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Endless Mountain Company manufactures a single product that is popular with outdoor recreation enthusiasts. The company sells its product to retailers throughout the northeastern quadrant of the United States. It is in the process of creating a master budget for 2017 and reports a balance sheet at December 31, 2016 as follows:

Endless Mountain Company
Balance Sheet
December 31, 2016
Assets
Current assets:
Cash	$	46,200
Accounts receivable (net)		260,000
Raw materials inventory (4,500 yards)		11,250
Finished goods inventory (1,500 units)		32,250
Total current assets				$	349,700
Plant and equipment:
Buildings and equipment		900,000
Accumulated depreciation		(292,000	)
Plant and equipment, net					608,000
Total assets				$	957,700
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable				$	158,000
Stockholders’ equity:
Common stock	$	419,800
Retained earnings		379,900
Total stockholders’ equity					799,700
Total liabilities and stockholders’ equity				$	957,700

The company’s chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2017 budget:

The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units, and 25,000 units for quarters 1-4, respectively. Notice that the company experiences peak sales in the second and fourth quarters. The budgeted selling price for the year is $32 per unit. The budgeted unit sales for the first quarter of 2018 is 13,000 units.

All sales are on credit. Uncollectible accounts are negligible and can be ignored. Seventy-five percent of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter.

Each quarter’s ending finished goods inventory should equal 15% of the next quarter’s unit sales.

Each unit of finished goods requires 3.5 yards of raw material that costs $3.00 per yard. Each quarter’s ending raw materials inventory should equal 10% of the next quarter’s production needs. The estimated ending raw materials inventory on December 31, 2017 is 5,000 yards.

Seventy percent of each quarter’s purchases are paid for in the quarter of purchase. The remaining 30% of each quarter’s purchases are paid in the following quarter.

Direct laborers are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred.

The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhead is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred.

The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciation expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred.

The company plans to maintain a minimum cash balance at the end of each quarter of $30,000. Assume that any borrowings take place on the first day of the quarter. To the extent possible, the company will repay principal and interest on any borrowings on the last day of the fourth quarter. The company’s lender imposes a simple interest rate of 3% per quarter on any borrowings.

Dividends of $15,000 will be declared and paid in each quarter.

The company uses a last-in, first-out (LIFO) inventory flow assumption. This means that the most recently purchased raw materials are the “first-out” to production and the most recently completed finished goods are the “first-out” to customers.

Required:

The company’s CFO has asked you to prepare the 2017 master budget. To fulfill this request, prepare the following budget schedules and financial statements.

1. Income statement for the year ended December 31, 2017.

2. Balance sheet at December 31, 2017.

Tell me what information you need, first.

Answer 1

Sales Budget
	Quarter
	1	2	3	4	Total
Budgeted sales in units	12000	37000	15000	25000	89000
Selling Price	$32	$32	$32	$32	$32
Budgeted sales revenue	$384,000	$1,184,000	$480,000	$800,000	$2,848,000
Cash Collection from sales
	Quarter
	1	2	3	4	Total
Beginning accounts receivable	$260,000				$260,000
Cash collection from first quarter sale	$288,000	$96,000			$384,000
Cash collection from second quarter sale		$888,000	$296,000		$1,184,000
Cash collection from third quarter sale			$360,000	$120,000	$480,000
Cash collection from fourth quarter sale				$600,000	$600,000
Total	$548,000	$984,000	$656,000	$720,000	$2,908,000
Production Schedule
	Quarter
	1	2	3	4	Total
Budgeted sales in units	12000	37000	15000	25000	89000
Add: Desired ending inventory	5550	2250	3750	1950	1950
Less: Beginning Inventory	1500	5550	2250	3750	1500
Units to be produced	16,050	33,700	16,500	23,200	89,450
Raw Material schedule
	Quarter
	1	2	3	4	Total
Units to be produced	16,050	33,700	16,500	23,200	89,450
Raw material per unit	3.5	3.5	3.5	3.5	3.5
Raw material required	56175	117950	57750	81200	313075
Add: Desired ending invemtory	11795	5775	8120	5000	5000
Less: Beginning Inventory	4500	11795	5775	8120	4500
Raw material to be purchased	63470	111930	60095	78080	313575
Cost of raw material per yard	$3	$3	$3	$3	$3
Cost of raw material	$190,410	$335,790	$180,285	$234,240	$940,725
Cash payment for cost of raw material
	Quarter
	1	2	3	4	Total
Beginning Accounts payable	$158,000				$158,000
Cash payment for first quarter purchase	$133,287	$57,123			$190,410
Cash payment for second quarter purchase		$235,053	$100,737		$335,790
Cash payment for third quarter purchase			$126,199.50	$54,085.50	$180,285
Cash payment for fourth quarter purchase				$163,968	$163,968
Total	$291,287	$292,176	$226,937	$218,054	$1,028,453
Direct labor
	Quarter
	1	2	3	4	Total
Units to be produced	16,050	33,700	16,500	23,200	89,450
Direct labor per unit	0.25	0.25	0.25	0.25	0.25
Total direct labor hour needed	4012.5	8425	4125	5800	22362.5
Rate per hour	$18	$18	$18	$18	$18
Cost of direct labor	$72,225	$151,650	$74,250	$104,400	$402,525

Manufacturing Overhead budget
	Quarter
	1	2	3	4	Total
Budgeted direct labour hours	4,012.50	8,425.00	4,125.00	5,800.00	22,362.50
Variable manufacturing overhead per direct labor hour	$3	$3	$3	$3
Variable manufacturing overhead	$12,037.50	$25,275.00	$12,375.00	$17,400.00	$67,087.50
Fixed Manufacturing overhead	$150,000	$150,000	$150,000	$150,000	$600,000.00
Total manufacturing overhead	$162,037.50	$175,275.00	$162,375.00	$167,400.00	$667,087.50
Less: depreciation	$20,000	$20,000	$20,000	$20,000	$80,000.00
Cash disbursement for manufacturing overhead	$142,037.50	$155,275.00	$142,375.00	$147,400.00	$587,087.50
Total manufacturing overhead					$667,087.50
Budgeted direct labor hours					22,362.50
Predetermined overhead rate for the year					$29.83
Selling and Administrative Budget
	Quarter
	1	2	3	4	Total
Budgeted unit sales	12000	37000	15000	25000	89,000
Variable selling and administrative expense per unit	$1.25	$1.25	$1.25	$1.25	$1.25
Variable selling and administrative expense	$15,000	$46,250	$18,750	$31,250	$111,250
Fixed selling and administrative expenses
Advertising	$25,000	$25,000	$25,000	$25,000	$100,000
Executive salaries	$64,000	$64,000	$64,000	$64,000	$256,000
Insurance	$12,000	$12,000	$12,000	$12,000	$48,000
Property Tax	$8,000	$8,000	$8,000	$8,000	$32,000
Depreciation expense	$8,000	$8,000	$8,000	$8,000	$32,000
Total fixed selling and administrative expenses	$117,000	$117,000	$117,000	$117,000	$468,000
Total selling and administrative expenses	$132,000	$163,250	$135,750	$148,250	$579,250
Less: Depreciation	$8,000	$8,000	$8,000	$8,000	$32,000
Cash disbursement for selling and administrative expensess	$124,000	$155,250	$127,750	$140,250	$547,250
Cash Budget
	Quarter
	1	2	3	4	Total
Beginning Cash Balance	$46,200	$30,001	$244,650	$314,338	$46,200
Add: Cash receipt
Collection from customers	$548,000	984000	656000	720000	$2,908,000
Total cash available	$594,200	$1,014,001	$900,650	$1,034,338	$2,954,200
Less: Cash disbursement
Direct Materials	$291,287	$292,176	$226,937	$218,054	$1,028,453
Direct labour	$72,225	151650	74250	104400	$402,525
Manufacturing Overhead	$142,038	$155,275	$142,375	$147,400	$587,088
Selling and administrative expense	$124,000	$155,250	$127,750	$140,250	$547,250
Dividends	$15,000	$15,000	$15,000	$15,000	$60,000
Total cash disbursement	$644,550	$769,351	$586,312	$625,104	$2,625,316
Excess or (deficiency) of cash available over disbursements	($50,350)	$244,650	$314,338	$409,235	$328,885
Financing:
Borrowing at the beginning of the quarter	$80,350				$80,350
Repayment at the end of the quarter				$89,992	$89,992
Interest	$2,411	$2,411	$2,411	$2,411	$9,642
Total financing	$82,761	$2,411	$2,411	($87,582)	$0
Ending Cash Balance	$30,001	$244,650	$314,338	$319,243	$319,243
Budgeted Income Statement
Sales	$2,848,000
Cost of Goods Sold	$2,098,066
Gross Margin	$749,935
Selling and administrative expense	$579,250
Net Operating income	$170,685
Less: Interest expense	$9,642
Net Income	$161,043