Question

Alex Incorporated manufactures a product with a selling price of $50 per unit. Units and monthly cost data follow: (20 points)

Variable:

Selling and administrative . . . . . . . . . . . . . . . . . .    $ 0.4 per unit sold

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . .   10 per unit manufactured

Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 per unit manufactured

Variable manufacturing overhead . . . . . . . . . . . . . . 5 per unit manufactured

Fixed:

Selling and administrative . . . . . . . . . . . . . . . . .          $15,000 per month

Manufacturing (including depreciation of $10,000). . .30,000 per month

The company pays 75% of the bills in the month incurred and 25% in the following month. All sales are on account with 50 percent collected the month of sale and the balance collected the following month. There are no sales discounts or bad debts.

The company desires to maintain an ending finished goods inventory equal to 20 percent of the following month’s sales and a raw materials inventory equal to 10 percent of the following month’s production. January 1, 2018, inventories are in line with these policies.

Actual unit sales for December and budgeted unit sales for January, February, and March of 2018 are as follows:

Alex INCORPORATED

Sales Budget For the Months of January, February, and March 2018

    Month                                          Dec              Jan           Feb            Mar

Sales—Units 6,250            5,000         10,000          8,000

Sales—Dollars $312,500   $250,000   $500,000    $400,000

Additional information:

The January 1 beginning cash is projected as $5,000.

For the purpose of operational budgeting, units in the January 1 inventory of finished goods are valued at variable manufacturing cost.

Each unit of finished product requires one unit of raw materials.

ALEX intends to pay a cash dividend of $10,000 in January

R e q u i r e d

1. A production budget for January and February.

2. A purchases budget in units for January.

3. A manufacturing cost budget for January.

4. A cash budget for January.

5. A budgeted contribution income statement for January.

6. Management is concerned that their supplier of raw materials will have a strike. Determine the budget implications if management plans to increase the January-end raw materials inventory to 100 percent of February’s production needs. Offer any recommendations you believe appropriate

Answer 1

1.) Production Budget: (in units)

Particulars	January	February
Opening Inventory	1000	2000
+ Production (Balancing figure)	6000	9600
- Sales	5000	10000
= Closing Inventory (20% of sale of next month)	2000	1600

2.) Purchase Budget:

Particulars	January (units)
Opening Inventory	600
+ Purchase (Balancing figure)	6360
- Consumption	6000
= Closing Inventory	960

3.) Manufacturing cost budget for January:

Particulars	Amount($)
Variable manufacturing costs:-
Direct Material (6000*10)	60000
Direct Labor (6000*10)	60000
Manufacturing overhead (6000*5)	30000
Fixed Manufacturing Costs:-
Cost per month including depreciation	30000
Total Cost	180000

4.) Cash Budget:

Particulars	Amount($)
Opening Balance	5000
Dividend	(10000)
Sales - January (50%)	125000
- December collection (50%)	156250
Raw Material purchase bill (6360*10*75%) - January	(47700)
(6000*10*25%) - December	(15000)
Fixed selling & Admin exp - January	(11250)
- December	(3750)
Manufacturing Expense - January	(15000)
- December	(5000)
Variable selling & Admin - January (2000*75%)	(1500)
- December (2500*25%)	(625)
Manufacturing overheads - January (30000*75%)	(22500)
- December (30000*25%)	(7500)
Labor - January (60000*75%)	(45000)
- December (60000*25%)	(15000)
= Closing Balance	86425

5.) Budgeted Contribution Income Statement - January:

Particulars	Amount($)
Sales Revenue (5000*50)	250000
- Direct Material (6000*10)	60000
- Direct Labor (6000*10)	60000
- Variable selling & admin (5000*0.4)	2000
- Variable manufacturing overhead (6000*5)	30000
- Fixed Selling & Admin	15000
- Fixed Manufacturing Expense	30000
Net Income	53000

• Contribution = Sales - Variable costs = $ 98000
• Profit = Contribution - Fixed Costs = $ 53000