Question
In: Accounting
Brighton, Inc., manufactures kitchen tiles. The company recently expanded, and the controller believes that it will...
Brighton, Inc., manufactures kitchen tiles. The company recently expanded, and the controller believes that it will need to borrow cash to continue operations. It began negotiating for a one-month bank loan of $500,000 starting May 1. The bank would charge interest at the rate of 1.25 percent per month and require the company to repay interest and principal on May 31. In considering the loan, the bank requested a projected income statement and cash budget for May.
The following information is available:
- The company budgeted sales at 600,000 units per month in April, June, and July and at 550,000 units in May. The selling price is $4 per unit.
- The inventory of finished goods on April 1 was 120,000 units. The finished goods inventory at the end of each month equals 20 percent of sales anticipated for the following month. There is no work in process.
- The inventory of raw materials on April 1 was 59,000 pounds. At the end of each month, the raw materials inventory equals no less than 40 percent of production requirements for the following month. The company purchases materials in quantities of 69,500 pounds per shipment.
- Selling expenses are 10 percent of gross sales. Administrative expenses, which include depreciation of $2,000 per month on office furniture and fixtures, total $160,000 per month.
- The manufacturing budget for tiles, based on normal production of 500,000 units per month, follows:
| Materials (0.25 pound per tile, 125,000 pounds, $4 per pound) | $ | 500,000 |
| Labor | 380,000 | |
| Variable overhead | 210,000 | |
| Fixed overhead (includes depreciation of $180,000) | 390,000 | |
| Total | $ | 1,480,000 |
Required:
a-1. Prepare schedules computing inventory
budgets by months for production in units for April, May, and
June.
a-2. Prepare schedules computing inventory budgets
by months for raw materials purchases in pounds for April and
May.
b. Prepare a projected income statement for
May. Cost of goods sold should equal the variable manufacturing
cost per unit times the number of units sold plus the total fixed
manufacturing cost budgeted for the period. When calculating net
sales assume cash discounts of 1 percent and bad debt expense of
0.50 percent.
- Req A1
Prepare schedules computing inventory budgets by months for production in units for April, May, and June.
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- Req A2
Prepare schedules computing inventory budgets by months for raw materials purchases in pounds for April and May.
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- Req B
Prepare a projected income statement for May. Cost of goods sold should equal the variable manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period. When calculating net sales assume cash discounts of 1 percent and bad debt expense of 0.50 percent. (Do not round intermediate calculations.)
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Solutions
Expert Solution
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| Brighton Inc. | |||||
| Workings | |||||
| Production Budget | April | May | June | July | |
| Budgeted Sales units | 600,000.00 | 550,000.00 | 600,000.00 | 600,000.00 | See A |
| Add: Closing | 110,000.00 | 120,000.00 | 120,000.00 | B= 20% of A of next month. | |
| Less: Opening | 120,000.00 | 110,000.00 | 120,000.00 | C= 20% of A of same month. | |
| Production Budget | 590,000.00 | 560,000.00 | 600,000.00 | D |
| Answer a- 2 | ||||
| Inventory Budget | April | May | June | |
| Production Budget | 590,000.00 | 560,000.00 | 600,000.00 | See D |
| Material required per tile | 0.25 | 0.25 | 0.25 | E |
| Material required for production | 147,500.00 | 140,000.00 | 150,000.00 | F=D*E |
| Add: Closing | 56,000.00 | 60,000.00 | G= 40% of F of next month. | |
| Less: Opening | 59,000.00 | 120,000.00 | H= For April its given in question. For May see N of April. | |
| Material Purchase Budget (pounds) | 144,500.00 | 80,000.00 | I | |
| Pounds per batch | 69,500.00 | 69,500.00 | J | |
| Number of batches | 2.08 | 1.15 | K=I/J | |
| Batches should be whole figure so it should be | 3.00 | 2.00 | L | |
| Material Purchase Budget (pounds) | 208,500.00 | 139,000.00 | M=J*L | |
| Calculation of closing quantity | April | May | ||
| Opening | 59,000.00 | 120,000.00 | See H | |
| Add: Purchases | 208,500.00 | 139,000.00 | See M | |
| Less: Used in production | 147,500.00 | 140,000.00 | See F | |
| Closing quantity | 120,000.00 | 119,000.00 | N |
| Ans b | ||
| Workings for Income Statement | ||
| Sales Budget | May | Note |
| Sales (units) | 550,000.00 | See A |
| Sell Price | 4.00 | O |
| Sales Budget | 2,200,000.00 | P=A*O |
| Cash discounts at 1 % | 22,000.00 | Q=P*1% |
| Bad debt expense at 0.50 % | 11,000.00 | R=P*0.5% |
| Selling expenses at 10 % | 220,000.00 | S=P*10% |
| Material usages Budget | May | |
| Sales (units) | 550,000.00 | See A |
| Material required per unit | 0.25 | See E |
| Material needed | 137,500.00 | T=A*E |
| Cost per pound | 4.00 | U |
| Material usages Budget ($) | 550,000.00 | V=T*U |
| Direct Labor Budget | May | |
| Normal production | 500,000.00 | W |
| Labor cost | 380,000.00 | X |
| Labor cost per unit | 0.76 | Y=X/W |
| Sales (units) | 550,000.00 | See A |
| Direct Labor cost | 418,000.00 | Z=Y*A |
| Manufacturing Overhead Budget | May | |
| Normal production | 500,000.00 | See W |
| Variable Overhead | 210,000.00 | AA |
| Variable Overhead rate per unit | 0.42 | AB=AA/W |
| Variable Overhead Budget | 231,000.00 | AC=AB*A |
| Fixed Overhead Budget | 390,000.00 | AD |
| Manufacturing Overhead Budget | 621,000.00 | AE=AC+AD |
| Income Statement | May | |
| Sales Revenues | 2,200,000.00 | See P |
| Less: Cash discounts | 22,000.00 | See Q |
| Net Sales | 2,178,000.00 | |
| Less: Cost of goods sold | ||
| Material usages | 550,000.00 | See V |
| Direct Labor cost | 418,000.00 | See Z |
| Manufacturing Overhead | 621,000.00 | See AE |
| Total Cost of goods sold | 1,589,000.00 | |
| Gross Profit | 589,000.00 | |
| Less: Operating Expenses | ||
| Bad debt |
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Brighton, Inc., manufactures kitchen tiles. The company recently
expanded, and the controller believes that it will need to borrow
cash to continue operations. It began negotiating for a one-month
bank loan of $500,000 starting May 1. The bank would charge
interest at the rate of 1.00 percent per month and require the
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bank loan of $500,000 starting May 1. The bank would charge
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cash to continue operations. It began negotiating for a one-month
bank loan of $500,000 starting May 1. The bank would charge
interest at the rate of 1.00 percent per month and require the
company to repay interest and principal on May 31. In considering
the loan, the bank requested a projected income statement and cash
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