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.

						Cost per Unit
			Amount per unit	Measure	Cost	Produced
Direct Material				kg/unit
Direct Labour				per hour
Total Manufacturing Overhead
				Evergreen
				Income Statement
				First Quarter, 2009
			January	February	March	TOTAL
Sales
Less Cost of Sales
Gross Margin
Operating Expenses
Income from Operatins
Interest Expense
Net Income

Answer 1

Step 1: Production Budget:- We will calculate the number of units to be produced in each of the three months

Particulars	January	February	March
Opening Inventory	15000	19250	22750
Add: Production (Balancing Figure)	24250	58500	68500
Less: Sales (given)	20000	55000	65000
= Closing Inventory(35% of next month's sales)	19250	22750	26250

Total Production = 24250+58500+68500 = 151250 units

Also in similar way calculating no. of units to be produced for April Month comes to (85000*35/100=29750)+75000-26250= 78500 units

Step 2: After calculating the production units we will compute the following:

a.) Material consumption

Particulars	January	February	March
Production units	24250	58500	68500
Material per unit	2 kg	2 kg	2 kg
Total Material Consumption (Kg)	48500	117000	13700

Similarly for the month of april, material consumption will be 157000 kg (78500*2).

b.) Material Purchase

Particulars	January	February	March
Opening Inventory	20000	17550	20550
+ Purchase (Balancing Figure)	46050	120000	140000
- Consumption	48500	117000	137000
= Closing Inventory(15% of next month's use)	17550	20550	23550

Total Material Purchase = 46050+120000+140000=306050 kg, total cost = $1*306050 = $306050

c.) Labour Cost : 151250 units to be produced during January to March

Labour Rate = $9/hour, One unit requires 15 minutes of labour

= 151250*15*9/60 = $ 340312.50

Answer Part 1:-

Direct Material $2.00 per unit 151250 units produced, total cost = $ 302500

Direct Labour $ 2.25 per unit (15*9/60) 151250 units produced = $ 340312.50

Total Manufacturing Overheads = $ 1.50*151250 = $ 226875

Total Cost per unit produced = 302500+3403125.5+226875/151250 = $ 5.75