Question

Northern Illinois Manufacturing is preparing its budget for the coming year. The first step is to plan for the first quarter of that coming year. Northern Illinois gathered the following information from its managers.

Sales:

Actual unit sates for November	113,500
Actual unit sales for December	103,100
Expected unit sales for January	114,000
Expected unit sales for February	113,500
Expected unit sales for March	116,000
Expected unit sales for April	126,000
Expected unit sales for May	138,500
Unit selling price	$12

Northern Illinois wants to keep 10% of the next month’s unit sales in ending inventory. All sales are on account. 85% of the Accounts Receivable are collected in the month of sale and 15% of the Accounts Receivable are collected in the month after sale. Accounts receivable on December 31 totaled 183,780.

Direct Materials:

The product uses metal, plastic, and rubber. In total, each unit requires 2 pounds of material at an average cost of 0.75 per pound.

Northern Illinois likes to keep 5% of the materials needed for the next month in its ending inventory. Payment for materials is made within 15 days. 50% is paid in the month of purchase and 50% is paid in the month after purchase. Accounts Payable on December 31 totaled $120,595. Raw materials on December 31 totaled 11,295 pounds.

Direct Labor:

Labor requires 12 minutes per unit for completion and is paid at a rate of $18 per hour.

Manufacturing Overhead:

Indirect materials	30 cents per labor hour
Indirect labor	50 cents per labor hour
Utilities	45 cents per labor hour
Maintenance	25 cents per labor hour
Salaries	$52,000 per month
Depreciation	$16,800 per month
Property taxes	$2,675 per month
Insurance	$2,200 per month
Janitorial	$1,800 per month

Selling and Administrative Expenses:

Variable selling and administrative cost per unit is $2.40.

Fixed selling and administrative costs per month are:

Advertising	$15,000 per month
Insurance	$1,400 per month
Salaries	$72,000 per month
Depreciation	$2,500 per month
Other fixed costs	$3,000 per month

Other Information:

The cash balance on December 31 totaled $220,500, but management has decided that it wants to maintain a cash balance of at least $750,000 beginning January 31. Dividends are paid each month at the rate of $2.50 per share for 5,000 shares outstanding. The company has an open line of credit with the First National Bank. The terms of the agreement requires borrowing to be in $1,000 increments at 8% interest. Northern Illinois borrows on the first day of the month and repays on the last day of the month. Reserve repayment, if required, until Northern Illinois can pay the entire amount. A $250,000 equipment purchase is planned for February.

Instructions (Do all parts):

Note: All budgets and schedules should be prepared by month for the first quarter (January, February, and March). Round all figures to the nearest dollar. For labor hours round to whole hours.

e. Prepare a manufacturing overhead budget.

f. Prepare a selling and administrative budget.

g. Prepare a schedule for expected cash collections from customers.

h. Prepare a schedule for expected payments for materials purchases.

i. Prepare a cash budget.

Answer 1

e.

Manufacturing overhead budget
		December	January	February	March	April
Direct labor hr		3,75,084.00	4,10,220.00	4,09,500.00	4,21,200.00	4,58,100.00
Indirect material	30% of labor hr.	1,12,525.20	1,23,066.00	1,22,850.00	1,26,360.00	1,37,430.00
Indirect labor	50% per labor hr.	1,87,542.00	2,05,110.00	2,04,750.00	2,10,600.00	2,29,050.00
Utilities	45% per labor hr.	1,68,787.80	1,84,599.00	1,84,275.00	1,89,540.00	2,06,145.00
Maintenance	25% per labor hr.	93,771.00	1,02,555.00	1,02,375.00	1,05,300.00	1,14,525.00
Salaries		52,000.00	52,000.00	52,000.00	52,000.00	52,000.00
Depreciation		16,800.00	16,800.00	16,800.00	16,800.00	16,800.00
Property tax		2,675.00	2,675.00	2,675.00	2,675.00	2,675.00
Insurance		2,200.00	2,200.00	2,200.00	2,200.00	2,200.00
Janitorial		1,800.00	1,800.00	1,800.00	1,800.00	1,800.00
		6,38,101.00	6,90,805.00	6,89,725.00	7,07,275.00	7,62,625.00

f.

Selling and administrative budget
		December	January	February	March	April
Sales units		1,03,100.00	1,14,000.00	1,13,500.00	1,16,000.00	1,26,000.00
Variable expense	$2.4 per unit	2,47,440.00	2,73,600.00	2,72,400.00	2,78,400.00	3,02,400.00
Fixed
Advertisement		15,000.00	15,000.00	15,000.00	15,000.00	15,000.00
Insurance		1,400.00	1,400.00	1,400.00	1,400.00	1,400.00
Salaries		72,000.00	72,000.00	72,000.00	72,000.00	72,000.00
Depreciation (non cash)		2,500.00	2,500.00	2,500.00	2,500.00	2,500.00
Other fixed cost		3,000.00	3,000.00	3,000.00	3,000.00	3,000.00
		3,41,340.00	3,67,500.00	3,66,300.00	3,72,300.00	3,96,300.00

g.

Cash collection from customers
	January	February	March
Opening recivable	1,83,780.00
Sales of january	11,62,800.00	2,05,200.00
Sales of February		11,57,700.00	2,04,300.00
Sales of March			11,83,200.00
	13,46,580.00	13,62,900.00	13,87,500.00

h.

Expected payment for material purchases
	January	February	March
Opening payable	1,20,595.00
Purchase of January	85,492.50	85,492.50
Purchase of February		85,434.00	85,434.00
Purchase of March			88,134.00
	2,06,087.50	1,70,926.50	1,73,568.00

i.

Cash budget
	January	February	March
Opening cash	2,20,500.00	7,51,587.50	9,25,096.50
Add: Additions
Collection from debtors	13,46,580.00	13,62,900.00	13,87,500.00
Additional loan	8,98,000.00	7,51,587.50	9,25,096.50
	22,44,580.00	21,14,487.50	23,12,596.50
Less: Payments
Payment to creditors	2,06,087.50	1,70,926.50	1,73,568.00
Direct labor cost	4,10,220.00	4,09,500.00	4,21,200.00
Overhead cost	6,74,005.00	6,72,925.00	6,90,475.00
Selling & administrative expense	3,38,840.00	3,65,000.00	3,63,800.00
Interest Paid	71,840.00	60,127.00	74,007.72
Dividend Paid	12,500.00	12,500.00	12,500.00
Equipment purchase		2,50,000.00
	17,13,492.50	19,40,978.50	17,35,550.72
Closing	7,51,587.50	9,25,096.50	15,02,142.28