Question

Cook 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 2017. 1. Sales: quarter 1, 28,600 bags; quarter 2,43,400 bags. Selling price is $62 per bag. 2. Direct materials: each bag of Snare requires 5 pounds of Gumm at a cost of $3.8 per pound and 6 pounds of Tarr at $1.50 per pound. 3. Desired inventory levels: Type of Inventory January 1 April 1 July 1 Snare (bags) 8,400 12,300 18,300 Gumm (pounds) 9,400 10,500 13,500 Tarr (pounds) 14,300 20,400 25,100 4. Direct labor: direct labor time is 15 minutes per bag at an hourly rate of $16 per hour. 5. Selling and administrative expenses are expected to be 15% of sales plus $178,000 per quarter. 6. Interest expense is $100.000. 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 125% of direct labor cost, and (2) the direct materials budget for Tarr shows the cost of Tarr purchases to be $299,000 in quarter 1 and $426,500 in quarter 2.

Answer 1

COOK FARM SUPPLY COMPANY
Sales Budget
For The Six Month Ending June 30, 2017
	Quarter 1		Six Months
	1	2
Expected unit sales    (a)	28,600	43,400	72,000
Unit selling price      (b)	$62	$62	$62
Total sales                 (a) x (b)	$1,773,200	$2,690,800	$4,464,000

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COOK FARM SUPPLY COMPANY
Production Budget
For The Six Month Ending June 30, 2017
	Quarter 1		Six Months
	1	2
Expected unit sales	28,600	43,400
Add: Desired Ending Finished Goods Units	12,300	18,300
Total Required Units	40,900	61,700
Less: Beginning Finished Goods Units	8,400	12,300
Required Production Units	32,500	49,400	81,900

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COOK FARM SUPPLY COMPANY
Direct Material Budget - Gumm
For The Six Month Ending June 30, 2017
	Quarter 1		Six Months
	1	2
Units to be produced     [Refer production budget]      (a)	32,500	49,400
Direct Materials per Unit         (In pounds)                 (b)	5	5
Total Pounds Needed for Production                       (a x b)	162,500	247,000
Add: Desired Ending Direct Materials (pounds)	10,500	13,500
Total Materials Required	173,000	260,500
Less: Beginning Direct Materials (pounds)	9,400	10,500
Direct Materials Purchases                                     (c)	163,600	250,000
Cost per Pound                                                        (d)	$3.80	$3.80
Total Cost of Direct Materials Purchases        (c x d)	$621,680	$950,000	$1,571,680

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COOK FARM SUPPLY COMPANY
Direct Labor Budget
For The Six Month Ending June 30, 2017
	Quarter 1		Six Months
	1	2
Units to be produced     [Refer production budget]                                     (a)	32,500	49,400
Direct Labor Time (hours) per Unit           (15 x 1 hour) / 60 minutes)      (b)	0.25	0.25
Total Required Direct Labor Hours                                                            (c = a x b)	8,125	12,350
Direct Labor Cost per Hour                                                                         (d)	16	16
Total Direct Labor Cost                                                                           (c x d)	130,000	197,600	327,600

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COOK FARM SUPPLY COMPANY
Selling and Administrative Expense Budget
For The Six Month Ending June 30, 2017
	Quarter 1		Six Months
	1	2
Budgeted Sales in Units	28,600	43,400	72,000
Variable Cost   [15% of sales]    (a)	$265,980	$403,620	$669,600
Fixed Cost                                    (b)	$178,000	$178,000	$356,000
Total                                             (a + b)	$443,980	$581,620	$1,025,600

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COOK FARM SUPPLY COMPANY
Budgeted Income Statement
For The Six Month Ending June 30, 2017
Sales                                       [Refer sales budget]	$4,464,000
Cost of Goods Sold                [Refer working note 1 below]	$2,664,000
Gross Profit                           [Sales - Cost of goods sold]	$1,800,000
Selling and Administrative Expenses	$1,025,600
Income from operations      [Gross profit - Selling and Administrative Expenses]	$774,400
Interest expense	$100,000
Income before Income Taxes    [Income from operations - Interest expense]	$674,400
Income Tax Expense                 [Income before income taxes x 30%]	$202,320
Net Income / (Loss)	$472,080

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Working note 1 - Computation of Cost of Goods Sold
	Quarter 1	Quarter 2	6 months
Number of snare bags sold                                        (a)	28,600	43,400
Total cost per unit [Refer working note 2]                  (b)	37.00	37.00
Cost of Goods Sold                                                       (a x b)	$1,058,200	$1,605,800	$2,664,000

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Working note 2 - Computation of Cost per unit
Direct materials:
Gumm                                 (5 pounds x $3.80)	19.00
Tarr                                     (6 pounds x $1.50)	9.00	28.00
Direct labor                                (0.25 hours x $16)		4.00
Manufactured overhead budget   [Direct labor cost x 125% = $4 x 125%]		5.00
Cost per unit		37.00