Question

Operating Budget, Comprehensive Analysis

Allison Manufacturing produces a subassembly used in the production of jet aircraft engines. The assembly is sold to engine manufacturers and aircraft maintenance facilities. Projected sales in units for the coming 5 months follow:

January	40,000
February	50,000
March	60,000
April	60,000
May	62,000

The following data pertain to production policies and manufacturing specifications followed by Allison Manufacturing:

1. Finished goods inventory on January 1 is 32,000 units, each costing $166.06. The desired ending inventory for each month is 80% of the next month's sales.
2. The data on materials used are as follows:

   Direct Material	Per-Unit Usage		DM Unit Cost ($)
   Metal	10 lbs.		8
   Components	6		5

   Inventory policy dictates that sufficient materials be on hand at the end of the month to produce 50% of the next month's production needs. This is exactly the amount of material on hand on December 31 of the prior year.
3. The direct labor used per unit of output is 3 hours. The average direct labor cost per hour is $14.25.
4. Overhead each month is estimated using a flexible budget formula. (Note: Activity is measured in direct labor hours.)

   	Fixed-Cost   Component ($)		Variable-Cost Component ($)
   Supplies	—		1.00
   Power	—		0.50
   Maintenance	30,000		0.40
   Supervision	16,000		—
   Depreciation	200,000		—
   Taxes	12,000		—
   Other	80,000		0.50

5. Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. (Note: Activity is measured in units sold.)

   	Fixed    Costs ($)		Variable Costs ($)
   Salaries	50,000		—
   Commissions	—		2.00
   Depreciation	40,000		—
   Shipping	—		1.00
   Other	20,000		0.60

6. The unit selling price of the subassembly is $205.
7. All sales and purchases are for cash. The cash balance on January 1 equals $400,000. The firm requires a minimum ending balance of $50,000. If the firm develops a cash shortage by the end of the month, sufficient cash is borrowed to cover the shortage. Any cash borrowed is repaid at the end of the quarter, as is the interest due (cash borrowed at the end of the quarter is repaid at the end of the following quarter). The interest rate is 12% per annum. No money is owed at the beginning of January.

Required:

1. Prepare a monthly operating budget for the first quarter with the following schedules. (Note: Assume that there is no change in work-in-process inventories.)

a. Schedule 1: Sales Budget. Do not include a multiplication symbol as part of your answer.

Allison Manufacturing
Sales Budget
For the Quarter Ended March 31
	January	February	March	Total
Units
Selling price	$	$	$	$
Sales	$	$	$	$

b. Schedule 2: Production Budget.

Allison Manufacturing
Production Budget
For the Quarter Ended March 31
	January	February	March	Total
Sales
Desired ending inventory
Total needs
Less: Beginning inventory
Units to be produced

c. Schedule 3: Direct Materials Purchases Budget. Do not include a multiplication symbol as part of your answer.

Allison Manufacturing
Direct Materials Purchases Budget
For the Quarter Ended March 31
	January Metal	January Components	February Metal	February Components	March Metal	March Components	Total Metal	Total Components
Units to be produced
Direct materials per unit
Production needs
Desired ending inventory
Total needs
Less: Beginning inventory
Direct materials to be purchased
Cost per unit	$	$	$	$	$	$	$	$
Total cost	$	$	$	$	$	$	$	$

d. Schedule 4: Direct Labor Budget. If required, round amounts to the nearest cent. Do not include a multiplication symbol as part of your answer.

Allison Manufacturing
Direct Labor Budget
For the Quarter Ended March 31
	January	February	March	Total
Units to be produced
Direct labor time per unit (hours)
Total hours needed
Cost per hour	$	$	$	$
Total cost	$	$	$	$

e. Schedule 5: Overhead Budget. If required, round amounts to the nearest cent. Do not include a multiplication symbol as part of your answer.

Allison Manufacturing
Overhead Budget
For the Quarter Ended March 31
	January	February	March	Total
Budgeted direct labor hours
Variable overhead rate	$	$	$	$
Budgeted variable overhead	$	$	$	$
Budgeted fixed overhead
Total overhead	$	$	$	$

f. Schedule 6: Selling and Administrative Expenses Budget. If required, round amounts to the nearest cent. Do not include a multiplication symbol as part of your answer.

Allison Manufacturing
Selling and Administrative Expenses Budget
For the Quarter Ended March 31
	January	February	March	Total
Planned sales
Variable selling and administrative expenses per unit	$	$	$	$
Total variable expense	$	$	$	$
Fixed selling and administrative expenses:
Salaries	$	$	$	$
Depreciation
Other
Total fixed expenses	$	$	$	$
Total selling and administrative expenses	$	$	$	$

g. Schedule 7: Ending Finished Goods Inventory Budget. If required, round amounts to the nearest cent.

Allison Manufacturing
Ending Finished Goods Inventory Budget
For the Quarter Ended March 31
Unit cost computation:
Direct materials:
Metal	$
Components		$
Direct labor
Overhead:
Variable
Fixed
Total unit cost		$
Finished goods inventory		$

h. Schedule 8: Cost of Goods Sold Budget.

Allison Manufacturing
Cost of Goods Sold Budget
For the Quarter Ended March 31
Direct materials
Metal	$
Components		$
Direct labor used
Overhead
Budgeted manufacturing costs		$
Add: Beginning finished goods
Cost of goods available for sale		$
Less: Ending finished goods
Budgeted cost of goods sold		$

i. Schedule 9: Budgeted Income Statement. Use a minus sign to indicate a negative amount.

Allison Manufacturing
Budgeted Income Statement
For the Quarter Ended March 31
Sales	$
Less: Cost of goods sold
Gross margin	$
Less: Selling and administrative expenses
Income before taxes	$

j. Schedule 10: Cash Budget. If an amount is zero, enter "0". Use a minus sign to enter a negative amount.

Allison Manufacturing
Cash Budget
For the Quarter Ended March 31
	January	February	March	Total
Beginning balance	$	$	$	$
Cash receipts
Cash available	$	$	$	$
Less Disbursements:
Purchases	$	$	$	$
Direct labor
Overhead
Selling & admin.
Total	$	$	$	$
Tentative ending balance	$	$	$	$
Borrowed/repaid
Interest paid
Ending balance	$	$	$	$

Answer 1

1. a.

Allison Manufacturing Sales Budget
	January	February	March	Total
Budgeted Unit Sales	40,000	50,000	60,000	150,000
Selling price	$ 205	$ 205	$ 205	$ 205
Budgeted Sales	$8,200,000	$10,250,000	$12,300,000	$30,750,000

b.

Allison Manufacturing Production Budget
	January	February	March	Total
Sales	40,000	50,000	60,000	150,000
Add: Desired ending inventory	40,000	48,000	48,000	48,000
Total needs	80,000	98,000	108,000	198,000
Less: Beginning inventory	32,000	40,000	48,000	32,000
Units to be produced	48,000	58,000	60,000	166,000

c.

Allison Manufacturing Direct Materials Purchase Budget
	January Metal	January Components	February Metal	February Components	March Metal	March Components	Total Metal	Total Components
Units to be Produced	48,000	48,000	58,000	58,000	60,000	60,000	166,000	166,000
Direct materials per unit	10	6	10	6	10	6	10	6
Production needs	480,000	288,000	580,000	348,000	600,000	360,000	1,660,000	996,000
Desired ending inventory	290,000	174,000	300,000	180,000	308,000	184,800	308,000	184,800
Total needs	770,000	462,000	880,000	528,000	908,000	544,800	1,968,000	1,180,800
Less: Beginning Inventory	240,000	144,000	290,000	174,000	300,000	180,000	240,000	144,000
Direct materials to be purchased	530,000	318,000	590,000	354,000	608,000	364,800	1,728,000	1,036,800
Cost per unit	8	5	8	5	8	5	8	5
Total cost	$4,240,000	$1,590,000	$4,720,000	$1,770,000	$486,400	$1,824,000	$13,824,000	$5,184,000

d.

Allison Manufacturing Direct Labor Budget
	January	February	March	Total
Units to be produced	48,000	58,000	60,000	166,000
Direct labor time per unit ( hours )	3	3	3	3
Total hours needed	144,000	174,000	180,000	498,000
Cost per hour	$ 14.25	$ 14.25	$ 14.25	$ 14.25
Total Direct Labor Cost	$2,052,000	$2,479,500	$2,565,000	$ 7,096,500