Question 1: Mercer Farm Supply Company manufactures and sells a fertilizer called Basic II.The following data are available for preparing budgets for Basic II for the first 2 quartersof 2017.
1. Sales: quarter one, 40,000 bags; quarter two, 50,000 bags. Selling price is $63 per bag.
2. Direct materials: each bag of Basic II requires 5 pounds of Crup at a cost of $3.80 perpound 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 perquarter.
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 budgetshows expected costs to be 100% of direct labor cost.
(2) The direct materials budget forDert which shows the cost of Dert to be $682,500 in quarter 1 and $832,500 in quarter 2.
Instructions: Prepare the budgeted multiple-step income statement for the first 6 months of 2017 andall required supporting budgets by quarters. (Note: Use variable and fixed in the sellingand administrative expense budget.) Do not prepare the manufacturing overhead budgetor the direct materials budget for Dert.
Question 2: As sales manager, Lance Lorraine was given the following static budget report forselling expenses in the Clothing Department of Harmon Company for the month of October.
HARMON COMPANY
Clothing Department
Budget Report
For the Month Ended October 31, 2017
Difference
Favorable F
Budget Actual Unfavorable U
Sales in units 8,000 10,000 2,000 F
Variable expenses
Sales commissions $ 2,000 $ 2,700 $2,700 U
Advertising expense 800 900 100 U
Travel expense 2,400 2,600 200 U
Free samples given out 1,600 1,500 100 F
Total variable 6,800 7,700 900 U
Fixed expenses
Rent 1,500 1,500 -0-
Sales salaries 1,000 1,000 -0-
Office salaries 800 800 -0-
Depreciation-autos (sales staff) 500 500 -0-
Total fixed 3,800 3,800 -0-
Total expenses $10,600 $11,500 $900 U
As a result of this budget report, Lance was called into the president's office and congratulated on his fine sales performance. He was reprimanded, however, for allowing his coststo get out of control. Lance knew something was wrong with the performance reportthat he had been given. However, he was not sure what to do, and comes to you foradvice.
Instructions: (a) Prepare a budget report based on flexible budget data to help Lance.
(b) Should Lance have been reprimanded? Explain.