Question

Master Budget Project

Okay Company is preparing to build its master budget. 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:

1. This will be the first year of operation for Okay Company.
2. Budgeted unit sales by quarter for 2017 are projected as follows: First quarter 6,300, Second quarter 6,100, Third quarter 6,100 & Fourth quarter 6,450. First and second quarter 2018 budgeted sales units is 6,400 each quarter.
3. The selling price is $45 per unit. Sales are estimated to be collected 75% in cash and 25% credit. Of the credit sales, 85% are estimated to be collected in the quarter following the sale and 15% are collected in the second quarter following the sale.
4. Since this is the first year of operations there is no beginning inventory of finished goods at the beginning of the year. Okay’s ending finished good inventory policy is 35% of the following quarter’s unit sales needs.
5. Each unit uses 0.50 hours of direct labor and 2 units of direct materials. Laborers are paid $12 per hour and one unit of direct materials costs $4.50.
6. Since this is the first year of operations there is no beginning inventory of direct materials at the beginning of the year. Okay plans to have 30% of the direct materials needed for the next quarter’s production units on hand at the end of each quarter.
7. Okay buys direct materials on account. 80% of the purchases are paid for in the quarter of acquisition, and the remaining 20% are paid for in the following quarter.
8. Fixed overhead totals $25,000 each quarter. Of this total, $5,000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred.
9. Variable overhead is budgeted at $3 per units produced. All variable overhead expenses are paid for in the quarter incurred.
10. Fixed selling and administrative expenses total $15,000 per quarter, including $2,500 depreciation.
11. Variable selling and administrative expenses are budgeted at $1.25 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.
12. Okay will pay quarterly dividends of $10,000. During the fourth quarter, $135,000 of equipment will be purchased.

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

1. Sales budget
2. Cash Collections of Sales
3. Production budget
4. Direct materials purchases budget
5. Cash Payments of Direct materials
6. Direct labor budget
7. Overhead budget
8. Operating expenses budget
9. Cash budget

Answer 1

1	Sales Budget
		1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Year
	Units	6,300	6,100	6,100	6,450	24,950
	Unit selling price	$45	$45	$45	$45	$45
	Total Sales	$283,500	$274,500	$274,500	$290,250	$1,122,750
2	Cash Collections of Sales
		1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Year
	Cash Sales	$212,625	$205,875	$205,875	$217,688	$842,063
	Credit Sales
	1st Quarter sales		$60,244	$10,631		$70,875
	2nd Quarter sales			$58,331	$10,294	$68,625
	3rd Quarter sales				$58,331	$58,331
	4th Quarter sales					$0
	Total cash collections	$212,625	$266,119	$274,838	$286,313	$1,039,894
3	Production budget
		1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Year
	Sales Budget	6,300	6,100	6,100	6,450	24,950
	Plus: Desired ending inventory	2,135	2,135	2,258	2,240	2,240
	Total Inventory Requirements	8,435	8,235	8,358	8,690	27,190
	Less: Beginning Inventory	-	2,135	2,135	2,258	-
	Units to be Produced	8,435	6,100	6,223	6,433	27,190
4	Direct materials purchases budget
		1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Year
	Units to be produced	8,435	6,100	6,223	6,433	27,190
	Direct Material per unit	2	2	2	2	2
	Production needs	16,870	12,200	12,445	12,865	54,380
	Desired ending inventory	3,660	3,734	3,860	1,920	1,920
	Total needs	20,530	15,934	16,305	14,785	56,300
	Less: Beginning inventory	-	3,660	3,734	3,860	-
	Purchases needed of Direct materials	20,530	12,274	12,571	10,926	56,300
	Cost per units of direct materials costs	$4.50	$4.50	$4.50	$4.50	$4.50
	Total purchases of direct materials	$92,385	$55,231	$56,570	$49,165	$253,350