Budget Planning: Inventory, Costing, and Income Statements

This article covers topics related to budget planning such as inventory types, costing methods, and income statements. It provides answers to questions on cost behavior, value chain, and contribution margin. The article also includes schedules and computations for cost of goods sold, cost of goods manufactured, and average product cost.

Running head: BUDGET PLANNING
Budget Planning
Name of the Student:
Name of the University:
Author’s Note:

1BUDGET PLANNING
Table of Contents
Answer to Question I:......................................................................................................................2
Answer to Question II:.....................................................................................................................2
Answer to Question III:...................................................................................................................3
Requirement 1:.............................................................................................................................3
Requirement 2:.............................................................................................................................3
Requirement 3:.............................................................................................................................5
Answer to Question 4:.....................................................................................................................6
Requirement a:.............................................................................................................................6
Requirement b:.............................................................................................................................6
Answer to Question 5:.....................................................................................................................7
Bibliography:...................................................................................................................................8

2BUDGET PLANNING
Answer to Question I:
1. Raw materials, work in process and finished goods are the three types of inventory, held
by the manufacturing companies.
2. A manufacturer of automobiles, Toyota, classifies steel, glass and plastic as raw material
inventory.
3. Cost of goods sold is not shown in the balance sheet for any type of companies.
4. The only difference in the balance sheets of service businesses, manufacturing businesses
and merchandising businesses relates to closing inventory.
Answer to Question II:
A. Value Chain: The sequence of activities that adds value to a firm’s product or service
B. Direct Materials: Materials that become a physical part of finished product and whose
costs are separately and conveniently traceable to the finished products
C. Work in process inventory: Goods that are in the manufacturing process are not yet
complete
D. Materials Inventory: Raw materials on hand for use in the manufacturing process
E. Finished Goods Inventory: Completed goods that have not yet been sold
F. Contribution Statement: An income statement format that is geared to cost behaviour
rather than costs organized by function

3BUDGET PLANNING
Answer to Question III:
Requirement 1:
Particulars Amount Amount
Sales Revenue $ 1,80,000
Cost of Goods Sold:
Purchases $ -95,000
Add: Merchandise inventory, Jan 1,2016 $ -10,000
$ -1,05,000
Less: Merchandise inventory, Dec 31,2016 $ -7,000 $ -98,000
Gross Profit $ 82,000
Selling & Administrative Expenses $ -65,300
Net Profit for the period $ 16,700
In the books of Excellent Company
Income Statement
for the year ended december 31,2016
Requirement 2:
Particulars Amount
(in $000)
Purchases of Raw Material $ 120
Add: Raw material inventory, beginning $ 40
Total Raw Material Available $ 160
Less: Raw material inventory, closing $ 70
Total Cost of Raw Material Used $ 90
a) In the books of Karling Corporation
Schedule of Cost of Raw Material Used
for the year ……

4BUDGET PLANNING
Particulars Amount
(in $000)
Cost of Raw Material Used $ 90
Direct Labor $ 200
PRIME COST $ 290
Manufacturing Overhead $ 230
TOTAL PRODUCTION COST $ 520
Add: Work in process inventory, beginning $ 70
$ 590
Less: Work in process inventory, ending $ 50
TOTAL COST OF GOODS MANUFACTURED $ 540
for the year ……
b) In the books of Karling Corporation
Schedule of Cost of Goods Manufactured
Particulars Amount
(in $000)
Cost of Goods Manufactured $ 540
Add: Finished Goods Inventory, beginning $ 120
Total Cost of Goods Available for Sales $ 660
Less: Finished Goods Inventory, ending $ 160
Total Cost of Goods Sold $ 500
c) In the books of Karling Corporation
Schedule of Cost of Goods Sold
for the year ……

5BUDGET PLANNING
Particulars Amount
(in $000)
Sales $ 990
Cost of Goods Sold $ -500
GROSS PROFIT $ 490
Administrative Expenses $ -150
Selling Expenses $ -140
Net Income for the period $ 200
for the year ……
d) In the books of Karling Corporation
Income Statement
Requirement 3:
Period Cost
Cost Item Variable Fixed DM DL MO S G & A
a) Indirect Material used √ √
b) Factory equipment amortization √ √
c) Indirect labor incurred √ √
d) Rent on factory building √ √
e) Direct materials used √ √
f) Insurance expired on administrative facilities √ √
g) Direct labor incurred √ √
h) Insurance expired on factory building √ √
i) Factory manager's salary √ √
j) Utilities on factory building √ √
k) Utilities on administraive facilities √ √
l) Salesperson's commission √ √
Cost Behaviour Product Cost
Computation of AverageProduct Cost:
Particulars Amount
Direct Material Cost A $ 1,50,000
Direct Labor Cost B $ 1,00,000
Manufacturing Overhead C $ 50,000
Total Product Cost D=A+B+C $ 3,00,000
Production Volume E 2000
Average Product cost per unit F=D/E $ 150

6BUDGET PLANNING
Answer to Question 4:
Requirement a:
Particulars Amount Amount Particulars Amount Amount
Sales $ 5,00,000 Sales $ 5,00,000
Less: Cost of Goods Sold Less: Variable Expenses
Direct Material $ 51,500 Direct Material $ 51,500
Direct Labor $ 72,500 Direct Labor $ 72,500
Fixed Manufacturing Overhead $ 55,000 Variable Manufacturing Overhead $ 41,000
Variable Manufacturing Overhead $ 41,000 Variable administraive expenses $ 48,000
Total Cost of Goods Sold $ 2,20,000 Variable selling expenses $ 49,750
GROSS PROFIT $ 2,80,000 Total Variable Expenses $ 2,62,750
CONTRIBUTION MARGIN $ 2,37,250
Fixed administrative expenses $ -44,500
Variable administraive expenses $ -48,000 Less: Fixed Expenses
Fixed selling expenses $ -46,250 Fixed Manufacturing Overhead $ 55,000
Variable selling expenses $ -49,750 Fixed administrative expenses $ 44,500
Fixed selling expenses $ 46,250
Total Fixed Expenses $ 1,45,750
Net Profit for the period $ 91,500 $ 91,500
Traditional Income Statement Contribution MArgin Income Statement
Requirement b:
Particulars 30000 40000 50000
Total Costs:
Variable costs $ 1,80,000 $ 2,40,000 $ 3,00,000
Fixed Costs $ 3,00,000 $ 3,00,000 $ 3,00,000
Total Costs $ 4,80,000 $ 5,40,000 $ 6,00,000
Cost per unit
Variable costs $ 6.00 $ 6.00 $ 6.00
Fixed Costs $ 10.00 $ 7.50 $ 6.00
Total cost per unit $ 16.00 $ 13.50 $ 12.00
Units produced and sold

7BUDGET PLANNING
Contribution Margin Income Statement:
Particulars Amount
Sales $ 7,20,000
Less: Variable Cost $ 2,70,000
Contribution Margin $ 4,50,000
Less: Fixed Cost $ 3,00,000
Net Profit $ 1,50,000
Answer to Question 5:
Contribution Margin Income Statement:
Particulars Cost per unit Sales Volume Total Amount
Sales $ 700 800 $ 5,60,000
Less: Variable Expenses
Direct Material $ 450 800 $ 3,60,000
Variable Selling Expenses $ 50 800 $ 40,000
Variable Administrative Expenses $ 5 800 $ 4,000
Total Variable expenses $ 505 800 $ 4,04,000
Contribution Margin $ 195 800 $ 1,56,000
Less: Fixed Expenses
Fixed Selling Expenses $ 20,000
Fixed Administrative Expenses $ 16,000
Total Fixed Expenses $ 36,000
Net Income $ 1,20,000

8BUDGET PLANNING
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