
and administrative expense budget.) Do not prepare the manufacturing overhead budget
or the direct materials budget for Dert.
P9-2B Urbina Inc. is preparing its annual budgets for the year ending December 31, 2017. Prepare sales, production,
Accounting assistants furnish the following data. direct materials, direct
labor, and income statement
Product LN 35 Product LN 40 budgets.
Sales budget: (LO 2, 3), AP
Anticipated volume in units 400,000 240,000
Unit selling price $25 $35
Production budget:
Desired ending finished goods units 20,000 25,000
Beginning finished goods units 30,000 15,000
Direct materials budget:
Direct materials per unit (pounds) 2 3
Desired ending direct materials pounds 50,000 10,000
Beginning direct materials pounds 40,000 20,000
Cost per pound $2 $3
Direct labor budget:
Direct labor time per unit 0.5 0.75
Direct labor rate per hour $12 $12
Budgeted income statement:
Total unit cost $12 $22
2 9 Budgetary Planning

An accounting assistant has prepared the detailed manufacturing overhead budget and
the selling and administrative expense budget. The latter shows selling expenses of $750,000
for product LN 35 and $580,000 for product LN 40, and administrative expenses of $420,000
for product LN 35 and $380,000 for product LN 40 Interest expense is $110,000 (Not allocated
(a) Total sales $18,400,000 to products.). Income taxes are expected to be 30%.
(b) Required production units:
LN 35, 390,000 Instructions
(c) Total cost of direct materials Prepare the following budgets for the year. Show data for each product. You do not need
purchases $3,800,000 to prepare quarterly budgets.
(d) Total direct labor cost (a) Sales (d) Direct labor
$4,590,000 (b) Production (e) Multiple-step Income statement (Note: Income
(e) Net income $4,333,000 (c) Direct materials taxes are not allocated to the products.)
Prepare sales and production P9-3B Ogleby Industries has sales in 2016 of $5,600,000 (800,000 units) and gross profit
budgets and compute cost per of $1,344,000. Management is considering two alternative budget plans to increase its
unit under two plans. gross profit in 2017.
(LO 2), E Plan A would increase the selling price per unit from $7.00 to $7.60. Sales volume
would decrease by 5% from its 2016 level. Plan B would decrease the selling price per unit
by 5%. The marketing department expects that the sales volume would increase by 150,000
units.
At the end of 2016, Ogleby has 70,000 units on hand. If Plan A is accepted, the 2017
ending inventory should be equal to 90,000 units. If Plan B is accepted, the ending inven-
tory should be equal to 100,000 units. Each unit produced will cost $2.00 in direct materi-
als, $1.50 in direct labor, and $0.50 in variable overhead. The fixed overhead for 2017
should be $980,000.

(c) Unit cost: Instructions

Plan A $5.26 (a) Prepare a sales budget for 2017 under (1) Plan A and (2) Plan B.
Plan B $5.00 (b) Prepare a production budget for 2014 under (1) Plan A and (2) Plan B.
(d) Gross profit: (c) Compute the cost per unit under (1) Plan A and (2) Plan B. Explain why the cost per
Plan A $1,778,400 unit is different for each of the two plans. (Round to two decimals.)
Plan B $1,567,500 (d) Which plan should be accepted? (Hint: Compute the gross profit under each plan.)
Prepare cash budget for P9-4B Derby Company prepares monthly cash budgets. Relevant data from operating
2 months. budgets for 2017 are:
(LO 4), AP January February
Sales $350,000 $400,000
Direct materials purchases 110,000 120,000
Direct labor 85,000 115,000
Manufacturing overhead 60,000 75,000
Selling and administrative expenses 75,000 80,000

All sales are on account. Collections are expected to be 60% in the month of sale, 25% in
the first month following the sale, and 15% in the second month following the sale. Thirty
percent (30%) of direct materials purchases are paid in cash in the month of purchase, and
the balance due is paid in the month following the purchase. All other items above are
paid in the month incurred. Depreciation has been excluded from manufacturing over-
head and selling and administrative expenses.
Other data:
1. Credit sales: November 2016, $200,000; December 2016, $290,000.
2. Purchases of direct materials: December 2016, $90,000.
3. Other receipts: January—collection of December 31, 2016, interest receivable $3,000;
February—proceeds from sale of securities $5,000.
4. Other disbursements: February—payment of $20,000 for land.
The company’s cash balance on January 1, 2017, is expected to be $50,000. The com-
(a) January: pany wants to maintain a minimum cash balance of $40,000.
collections $312,500
payments $96,000 Instructions
(b) Ending cash balance: (a) Prepare schedules for (1) expected collections from customers and (2) expected pay-
January $49,500 ments for direct materials purchases.
February $40,000 (b) Prepare a cash budget for January and February in columnar form.
 Problems: Set B 3

P9-5B The budget committee of Widner Company collects the following data for its West- Prepare purchases and income
wood Store in preparing budgeted income statements for July and August 2017. statement budgets for a
merchandiser.
1. Expected sales: July $400,000, August $450,000, September $500,000.
2. Cost of goods sold is expected to be 65% of sales. (LO 5), AP
3. Company policy is to maintain ending merchandise inventory at 15% of the following
month’s cost of goods sold.
4. Operating expenses are estimated to be:
Sales salaries $50,000 per month
Advertising 5% of monthly sales
Delivery expense 2% of monthly sales
Sales commissions 4% of monthly sales
Rent expense $3,000 per month
Depreciation $700 per month
Utilities $500 per month
Insurance $300 per month
5. Interest expense is $3,000 per month. Income taxes are estimated to be 30% of income
before income taxes.
Instructions (a) Purchases: July $264,875
(a) Prepare the merchandise purchases budget for each month in columnar form. August $297,375
(b) Prepare budgeted multiple-step income statements for each month in columnar form. (b) Net income: July $29,050
Show the details of cost of goods sold in the statements. August $37,450