Question

Waterways Corporation is preparing its budget for the coming year. The first step is to plan for the first quarter of that coming year. Waterways gathered the following information from the 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

Waterways 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.

Waterways 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 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.

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. Waterways borrows on the first day of the month and repays on the last day of the month. Reserve repayment, if required, until Waterways 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 and a cash 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.

Answer 1

e)

Manufacturing Overhead Budget
	1st Quarter
	January	February	March	Total
Variable costs
Indirect materials	$6,795	$6,775	$7,050	$20,620
Indirect labor	$11,325	$11,292	$11,750	$34,367
Maintenance	$5,662	$5,646	$5,875	$17,183
Utilities	$10,192	$10,163	$10,575	$30,930
Total variable costs	$33,975	$33,875	$35,250	$103,100
Fixed costs
Depreciation	$16,800	$16,800	$16,800	$50,400
Salaries	$42,000	$42,000	$42,000	$126,000
Maintenance	$1,300	$1,300	$1,300	$3,900
Property taxes and insurance	$2,500	$2,500	$2,500	$7,500
Insurance	$1,200	$1,200	$1,200	$3,600
Total fixed costs	$63,800	$63,800	$63,800	$191,400
Total manufacturing overhead	$97,775	$97,675	$99,050	$294,500
Computation for MOH rate
Direct labor hours	$22,650	$22,583	$23,500	$68,733
			MOH Rate	$4.28
MOH cash payment	$80,975	$80,875	$82,250	$244,100

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f)

Selling and Administrative Expense Budget
	1st Quarter
	January	February	March	Total
Budgeted sales (in units)	$113,333	$112,500	$116,667	$342,500
Variable expenses
All expenses cost @ $1.62	$2	$2	$2	$2
Total variable expenses	$183,599	$182,250	$189,001	$554,850
Fixed expenses
Advertising	$15,000	$15,000	$15,000	$45,000
Salaries	$72,000	$72,000	$72,000	$216,000
Insurance	$1,400	$1,400	$1,400	$4,200
Depreciation	$2,500	$2,500	$2,500	$7,500
Other fixed costs	$3,000	$3,000	$3,000	$9,000
Total fixed expenses	$93,900	$93,900	$93,900	$281,700
Total selling and administration expenses	$277,499	$276,150	$282,901	$836,550
Totalselling and administration cash payments	$274,999	$273,650	$280,401	$829,050
(excluding depreciation)

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g)

Schedule of expected collections from customers only
	First Quarter
	January	February	March	Total
Accounts receivable 12/31/16	$183,750
Sales - January	$1,155,997	$203,999
Sales - February		$1,147,500	$202,500
Sales - March			$1,190,003	$210,001
Total amount of collections	$1,339,747	$1,351,499	$1,392,503

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h)

Schedule of expensed payments for direct materials only
	First Quarter
	January	February	March	Total
Accounts payable 12/31/16	$120,595
Purchases - January	$85,289	$85,289
Purchases - February		$84,859	$84,859
Purchases - March			$88,453	$88,453
Total payments	$205,884	$170,148	$173,313