Question

Optima Company is a high-technology organisation that produces a mass-storage system. The design of Optima’s system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (2017). The budget will detail each quarter’s activity and the activity for the year in total. The master budget will be based on the following information:

a Fourth-quarter sales for 2016 are 65 000 units.

b Unit sales by quarter (for 2017) are projected as follows:

First quarter	75 000
Second quarter	80 000
Third quarter	85 000
Fourth quarter	95 000

The selling price is $500 per unit. All sales are credit sales. Optima collects 85% of all sales within the quarter in which they are realised; the other 15% is collected in the following quarter. There are no bad debts.

c There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter:

First quarter	13 000 units
Second quarter	15 000 units
Third quarter	20 000 units
Fourth quarter	10 000 units

d Each mass-storage unit uses five hours of direct labour and three units of direct materials. Workers are paid $25 per hour, and one unit of direct materials costs $80.

e There are 65 700 units of direct materials in beginning inventory as at 1 January 2017. At the end of each quarter, Optima plans to have 30% of the direct materials needed for next quarter’s unit sales. Optima will end the year with the same amount of direct materials found in this year’s beginning inventory.

f Optima buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition and the remaining half are paid for in the following quarter. Wages and salaries are paid on the 15th and 30th of each month.

g Fixed overhead totals $1 million each quarter. Of this total, $350 000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year’s total fixed overhead by the year’s budgeted production in units.

h Variable overhead is budgeted at $6 per direct labour hour. All variable overhead expenses are paid for in the quarter incurred.

i Fixed selling and administrative expenses total $250 000 per quarter, including $50 000 depreciation.

j Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and

administrative expenses are paid for in the quarter incurred.

k The balance sheet as at 31 December 2017 is as follows:

ASSETS
Cash	$ 250 000
Direct materials inventory	5 256 000
Accounts receivable	3 300 000
Plant and equipment, net	33 500 000
Total assets	$42 306 000

LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$ 7248000*
Capital share	27 000 000
Retained earnings	8 058 000
Total liabilities and shareholders’ equity	$42 306 000

* For purchase of direct materials only.

l Optima will pay quarterly dividends of $300 000. At the end of the fourth quarter, $2 million of equipment will be purchased.

REQUIRED:

Prepare a master budget for Optima Company for each quarter of 2017 and for the year in total. The following component budgets must be included:

1 Sales budget

2 Production budget

3 Direct materials purchases budget

4 Direct labour budget

5 Overhead budget

6 Selling and administrative expenses budget

7 Ending finished goods inventory budget

8 Cost of goods sold budget (Note: Assume that there is no change in work in process inventories.)

9 Cash budget

10 Pro forma income statement (using absorption costing) (Note: Ignore income taxes.)

11 Pro forma balance sheet (Note: Ignore income taxes.)

Answer 1

1	Sale budget	budgted unit sales
		Qtr. 1	Qtr 2	Qtr 3	Qtr 4	Total
	Expected units sales	75,000	80000	85000	95,000	3,35,000
	Selling price	500.00	500.00	500.00	500.00	500.00
	Total sales	3,75,00,000	4,00,00,000	4,25,00,000	12,00,00,000	16,75,00,000
	Cash collection budget	Qtr. 1	Qtr 2	Qtr 3	Qtr 4	Total
	Current quarter 85%	3,18,75,000	3,40,00,000	3,61,25,000	10,20,00,000	20,40,00,000
	Past quarter 15%	48,75,000	56,25,000	60,00,000	63,75,000	2,28,75,000
	Total	3,67,50,000	3,96,25,000	4,21,25,000	10,83,75,000	22,68,75,000
2	Production budget	Qtr. 1	Qtr 2	Qtr 3	Qtr 4	Total
	Budgeted sales	75,000	80000	85000	95000	3,35,000
Add	Ending inventory	13000	15000	20000	10000	10000
	Required units of available production	88,000	95,000	1,05,000	1,05,000	3,45,000
Less	beginning inventory	0	13,000	15000	20000	0
	Units to be produced	88,000	82,000	90,000	85000	3,45,000
3	Direct material budget	Qtr. 1	Qtr 2	Qtr 3	Qtr 4	Total
	Number of units produced	88,000	82,000	90,000	85,000	3,45,000
	Basis of units	3	3	3	3	5
	Production needs	2,64,000	2,46,000	2,70,000	2,55,000	10,35,000
Add	ending material inventory 30%	73800	81000	76500	65700	65700
	Total material requirements	337800	327000	346500	320700	11,00,700
Less	beginning material inventory	65700	73800	81000	76500	65700
	Material to be purchased	272100	253200	265500	244200	10,35,000
	Material price per unit	80	80	80	80	80
	Total cost of direct material purchases	21768000	20256000	21240000	19536000	8,28,00,000
4	direct labor budget	Qtr. 1	Qtr 2	Qtr 3	Qtr 4	Total
	Production budget units	88,000	82,000	90,000	85,000	3,45,000
	Per unit direct hours required	5	5	5	5	5
	Total labor hours needed	440000	410000	450000	425000	1725000
	Labor price per hour	25	25	25	25	25
	Labor dollars	11000000	10250000	11250000	10625000	43125000