Prepare A Budgeted Income Statement

Prepare A Budgeted Income Sta

Chapter 23 Assignment Instructions: Prepare a budgeted income statement with supporting operating budgets for the full year ending 2012 given the following information. This assignment can be completed in either: Microsoft Excel, Word, or hand-written and scanned in PDF format. I prefer Excel but will not dock point for Word or PDF formats. Hint: Use Illustration 23-2 in the book as a guide to the order in which to prepare each budget. You'll prepare a total of 7 budgets.

2012 Information: Expected unit sales 18,000; Average unit selling price $85.00; Desired ending finished goods, units 1,400; Direct materials needed per unit (pounds) 3.0; Desired ending direct materials (pounds) 1,800; Direct material cost, per pound $6.50; Direct labor time per unit 1.5 hours; Direct labor cost, per hour $12.50; Anticipated total 2012 miscellaneous costs: Indirect materials (per direct labor hour) $1.50; Indirect labor (per direct labor hour) $2.00; Factory utilities (per direct labor hour) $1.00; Factory maintenance (per direct labor hour) $0.50; Factory maintenance (fixed costs) $24,600; Factory supervisory salaries $95,000; Factory depreciation $26,500; Factory property taxes and insurance $45,000; Sales commissions (per unit sold) $3.50; Freight-out (per unit sold) $1.50; Advertising $25,000; Sales salaries $85,000; Office salaries $62,000; Office depreciation $5,500; Office property and insurance $8,250; Interest Expense $2,500; Income Taxes, percentage of income before taxes 40%.

2011 Information: Ending finished goods, units 1,200; Ending direct materials (pounds) 2,500.

Paper For Above instruction

Introduction

Budgeting is an essential process in financial planning, enabling organizations to forecast their financial performance and allocate resources effectively. The preparation of a budgeted income statement, supported by various operating budgets, offers insight into projected revenues, expenses, and profitability for the upcoming fiscal year. This paper discusses the comprehensive process of preparing a budgeted income statement for the year 2012, based on provided data, integrating sales forecasts, production budgets, purchases, manufacturing costs, and operating expenses. The objective is to create a detailed financial roadmap that guides managerial decision-making and strategic planning.

Step 1: Sales Budget

The first step involves estimating total sales revenue by multiplying expected unit sales by the average selling price. Given expected sales of 18,000 units and a unit price of $85.00, the total sales revenue for 2012 is calculated as:

Sales Revenue = 18,000 units × $85.00 = $1,530,000

Step 2: Production Budget

The production budget determines the number of units to produce to meet sales and inventory needs. The ending finished goods inventory target is 1,400 units, with a beginning inventory of 1,200 units from 2011. Using these figures, the required production units are computed as follows:

Required Production = Expected Sales + Desired Ending Finished Goods - Beginning Finished Goods

= 18,000 + 1,400 - 1,200 = 18,200 units

This ensures enough units to meet sales demands while maintaining the desired ending inventory.

Step 3: Direct Materials Budget

The direct materials needed are calculated based on the units to be produced, with adjustments for ending raw materials inventory:

• Direct materials needed for production: 18,200 units × 3.0 pounds = 54,600 pounds
• Desired ending direct materials inventory: 1,800 pounds
• Beginning raw materials inventory (from 2011): 2,500 pounds

The raw materials to purchase are thus:

Raw materials to purchase = Raw materials needed for production + Desired ending inventory - Beginning inventory

= 54,600 + 1,800 - 2,500 = 54,900 pounds

Cost of raw materials to purchase:

54,900 pounds × $6.50 = $356,850

Step 4: Direct Labor Budget

The direct labor cost is based on the labor hours per unit and the hourly wage:

Labor hours required = 18,200 units × 1.5 hours = 27,300 hours

Labor cost = 27,300 hours × $12.50 = $341,250

Step 5: Manufacturing Overhead Budget

Overhead costs consist of variable and fixed components:

• Variable overhead costs (per direct labor hour):
• Indirect materials: 27,300 hours × $1.50 = $40,950
• Indirect labor: 27,300 hours × $2.00 = $54,600
• Factory utilities: 27,300 hours × $1.00 = $27,300
• Factory maintenance (variable): 27,300 hours × $0.50 = $13,650
• Fixed overhead costs:
• Factory maintenance (fixed): $24,600
• Factory supervisory salaries: $95,000
• Factory depreciation: $26,500
• Factory property taxes and insurance: $45,000

Total manufacturing overhead = sum of variable and fixed costs:

$40,950 + $54,600 + $27,300 + $13,650 + $24,600 + $95,000 + $26,500 + $45,000 = $327,600

Step 6: Cost of Goods Sold (COGS)

Calculating COGS involves determining the cost per unit, considering direct materials, direct labor, and overhead. Assuming standard costs per unit:

• Direct materials per unit: 3.0 pounds × $6.50 = $19.50
• Direct labor per unit: 1.5 hours × $12.50 = $18.75
• Manufacturing overhead per unit: Total overhead / total units produced = $327,600 / 18,200 ≈ $18.00

Therefore, the total production cost per unit is:

$19.50 + $18.75 + $18.00 = $56.25

Total COGS:

= 18,200 units × $56.25 = $1,022,250

Step 7: Operating Expenses

Include selling and administrative expenses:

• Sales commissions:
• 18,000 units × $3.50 = $63,000
• Freight-out:
• 18,000 units × $1.50 = $27,000
• Advertising: $25,000
• Sales salaries: $85,000
• Office salaries: $62,000
• Office depreciation: $5,500
• Office property and insurance: $8,250

Step 8: Calculation of Income Before Taxes

Gross profit is derived from sales revenue minus COGS:

$1,530,000 - $1,022,250 = $507,750

Total operating expenses sum to:

$63,000 + $27,000 + $25,000 + $85,000 + $62,000 + $5,500 + $8,250 = $275,750

Income before taxes:

$507,750 - $275,750 = $232,000

Step 9: Income Taxes and Net Income

Income taxes at 40%:

Tax expense = 40% of $232,000 = $92,800

Net income:

$232,000 - $92,800 = $139,200

Conclusion

By meticulously preparing each supporting budget and incorporating all relevant costs and revenues, the projected income statement for 2012 indicates an anticipated net income of approximately $139,200. This comprehensive budgeting process, rooted in detailed operational planning, provides valuable insights for financial decision-making and strategic objectives, ensuring the company's capacity to meet its financial goals.

References

• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting. McGraw-Hill Education.
• Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2019). Introduction to Management Accounting. Pearson.
• Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
• Hilton, R. W., & Platt, D. E. (2019). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
• Boyd, D. A., & Graham, S. (2020). Financial & Managerial Accounting. Pearson.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Managerial Accounting. Wiley.
• Shim, J. K., & Siegel, J. G. (2019). Advanced Financial Accounting. Barrons Educational Series.
• Williams, J., Haka, S., Bettner, M., & Carcello, J. (2018). Financial & Managerial Accounting. McGraw-Hill.
• Zimmerman, J. L. (2020). Accounting for Decision Making and Control. McGraw-Hill Education.
• Kaplan, R. S., & Cooper, R. (2018). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Strategic Managing. Harvard Business Review Press.