Question

The Grilton Tire Company manufactures racing tires for bicycles. Grilton sells tires for $50 each. Grilton is planning for next year (2020) by developing a master budget by quarters. Grilton’s balance sheet for December 31, 2019 follows:

GRILTON TIRE COMPANY

Balance Sheet

December 31, 2019

Assets

Current Assets:

  Cash                                                                                           $  39,000

  Accounts Receivable                                                                   40,000

  Raw Materials Inventory                                                               2,400

  Finished Goods Inventory                                                            8,700

  Total Current Assets                                                                                              $ 90,100

Property, Plant and Equipment:

  Equipment                                                                                 177,000

  Less: Accumulated Depreciation                                            (42,000)                135,000

Total Assets                                                                                                               $225,100

Liabilities

Current Liabilities:

  Accounts Payable                                                                                                  $  8,000

Stockholder’s Equity

Common Stock, no par                                                           $ 130,000

Retained Earnings                                                                         87,100

  Total Stockholder’s Equity                                                                                  217,100

Total Liabilities and Stockholder’s Equity                                                          $225,100

Other data for Grilton Tire Company:

1. Budgeted Sales are 1,500 for the first quarter and expected to increase by 200 tires per quarter. Cash Sales are expected to be 30% of total sales, with the remaining 70% of sales on account.
2. Finished Goods Inventory on December 31, 2019 consists of 300 tires at $29 each.
3. Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2020 are expected to be 2,300 tires and second quarter sales for 2020 are expected to be 2,500.  FIFO inventory costing method is used.
4. Direct Materials cost is $8 per tire.
5. Desired ending Raw Materials Inventory is 30% of the next quarter’s direct materials needed for production.
6. Each tire requires 0.40 hours of direct labor; direct labor costs average $16 per hour.
7. Variable manufacturing overhead is $2 per tire produced.
8. Fixed manufacturing overhead includes $4,500 per quarter in depreciation and $26,780 per quarter for other costs, such as utilities, insurance, and property taxes.
9. Fixed selling and administrative expenses include $8,000 per quarter for salaries; $1,800 per quarter for rent; $1,200 per quarter for insurance; and $500 per quarter for depreciation.
10. Variable selling and administrative expenses include supplies at 2% of sales.
11. Capital expenditures include $45,000 for new manufacturing equipment, to be purchased and paid in the first quarter.
12. Cash receipts for sales on account are 60% in the quarter of sale and 40% in the quarter following the sale. The December 31, 2019 Accounts Receivable ($40,000) is received in the first quarter of 2020.
13. Direct materials purchases are paid 70% in the quarter purchased and 30% in the following quarter. The December 31, 2019 Accounts Payable ($8,000) is paid in the first quarter of 2020.
14. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.
15. Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred.
16. Grilton desires to maintain a minimum cash balance of $35,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter. Interest must be paid at the beginning of each quarter.

• 1	Grilton Tire Company
  	Sales Budget
  	For the Year Ended December 31, 2020
  		Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
  	Budgeted tires to be sold	1500	1700	1900	2100	7200
  	Selling price per unit	$               50	$               50	$               50	$               50	$               50
  	Total sales $	75000	85000	95000	105000	360000
  2	Grilton Tire Company
  	Schedule of Expected Cash Collections
  	For the Year Ended December 31, 2020
  		Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
  	Sales $	75000	85000	95000	105000	360000
  	Cash sales collections (30%)	22500	25500	28500	31500	108000
  	Collections for credit sales of:
  	Previous quarter (40%)	40000	21000	23800	26600	111400
  	Current quarter (60%)	31500	35700	39900	44100	151200
  	Collection on credit sales	71500	56700	63700	70700	262600
  	Total cash collections $	94000	82200	92200	102200	370600
  3	Grilton Tire Company
  	Production Budget
  	For the Year Ended December 31, 2020
  		Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
  	Budgeted tires to be sold	1500	1700	1900	2100	7200
  	Add: Desired ending FG inventory	680	760	840	920	920
  	Total tires needed	2180	2460	2740	3020	8120
  	Less: Beginning FG inventory	300	680	760	840	300
  	Budgeted tires to be produced	1880	1780	1980	2180	7820

4. Prepare a direct materials budget for each quarter and in total for the year 2020.

5. Prepare a schedule of expected cash disbursements for purchases of  materials for each quarter and in total of the year 2020.

6. Prepare a budgeted Schedule of Cost of Goods Manufactured for the year of 2020.

7. Prepare a budgeted Income Statement for the year of 2020

8. Prepare a cash budget for the year of 2020.

Answer 1

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Grilton Tire Company
Material Usage Budget	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total	Qtr. 1	Qtr. 2
Budgeted sales (Units)	1,500.00	1,700.00	1,900.00	2,100.00	7,200.00	2,300.00	2,500.00
Add: Closing	680.00	760.00	840.00	920.00	920.00	1,000.00
Less: Opening	300.00	680.00	760.00	840.00	300.00	920.00
Production Budget	1,880.00	1,780.00	1,980.00	2,180.00	7,820.00	2,380.00
Material required per unit	1.00	1.00	1.00	1.00	1.00	1.00
Material Usage Budget	1,880.00	1,780.00	1,980.00	2,180.00	7,820.00	2,380.00

Answer 4- Material Purchase Budget	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total	Qtr. 1
Material Usage Budget	1,880.00	1,780.00	1,980.00	2,180.00	7,820.00	2,380.00
Add: Closing	534.00	594.00	654.00	714.00	714.00
Less: Opening	300.00	534.00	594.00	654.00	300.00
Material Purchase Budget	2,114.00	1,840.00	2,040.00	2,240.00	8,234.00
Cost per unit	8.00	8.00	8.00	8.00	8.00
Material Purchase Budget	16,912.00	14,720.00	16,320.00	17,920.00	65,872.00

Answer 5- Material Payment Budget	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Material Purchase Budget	16,912.00	14,720.00	16,320.00	17,920.00	65,872.00
Payment of December accounts Payable	8,000.00	-	-	-	8,000.00
Current quarter (70%)	11,838.40	10,304.00	11,424.00	12,544.00	46,110.40
Previous quarter (30%)		5,073.60	4,416.00	4,896.00	14,385.60
Expected cash disbursements for materials	19,838.40	15,377.60	15,840.00	17,440.00	68,496.00
Direct Labor Budget	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Production Budget	1,880.00	1,780.00	1,980.00	2,180.00	7,820.00
Labor Hour required per unit	0.40	0.40	0.40	0.40	0.40
Labor Hour required	752.00	712.00	792.00	872.00	3,128.00
Cost per Hour	16.00	16.00	16.00	16.00	16.00
Direct Labor Budget	12,032.00	11,392.00	12,672.00	13,952.00	50,048.00
Manufacturing overhead Budget
Variable manufacturing overhead Budget	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Production Budget	1,880.00	1,780.00	1,980.00	2,180.00	7,820.00
Variable manufacturing overhead per unit	2.00	2.00	2.00	2.00	2.00
Variable manufacturing overhead Budget	3,760.00	3,560.00	3,960.00	4,360.00	15,640.00
Fixed manufacturing overhead
Depreciation	4,500.00	4,500.00	4,500.00	4,500.00	18,000.00
Other Costs	26,780.00	26,780.00	26,780.00	26,780.00	107,120.00
Fixed manufacturing overhead	31,280.00	31,280.00	31,280.00	31,280.00	125,120.00
Manufacturing overhead Budget	35,040.00	34,840.00	35,240.00	35,640.00	140,760.00
Selling & admin expenses Budget
Variable Selling & admin expenses Budget	Qtr. 1	Qtr. 2	Qtr. 3	Qtr. 4	Total
Total Sales $	75,000.00	85,000.00	95,000.00	105,000.00	360,000.00
Variable Selling & admin expenses %	2%	2%	2%	2%	2%
Variable Selling & admin expenses Budget	1,500.00	1,700.00	1,900.00	2,100.00	7,200.00
Fixed Selling & admin expenses
Salaries	8,000.00	8,000.00	8,000.00	8,000.00	32,000.00
Rent	1,800.00	1,800.00	1,800.00	1,800.00	7,200.00
Insurance	1,200.00	1,200.00	1,200.00	1,200.00	4,800.00
Depreciation	500.00	500.00	500.00	500.00	2,000.00
Fixed Selling & admin expenses	11,500.00	11,500.00	11,500.00	11,500.00	46,000.00
Selling & admin expenses Budget	13,000.00	13,200.00	13,400.00	13,600.00	53,200.00