Question

Understanding Relationships, Master Budget, Comprehensive Review

Optima Company is a high-technology organization that produces a mass-storage system. The design of Optima's system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (20X1). The budget will detail each quarter's activity and the activity for the year in total. The master budget will be based on the following information:

Fourth-quarter sales for 20X0 are 55,000 units.

Unit sales by quarter (for 20X1) are projected as follows:

First quarter	65,000
Second quarter	70,000
Third quarter	75,000
Fourth quarter	90,000

The selling price is $400 per unit. All sales are credit sales. Optima collects 85% of all sales within the quarter in which they are realized; the other 15% is collected in the following quarter. There are no bad debts.There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter:

First quarter	13,000 units
Second quarter	15,000 units
Third quarter	20,000 units
Fourth quarter	10,000 units

Each mass-storage unit uses 5 hours of direct labor and three units of direct materials. Laborers are paid $10 per hour, and one unit of direct materials costs $80.

There are 65,700 units of direct materials in beginning inventory as of January 1, 20X1. At the end of each quarter, Optima plans to have 30% of the direct materials needed for next quarter's unit sales. Optima will end the year with the same amount of direct materials found in this year's beginning inventory.

Optima buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition, and the remaining half are paid for in the following quarter. Wages and salaries are paid on the 15th and 30th of each month.

Fixed overhead totals $1 million each quarter. Of this total, $350,000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year's total fixed overhead by the year's budgeted production in units.

Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred.

Fixed selling and administrative expenses total $250,000 per quarter, including $50,000 depreciation.

Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.

The balance sheet as of December 31, 20X0, is as follows:

Assets
Cash			$ 250,000
Direct materials inventory			5,256,000
Accounts receivable			3,300,000
Plant and equipment, net			33,500,000
Total assets			$42,306,000

Liabilities and Stockholders’ Equity
Accounts payable			$ 7,248,000*
Capital stock			27,000,000
Retained earnings			8,058,000
Total liabilities and stockholders’ equity			$42,306,000
* For purchase of direct materials only.

Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2 million of equipment will be purchased.

Required:

Prepare a master budget for Optima Company for each quarter of 20X1 and for the year in total. The following component budgets must be included:

1. Sales Budget (units and budgeted sales in thousands)

Optima Company
Sales Budget
For the Year Ending December 31, 20X1
	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Units
Unit price	$	$	$	$	$
Total sales	$	$	$	$	$

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Correct

2. Production budget (amounts in full, not in thousands) If an amount is zero, enter "0".

Optima Company
Production Budget
For the Year Ending December 31, 20X1
	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Sales
Desired ending inventory
Total needs
Less: Beginning inventory
Production

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Correct

3. Direct Materials Purchases Budget (in thousands, except for per unit/hour data) If required, round answers to one decimal place.

Optima Company
Direct Materials Purchases Budget
For the Year Ending December 31, 20X1
	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Production
Materials/unit
Production needs
Desired ending inventory
Total needs
Less: Beginning inventory
Purchases
Cost per unit	$	$	$	$	$
Purchase cost	$	$	$	$	$

Feedback

Partially correct

4. Direct Labor Budget (in thousands, except per unit/hour data)

Optima Company
Direct Labor Budget
For the Year Ending December 31, 20X1
	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Production
Hours per unit
Hours needed
Cost per hour	$	$	$	$	$
Total cost	$	$	$	$	$

Feedback

Correct

5. Overhead Budget (in thousands, except per unit/hour data)

Optima Company
Overhead Budget
For the Year Ending December 31, 20X1
	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Budgeted hours
Variable rate	$	$	$	$	$
Budgeted VOH	$	$	$	$	$
Budgeted FOH
Total OH	$	$	$	$	$

Feedback

Correct

6. Selling and Administrative Expenses Budget (in thousands, except per unit/hour data)

Optima Company
Selling and Administrative Expenses Budget
For the Year Ending December 31, 20X1
	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Planned sales
Variable rate	$	$	$	$	$
Variable expenses	$	$	$	$	$
Fixed expenses
Total expenses	$	$	$	$	$

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Correct

7. Ending finished goods inventory budget. Enter amounts in full, not in thousands. Round to the nearest cent.

Optima Company
Ending Finished Goods Inventory Budget
For the Year Ending December 31, 20X1
Unit cost computation:
Direct materials	$
Direct labor
Overhead:
Variable
Fixed
Total unit cost	$
Finished goods	$

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Correct

8. Cost of goods sold budget (Note: Assume that there is no change in work-in-process inventories.) Enter amounts in full, not in thousands. If an amount is zero, enter "0".

Optima Company
Cost of Goods Sold Budget
For the Year Ending December 31, 20X1
Direct materials used	$
Direct labor used
Overhead
Budgeted manufacturing costs	$
Add: Beginning finished goods inventory
Cost of goods available for sale	$
Less: Ending finished goods inventory
Budgeted cost of goods sold	$

Feedback

Partially correct

9. Cash Budget (in thousands)

Optima Company
Cash Budget
For the Year Ending December 31, 20X1
	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Beginning cash bal.	$	$	$	$	$
Collections:
Credit sales:
Current quarter
Prior quarter
Cash available	$	$		$	$
Less disbursements:
Direct materials:
Current quarter	$	$	$	$	$
Prior quarter
Direct labor
Overhead
Selling and admin.
Dividends
Equipment
Total cash needs	$	$	$	$	$
Ending cash	$	$	$	$	$

Feedback

Partially correct

10. Pro forma income statement (using absorption costing). Enter amounts in full, not in thousands.(Note: Ignore income taxes.)

Optima Company
Pro Forma Income Statement
For the Year Ending December 31, 20X1
Sales	$
Less: Cost of goods sold
Gross margin	$
Less: Selling and administrative expenses
Income before taxes	$

Feedback

Partially correct

11. Pro forma balance sheet. Enter amounts in full, not in thousands. List all assets and liabilities in order of liquidity. (Note: Ignore income taxes.)

Optima Company
Pro Forma Balance Sheet
December 31, 20X1
Assets
Cash	$
Accounts receivable
Direct materials inventory
Finished goods inventory
Plant and equipment
Total assets	$
Liabilities and stockholders' equity
Accounts payable	$
Capital stock
Retained earnings
Total liabilities and stockholders' equity	$

Answer 1

Optima Company
For the Year Ending Dec. 31, 20X1

1. Sales Budget :-

	Qtr.	Qtr. 2	Qtr. 3	Qtr. 4	Total
Total Units	65,000	70,000	75,000	90,000	300,000
Unit Prices	400	400	400	400
Total Sales	26,000,000	28,000,000	30,000,000	36,000,000	120,000,000

2) Production Budget :- Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total Total sales 65,000 70,000 75,000 90,000 300,000 Desired Ending Inventory 13,000 15,000 20,000 10,000 58,000 Total needs 78,000 85,000 95,000 100,000 358,000 Less: Beginning Inventory (13,000) (15,000) (20,000) (48,000) Production in Units 78,000 72,000 80,000 80,000 310,000 3.Direct Material Purchase Budget :- Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total Total Production 78,000 72,000 80,000 80,000 310,000 Material per Unit 3 3 3 3 3 production needs 234,000 216,000 240,000 240,000 930,000 Desired Ending Inventory 64,800 72,000 72,000 65,700 274,500 Total Needs 298,800 288,000 312,000 305,700 1,204,500 Less: Beginning Inventory (65,700) (64,800) (72,000) (72,000) (274,500) Purchases 233,100 223,200 240,000 233,700 930,000 Cost per Unit 80 80 80 80 80 Purchase Costs 18,648,000 17,856,000 19,200,000 18,696,000 74,400,000 4.Direct Labor Budget:-

	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Total Production	78,000	72,000	80,000	80,000	310,000
Hours Per Unit	5	5	5	5	5
Hours Needed	390,000	360,000	400,000	400,000	1,550,000
Cost per Hour	10	10	10	10	10
Total Cost	3,900,000	3,600,000	4,000,000	4,000,000	15,500,000

5.Overhead Budget :- Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total Total Budgeted Hrs 390,000 360,000 400,000 400,000 1,550,000 Variable Rate 6 6 6 6 6 Budgeted VOH 2,340,000 2,160,000 2,400,000 2,400,000 9,300,000 Budgeted FOH 1,000,000 1,000,000 1,000,000 1,000,000 4,000,000 Total OH 3,340,000 3,160,000 3,400,000 3,400,000 13,300,000