Question

Business Decision Case The sales department of Donovan Manufacturing, Inc. has completed the

following sales forecast for the months of January through March 20X1 for its only two products:

50,000 units of J to be sold at $90 each and 30,000 units of K to be sold at $70 each. The desired

unit inventories at March 31, 20X1, are 10% of the next quarter’s unit sales forecast, which are

60,000 units of J and 30,000 units of K. The January 1, 20X1, unit inventories were 5,000 units of

J and 2,000 units of K.

Each unit of J requires 3 pounds of material A and 2 pounds of material B for its manufacture; K

requires 2 pounds of A and 4 pounds of B. The purchase cost of A is $9 per pound and the purchase

cost of B is $5 per pound. Materials A and B on hand at January 1, 20X1, were 19,000 pounds of A

and 7,000 pounds of B. Desired inventories at March 31, 20X1, are 14,000 pounds of A and 8,000

pounds of B.

Each unit of J requires 0.5 hours of direct labor in the factory; each unit of K requires 1.0 hour

of direct labor. The average hourly rate for direct labor is $12 per hour. Estimated manufacturing

overhead cost is $6 per direct labor hour plus $90,000 per month. Selling and administrative expenses

are estimated to be 10% of sales revenue plus $180,000 per month.

Cash sales for the first quarter are estimated to be $300,000 per month. It is forecast that 30%

of the credit sales for the quarter ended March 31, 20X1, will occur in January, 30% in February,

and 40% in March. Of credit sales (December through March), 40% will be collected as cash in the

month of sale and 55% will be collected in the following month. The remainder will be uncollectible.

Cash collected in January 20X1 from December 20X0 sales will be $1,050,000.

The January 1, 20X1, cash balance was $70,000. The minimum acceptable cash balance at

the end of each month is $60,000. Short-term borrowings (6-month term) are made in multiples of

$10,000. Interest is charged at the rate of 1% per month on short-term borrowings. The first interest

payment is made the month following the borrowing. Cash disbursements (excluding interest on

short-term borrowings) are estimated as follows:

January February March

Manufacturing costs .................... $1,500,000 $1,300,000 $1,400,000

Selling and administrative expenses ....... 390,000 410,000 400,000

Interest expense....................... 90,000 90,000 90,000

Income tax payment .................... 0 0 210,000

Capital expenditures.................... 124,000 110,000 50,000

Cash dividends........................ 300,000 0 0

Required

a. Prepare the sales budget for the quarter ended March 31, 20X1.

b. Prepare the production budget for the quarter ended March 31, 20X1.

c. Prepare the direct materials budget for the quarter ended March 31, 20X1.

d. Prepare the direct labor budget for the quarter ended March 31, 20X1.

e. Prepare the manufacturing overhead budget for the quarter ended March 31, 20X1.

f . Prepare the selling and administrative expense budget for the quarter ended March 31, 20X1.

g. Prepare a schedule of cash collected from customers for the quarter ended March 31, 20X1.

h. Prepare the cash budget for the quarter ended March 31, 20X1.

Answer 1

Part A

Donovan Manufacturing, Inc. Sales Budget For the Quarter Ended March 31, 20X1
Product	Forecast Unit Sales Volume	Planned Unit Sales Price	Budgeted Total Sales
J	50000	90	4500000
K	30000	70	2100000
Total sales			6600000

Part B

Donovan Manufacturing, Inc. Production Budget For the Quarter Ended March 31, 20X1
	Units of Finished Product
	J	K
Forecast unit sales
Desired ending
10% x 60,000	6000
10% x 30,000		3000
Quantities to be available	56000	33000
Less: Beginning inventories	5000	2000
Total production to be scheduled	51000	31000

Part C

Donovan Manufacturing, Inc. Direct Material Budget For the Quarter Ended March 31, 2016
	Material A	Material B
Direct material required:
Product J: 51,000 x 3	153000
51,000 x 2		102000
Product K: 31,000 x 2	62000
31,000 x 4		124000
Desired ending materials inventories	14000	8000
Total pounds of material to be available	229000	234000
Less: Beginning materials inventories	19000	7000
Total pounds of material to be purchased	210000	227000
( Multiply By X )Unit purchase price	9	5
Total material purchases	1890000	1135000

Part D

Donovan Manufacturing, Inc. Direct Labor Budget For the Quarter Ended March 31, 20X1
Direct labor hours required for production:
Product J: 51,000 x 0.5 hours	25500
Product K: 31,000 x 1.0 hours	31000
Total direct labor hours	56500
( Multiply By X)Hourly rate for direct labor	12
Total direct labor cost	678000

Part E

Donovan Manufacturing, Inc. Manufacturing Overhead Budget For the Quarter Ended March 31, 20X1
Total direct labor hours	56500
( Multiply By X ) Variable manufacturing overhead rate	6
Variable manufacturing overhead cost	339000
Fixed manufacturing overhead cost ($90,000 x 3)	270000
Total manufacturing overhead cost	609000

Part F

Donovan Manufacturing, Inc. Selling and Administrative Expense Budget For the Quarter Ended March 31, 2016
Total sales revenue	6600000
(Multiply By X) Variable selling and administrative rate	10%
Variable selling and administrative
Expenses	660000
Fixed selling and administrative expenses ($180,000 x 3)	540000
Total selling and administrative expenses	1200000

Part G

Donovan Manufacturing, Inc. Schedule of Cash Collected from Customers For the Quarter Ended March 31, 2016
	January	February	March
Cash sales:	300000	300000	300000
Credit sales:
December	1050000
January:
[ ( 6600000-900000 ) X 30% = 1710000 ] X 40%	684000
[ ( 6600000-900000 ) X 30% = 1710000 ] X 55%		940500
February
[ ( 6600000-900000 ) X 30% = 1710000 ] X 40%		684000
[ ( 6600000-900000 ) X 30% = 1710000 ] X 55%			940500
March:
[ ( 6600000-900000 ) X 40% = 2280000 ] X 40%			912000
Total credit sales	1734000	1624500	1852500
Total sales	2034000	1924500	2152500

Part H

Donovan Manufacturing, Inc. Cash Budget For the Quarter Ended March 31, 2016
	January	February	March
Beginning cash balance	70000	60000	70900
Cash receipts
Cash sales	300000	300000	300000
Collections from customers	1734000	1624000	1852500
Short-term borrowing	360000
Cash available	2464000	1984500	2223400
Cash disbursement:
Manufacturing costs	1500000	1300000	1400000
Selling and administrative expenses	390000	410000	400000
Interest expense	90000	93600	93600
Income tax payments			210000
Capital expenditures	124000	110000	50000
Cash dividends	300000
Total disbursement	2404000	1913600	2153600
Ending cash balance	60000	70900	69800

90000 + (360000 X 1%) = 93600