Question

Fultz Company has accumulated the following budget data for the year 2017.

1. Sales: 30,000 units, unit selling price $85.
2. Cost of one unit of finished goods: direct materials 1 pound at $5 per pound, direct labor 3 hours at $15 per hour, and manufacturing overhead $5 per direct labor hour.
3. Inventories (raw materials only): beginning, 10,000 pounds; ending, 15,000 pounds.
4. Selling and administrative expenses: $170,000; interest expense: $30,000.
5. Income taxes: 30% of income before income taxes.
Required:
(a) Prepare a schedule showing the computation of cost of goods sold for 2017.
(b) Prepare a budgeted multiple-step income statement for 2017.

Answer 1

Fultz Company

a) Computation of Cost of Goods Sold for 2017:

i) Cost of Materials:

1. Beginning inventory = 10,000 x $5 = $50,000

2. Ending inventory = 15,000 x $5 = $75,000

3. Cost of Materials used in production = 30,000 x $5 = $150,000

4. Purchased Materials = Cost of materials plus ending inventory less beginning inventory = $(150,000 + 75,000 - 50,000) = $175,000

ii) Cost Direct Labor and Manufacturing Overhead:

1. Direct labor hours = 3 x 30,000 = 90,000 hours

2. Direct labor = 3 x $15 x 30,000 = $1,350,000

3. Manufacturing overhead = $5 x 90,000 = $450,000

iii) Cost of Goods Sold:

Cost of Materials used in production = 30,000 x $5 = $150,000

Direct labor = 3 x $15 x 30,000 = $1,350,000

Manufacturing overhead = $5 x 90,000 = $450,000

Total = $1,950,000

b) Budgeted Multiple-step Income Statement for 2017:

Sales (30,000 x $85) = $2,550,000

less Cost of Sales = $1,950,000

Gross Profit = $600,000

less Selling & Administrative expenses = $170,000

EBIT = $430,000

less Interest expense = $30,000

Net Income before taxes = $400,000

30% Income Taxes = $120,000

Net Income after taxes = $280,000

Step-by-step explanation:

a) There are no inventories of work in process and finished goods. Therefore, the cost of goods sold is not adjusted for these items.

b) EBIT = Earnings before interests and taxes. It an important financial measure that determines the effectiveness and efficiency of management to manage expenses in order to earn profits that could be distributed to fund owners and other stakeholders, e.g. government.