Question

Waterways for Chapter 9

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.

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.

i. Prepare a cash budget.

Answer 1

Production Budget:

	January	February	March
Expected Unit Sales	114,000	113,500	116,000
Desired Ending Inventory	11,350	11,600	12,600
Total Inventory Needs	125,350	125,100	128,600
Less: Beginning Inventory	11,400	11,350	11,600
Expected Production in Units	113,950	113,750	117,000

e. Manufacturing Overhead Budget:

	January	February	March
Direct labor hours required in production	22,790 hours	22,750 hours	23,400 hours
Variable Manufacturing Overhead
Indirect Materials ( 30 c per DLH)	$ 6,837	$ 6,825	$ 7,020
Indirect Labor ( 50 c per DLH)	11,395	11,375	11,700
Utlities ( 45 c per DLH)	10,255.50	10,237.50	10,530
Maintenance ( 25 c per DLH)	5,697.50	5,687.50	5,850
Total Variable Manufacturing Overhead	34,185	34,125	35,100
Salaries	52,000	52,000	52,000
Depreciation	16,800	16,800	16,800
Property Taxes	2,675	2,675	2,675
Insurance	2,200	2,200	2,200
Janitorial	1,800	1,800	1,800
Budgeted Total Manufacturing Overhead	$ 109,660	$ 109,600	$ 110,575

f. Selling and Adminisrative Budget:

	January	February	March
Variable Selling and Administrative Expenses ( $ 2.40 x Expected Units Sales)	$ 273,600	$ 272,400	$ 278,400
Fixed Selling and Advertising Expenses
Advertising	15,000	15,000	15,000
Insurance	1,400	1,400	1,400
Salaries	72,000	72,000	72,000
Depreciation	2,500	2,500	2,500
Other Fixed Costs	3,000	3,000	3,000
Budgeted Total Selling and Administrative Overhead	$ 367,500	$ 366,300	$ 372,300

g. Schedule for Expected Cash Collections from Customers:

	January	February	March	Quarter
Collection of sales of
December	183,780	0	0	183,780
January	1,162,800	205,200	0	1,368,000
February	0	1,157,700	204,300	1,362,000
March			1,183,200	1,183,200
Totals	$ 1,346,580	$ 1,362,900	$ 1,387,500	$ 4,096,980

Direct Materials Purchases Budget:

	January	February	March
Direct Materials expected to be used in production ( lbs. )	227,900	227,500	234,000
Add: Desired Ending Inventory ( 5 % of next month needs)	11,375	11,700	6,363
Total Direct Material needs	239,275	239,200	240,363
Less: Beginning Inventory	11,295	11,375	11,700
Budgted Direct Materials Purchases in Units	227,980	227,825	228,663
Cost per Unit	$ 0.75	$ 0.75	$ 0.75
Budgeted Direct Materials Dollar Purchases	$ 170,985	$ 170,869	$ 171,497

h. Schedule of Expected Payments for Materials Purchases:

	January	February	March	Quarter
Payments for Materials Purchases of:
December	120,595			120,595
January	85,493	85,492		170,985
February		85,435	85,434	170,869
March			85,749	85,749
Totals	206,088	170,927	171,183	548,198

i.

Waterways Corporation
Cash Budget
For the three months ended March 31
	January	February	March	Quarter
	$	$	$	$
Beginning Cash Balance	220,500	750,588	813,961	220,500
Add: Cash Receipts	1,346,580	1,362,900	1,387,500	4,096,980
Total Cash Available	1,567,080	2,113,488	2,201,461	4,317,480
Less: Cash Disbursements for
Materials Purchases	206,088	170,927	171,183	548,198
Direct Labor	410,220	409,500	421,200	1,240,920
Manufacturing Overhead	92,860	92,800	93,775	279,435
Selling and Administrative Expenses	365,000	363,800	369,800	1,098,600
Dividends	12,500	12,500	12,500	37,500
Purchase of Equipment	0	250,000	0	250,000
Total Cash Disbursements	1,086,668	1,299,527	1,068,458	3,454,653
Cash Surplus ( Deficit)	519,588	813,961	1,133,003	862,827
Financing
Borrowings	231,000	0	0
Repayment	0	0	(231,000)
Interest		0	(4,620)
Total Financing	231,000	231,000	(235,620)	(4,620)
Ending Cash Balance	750,588	813,961	897,383