Question

Section 1:

Identify and explain a product that you will manufacture.

Calculate the cost to manufacture this product on a per unit basis considering the cost factors of material, labour and manufacturing overhead. This calculation will form the basis of the cost of goods sold.

Determine the expected selling price of this product based on market research or based on a required gross profit.

Determine the amount of operating expenses, and selling and administrative expenses that will be required each month to operate the business. (These expenses could all be considered cash basis).

Section 2:

Based on the information developed in Section 1 prepare a Sales Budget differentiating between cash and credit sales for each month of operations starting in January, the first month of operation, to the end of the first quarter ended March 31, 2016. You should state the collection period for the credit sales. (Usually net 30 days)

Based on the forecasted sales budget, prepare an Inventory Purchases Budget for each monthly period and set a target for the ending inventory at each month end. You should state the payment period that is expected. Prepare a Cash Budget for each month based on the Sales and Inventory Budgets and the estimated operating expenses each month.

Answer 1

section 1

ASSUMPTION

INNOVATIVE PRODUCT INC MANUFACTURE PRODUCT ATV BAGS

GIVEN COST STRUCTURE.

PARTICULARS	AMOUNT PER UNIT
MATERIAL	50
LABOUR	20
OVERHEADS	30
COST OF GOODS SOLD	100
SELLING PRICE	200
OPERATING EXPENSE	2000 PER MONTH
SELLING AND ADMINISTRATIVE EXPENSE	5000 PER MONTH

SECTION 2:-

PREPARATION OF SALES BUDGET FOR THE 1 QUARTER 2016 ( JAN - MARCH)

PARTICULARS	JAN	FEB	MAR	QUATER
UNITS OF SALES	5000	7000	10000	22,000
SELLING PRICE PER UNIT	200	200	200	200
TOTAL SALES	10,00,000	14,00,000	20,00,000	44,00,000
CASH SALES	5,00,000	10,00,000	12,00,000	27,00,000
CREDIT SALES	5,00,000	4,00,000	8,00,000	17,00,000

COLLECTION PERIOD FOR CREDIT SALES:- ( 30 DAYS)

PARTICULARS	JAN	FEB	MARCH
ACCOUNTS RECEIVABLE		5,00,000	4,00,000
CREDIT SALES	5,00,000	4,00,000	8,00,000
COLLECTION PERIOD	0	37.5	15

* AS BUSINESS STARTED IN JAN SO THERE IS NO ACCOUNTS RECEIVABLE IN JAN.

* COLLECTION PERIOD FORMULA = 30 DAYS*ACCOUNTS RECEIVABLE/CREDIT SALES

B) PREPARE INVENTORY PURCHASE BUDGET

80% OF THE SALES UNITS ARE USED FOR COST OF GOODS SOLD.

20% OF SALES UNITS ARE USED FOR CLOSING INVENTORY.

PARTICULARS	JAN	FEB	MAR
SALES	10,00,000	14,00,000	20,00,000
COGS(NOTE 1)	4,00,000	5,60,000	8,00,000
PLUS:- CLOSING INVENTORY COST (NOTE 2)	1,00,000	1,40,000	2,00,000
TOTAL INVENTORY NEEDED (SALES+CLOSING INVENTORY - COGS)	7,00,000	9,80,000	14,00,000
OPENING INVENTORY COST	0	1,00,000	1,40,000
PURCHASES(INVENTORY NEEDED + OPENING INVENTORY)	7,00,000	10,80,000	15,40,000
ACCOUNTS PAYABLE	0	7,00,000	10,80,000
PAYMENT PERIOD (ACCOUNTS PAYABLE/PURCHASES*30 DAYS)	0	20 DAYS	21 DAY

ALL ARE CREDIT PURCHASES

1)COGS:- JAN    FEB MAR

UNITS(80% OF SALES UNITS)    4000 5600 8000

COGS PER UNIT 100    100 100

COGS    4,00,000    5,60,000 8,00,000

2)CLOSING INVENTORY(20% OF SALES UNITS) 1000 1400    2000

CLOSING INVENTORY COST 1,00,000    1,40,000 2,00,000

( CLOSING INVENTORY UNIT*COGS PER UNIT)

3)OPENING INVENTORY    0 1000 14,00

OPENING INVENTORY COST    0    1,00,000 1,40,000

(OPENING INVENTORY*COGS PER UNIT)

   CASH BUDGET FOR THE QUARTER

PARTICULARS	JAN	FEB	MAR
OPENING BALANCE	0	4,93,000	12,86,000
INCOME
CASH SALES	5,00,000	10,00,000	12,00,000
CREDIT SALES		5,00,000	4,00,000
TOTAL INCOME	5,00,000	15,00,000	16,00,000
EXPENDITURE
PURCHASES		7,00,000	10,80,000
OPERATING EXPENSES	2000	2000	2000
SELLING AND ADMINISTRATIVE EXPENSE	5000	5000	5000
TOTAL EXPENDITURE	7000	7,07,000	10,87,000
NET CASH FLOW	4,93,000	7,93,000	5,13,000
CLOSING CASH BALANCE (OPENING BALANCE +NET CASH FLOW)	4,93,000	12,86,000	17,99,000