Question

You have just been hired into a management position which requires the application of your budgeting skills. You find out that budgeting has not been a priority of the company. You have contacted various areas on the organization and have accumulated the information below to assist you in preparing a comprehensive budget.

Manufacturing Inc. produces a part used in the production of engines.

Actual Sales and Projected Sales in Units:

March (Actual) ......... 38,000

April ..........44,000

May ........... 45,000

June ........... 50,000

July ........... 52,000

Sales are the following type: 55% Cash Sales collected in month of sales -- 45% Credit Sales collected in the following month of sale

The following data pertains to the manufacturing process.

1. Finished goods inventory --- March 31st --- 35,200 Units --- $148.71 budgeted cost to make a unit --- Desired ending finished goods for each month 80% of next month's sales volume.

2. Direct materials used:

Direct Material : Metal

Per-Unit Usage : 10 pounds

Cost Per Pound: $8.00

The beginning balance of each month needs to be able to produce 50% of that month's estimated sales volume

Beginning material in pounds as of April 1st 220,000

Direct Materials paid in month purchased.

3. The direct labor used per unit --- 4 hours--- $13.00 per hour --- direct labor paid in month incurred

4. Overhead each month is estimated based on direct labor hours per variable cost. All costs that use cash are paid in month incurred.

--------------------------------------------------------Fixed Cost ---------------------Variable cost

Supplies -------------------------------------------N/A -------------------------------- $1.00

Power -----------------------------------------------N/A ---------------------------------$0.50

Maintenance -------------------------------------$28,000 ----------------------------$0.40

Supervision ------------------------------------- $16,000 --------------------------------N/A

Depreciation -------------------------------------$20,000 --------------------------------N/A

Taxes ---------------------------------------------- $12,000 --------------------------------N/A

Other ---------------------------------------------- $80,000 -------------------------------$1.10
Total ------------------------------------------------ $156,000 ----------------------------- $3.00

5. Monthly selling and administrative expenses are based on units sold per variable cost. All costs that use cash are paid in month incurred.

------------------------------------------------------- Fixed Cost ----------------------------- Variable Cost

Salaries ------------------------------------------- $30,000 -----------------------------------N/A

Commissions ------------------------------------ N/A ------------------------------------------- $1.00

Depreciation ------------------------------------- $10,000 ----------------------------------- N/A

Shipping ------------------------------------------ N/A ------------------------------------------ $0.60

Other --------------------------------------------- $20,000 -------------------------------------- $0.40

Total ---------------------------------------------- $60,000 -------------------------------------- $2.00

6. Unit selling price = $165 per unit

7. Cash balance as of April 1st = $120,000

Prepare the following second quarter budgets- 1. Sales Budget per month and quarter, 2. Production Budget per month and quarter, 3. Direct materials purchase budget per month and quarter, 4. Manufacturing Cost budget per month and quarter, 5. Selling and Administrative expenses budget per month and quarter.

Answer 1

1. Sales Budget per month and quarter

	April	May	June	Total
Expected Sales Units	44000	45000	50000	139000
Unit Price	$               165.00	$                165.00	$               165.00
Expected Sales	$   7,260,000.00	$    7,425,000.00	$   8,250,000.00	$ 22,935,000.00

2. Production Budget per month and quarter

	April	May	June	Total
Expected Sales Units	44000	45000	50000	139000
Desired Ending Inventory	36000	40000	41600
Total Units Required	80000	85000	91600	256600
Less Opening Inventory	35200	36000	40000
Total Production Required	44800	49000	51600	145400

3.Direct materials purchase budget per month and quarter

	April	May	June	Total
Total Production Required	44800	49000	51600	145400
Pounds per unit required	10	10	10
Total Material Required	448000	490000	516000	1454000
Desired Ending Inventory	225000	250000	260000
Total Units Required	673000	740000	776000	2189000
Less Opening Inventory	220000	225000	250000
Total Material to be purchased	453000	515000	526000	1494000
Unit Cost	$                    8.00	$                    8.00	$                   8.00
Total Material Cost	$   3,624,000.00	$    4,120,000.00	$   4,208,000.00	$ 11,952,000.00

Ending Inventory = Sales of next month x 10 pounds x 50%

4.Manufacturing Cost budget per month and quarter

	April	May	June	Total
Raw Material Cost	$   3,624,000.00	$    4,120,000.00	$   4,208,000.00	$ 11,952,000.00
Direct Labor Cost	$   2,329,600.00	$    2,548,000.00	$   2,683,200.00	$    7,560,800.00
Overheads
Variable	$       537,600.00	$       588,000.00	$      619,200.00	$    1,744,800.00
Fixed	$       156,000.00	$       156,000.00	$      156,000.00	$        468,000.00
Total	$   6,647,200.00	$    7,412,000.00	$   7,666,400.00	$ 21,725,600.00

Labor Cost is Calculated = Production units x 4 hours x $13
Variable Overhead is Calculated = Production units x 4 hours x $3

5.Selling and Administrative expenses budget per month and quarter

	April	May	June	Total
Selling & Administrative Expenses
Variable	$         88,000.00	$          90,000.00	$      100,000.00	$        278,000.00
Fixed	$         60,000.00	$          60,000.00	$         60,000.00	$        180,000.00
Total	$       148,000.00	$       150,000.00	$      160,000.00	$        458,000.00