Question

Sales, production, purchases, and cash budgets Freese, Inc., is in the process of preparing the fourth quarter budget for 2013, and the following data have been assembled:

Problem 14.23 LO 4, 5, 8

The company sells a single product at a price of $60 per unit. The estimated sales volume for the next six months is as follows:

September ................................................................13,000 units

October .....................................................................12,000 units

November...................................................................14,000 units

December...................................................................20,000 units

January........................................................................9,000 units

February.....................................................................10,000 units

All sales are on account. The company's collection experience has been that 32% of a month's sales are collected in the month of sale. 64% are collected in the month following the sale, and 4% are uncollectible. It is expected that the net realizable value of accounts receivable (i.e. accounts receivable less allowance for uncollectible accounts) will be $499,200 on September 30, 2013.

Management's policy is to maintain ending finished goods inventory each month at a level equal ton 40% of the next month's budgeted sales. The finished goods inventory on September 30, 2013, is expected to be 4,800 units.

To make one unit of finished produce, 5 pounds of materials are required. Management's policy is to have enough materials on hand at the end of each month to equal 30% of the next month's estimated usage. The raw materials inventory is expected to be 19,200 pounds on September 30, 2013.

The cost per pound of raw material is $4, and 70% of all purchases are paid for in the month of purchase; the remainder is paid in the following month. The accounts payable for raw material purchases is expected to be $75,960 on September 30, 2013.

1. Prepare a sales budget in units and dollars, by month and in total, for the fourth quarter (October, November, and December) of 2013.

2. Prepare a schedule of cash collections from sales, by month and in total, for the fourth quarter of 2013.

3. Prepare a production budget in units, by month and in total, for the fourth quarter of 2013.

4. Prepare a materials purchases budget in pounds, by month and in total, for the fourth quarter of 2013.

5. Prepare a schedule of cash payments for materials, by month and in total, for the fourth quarter of 2013.

Answer 1

Sales budget

Particulars	September	October	November	December	January	February	Quarter 4
Sales in units	13,000	12,000	14,000	20,000	9,000	10,000	46,000
budgeted sales in dollars @ $60	780,000	720,000	840,000	1,200,000	540,000	600,000	2,760,000

Schedule of cash collection

Particulars	September	October	November	December	January	February	Quarter 4
Balance outstanding at the beginning	530,400	530,400	489,600	571,200	816,000	368,000	530,400
Credit sale during the month	780,000	720,000	840,000	1,200,000	540,000	600,000	2,760,000
Balance collected for the current month	249,600	230,400	268,800	384,000	172,000	192,000	883,200
Balance collected for the previous month	499,200	499,200	460,800	537,600	768,000	345,600	1,497,600
Allowance for Bad debts	31,200	31,200	28,800	33,600	48,000	21,600	93,600
Balance outstanding at the end	530,400	489,600	571,200	816,000	368,000	408,800	816,000

Production Budget

Particulars	Sep	Oct	Nov	Dec	Jan	Feb	Quarter 4
Opening finished goods available	5200	4800	5600	8000	3600	4000	4800
Current month sales	13000	12000	14000	20000	9000	10000	46000
Finished goods required	4800	5600	8000	3600	4000	18400	3600
Production required for the month	12600	12800	16400	15600	9400	24400	44800

Material Purchase Budget

Particulars	Sep	Oct	Nov	Dec	Jan	Feb	Quarter 4
Opening raw material available	18900	19200	24600	23400	14100	36600	19200
Current month usage	63000	64000	82000	78000	47000	122000	224000
Material required at the end	19200	24600	23400	14100	36600	67200	14100
Material Purchased for the month (in pounds )	63300	69400	80800	68700	69500	152600	218900

Schedule for cash payments

Particulars	September	October	November	December	January	February	Quarter 4
Balance outstanding at the beginning		75,960	83,280	96,960	82,440	83,400	75,960
Purchase cost for the month	253,200	277,600	323,200	274,800	278,000	610,400	875,600
Balance paid for the current month	177,240	194,320	226,240	192,360	194,600	427,280	612,920
Balance paid for the previous month		75,960	83,280	96,960	82,440	83,400	256,200
Balance outstanding at the end	75,960	83,280	96,960	82,440	83,400	183,120	82,440

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