Question

Evergreen Corporation is preparing the master budget for the third quarter ending March 31, 2009.  It sells a single product for $20 a unit.  Sales are 25% cash and 75% credit.  The credit sales are collected 30% in the month of the sale and the remaining 70% is collected in the next month.  No credit sales occurred in December 2008. The December 31 inventory of finished goods is 15,000 units and projected sales are 20,000, 55000, 65,000, 75,000, and 85,000 units for the first  months of the year.  The desired ending inventory for each month is 35% of the next month's sales. The inventory of Finished Goods expected to be on hand on April 30 is 10,500 units.  Each Finished Unit requires 2 kilograms of materials at a cost of $1.00 per kilo and it takes 15 minutes to complete one unit.  Evergreen anticipates having 20,000 kilos of materials on hand at December 31, 2008.  The company requires 15% of the next month production materials needs to be available before the start of the month.  Labour is paid at the rate of $9.00 per hour and is paid when incurred.  Production overhead is incurred based on units of production and costs $1.50 per unit. Sixty percent of the purchases are paid in the month of purchase and 40% are paid in the following month.  Purchases in December 2008 were $232,500.

Operating expenses are paid in the month incurred and consist of sales commissions (8% of sales), shipping cost (4% of sales), office salaries of $15,000 a month, advertising of $2,800 per month,  and amortization of $3,200 per month, and other miscellaneous expenses of $4,500 per month.  The cash balance must not be negative. The beginning cash balance is $48,000.  Loans are obtained at the end of the month in which a cash shortage occurs and are made in even multiples of $1,000.  Interest is 1% per month based on the beginning-of-month loan balance and must be paid at the end of each month when the loan is repaid.   Evergreen paid $4,000 in cash dividends in January and purchased land for $150,000 in March paying cash.

				Manufacturing Overhead Budget
			January	February	March	TOTAL
Production Units
Overhead per unit produced
Total Overhead

Answer 1

• We must need to calculate the ‘units to be produced’ or production units:

	Jan	Feb	Mar
Budgeted unit sales	20,000	55,000	65,000
Add: Desired ending inventory	19,250	22,750	26,250
Total needs	39,250	77,750	91,250
Less: Beginning inventry of finished goods	15,000	19,250	22,750
Production units	24,250	58,500	68,500

• Answer: manufacturing overhead budget

	Jan	Feb	Mar	TOTAL
Production units	24250	58500	68500	151250
Overhead per unit produced	$                   1.50	$                1.50	$               1.50	$               1.50
Total Overhead	$         36,375.00	$     87,750.00	$ 102,750.00	$ 226,875.00