Question

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:

1. 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.
2. 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.
3. Each quarter’s ending finished goods inventory should equal 15% of the next quarter’s unit sales.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. Dividends of $15,000 will be declared and paid in each quarter.
11. 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. Quarterly sales budget including a schedule of expected cash collections.

2. Quarterly production budget.

3. Quarterly direct materials budget including a schedule of expected cash disbursements for purchases of materials.

4. Quarterly direct labor budget.

5. Quarterly manufacturing overhead budget.

6. Ending finished goods inventory budget at December 31, 2017.

7. Quarterly selling and administrative expense budget.

8. Quarterly cash budget.

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

10. Balance sheet at December 31, 2017.

Answer 1

1.a.

Sales Budget
	Q1	Q2	Q3	Q4	Total
Budgeted Sales in Units	12,000	37,000	15,000	25,000	89,000
Selling Price per Unit	$ 32	$ 32	$ 32	$ 32	$ 32
Budgeted Sales Dollars	$384,000	$1,184,000	$480,000	$800,000	$2,848,000

1.b.

Schedule of Expected Cash Collections
	Q1	Q2	Q3	Q4	Total
Q4: 2016	$ 260,000				$ 260,000
Q1: 2017	288,000	96,000			384,000
Q2 : 2017		888,000	296,000		1,184,000
Q3: 2017			360,000	120,000	480,000
Q4 : 2017				600,000	600,000
Total Cash Receipts	548,000	984,000	656,000	720,000	2,908,000

2.

Production Budget
	Q1	Q2	Q3	Q4	Total
Budgeted Sales in Units	12,000	37,000	15,000	25,000	89,000
Add: Desired Ending Inventory	5,550	2,250	3,750	1,950	1,950
Total Needed	17,550	39,250	18,750	26,950	90,950
Less: Beginning Inventory	1,500	5,550	2,250	3,750	1,500
Budgeted Production in Units	16,050	33,700	16,500	23,200	89,450

3. a.

Direct Materials Budget
	Q1	Q2	Q3	Q4	Total
Qty Required in Production ( yards )	56,175	117,950	57,750	81,200	313,075
Add: Desired Ending Inventory	11,795	5,775	8,120	5,000	5,000
Total Needed	67,970	123,725	65,870	86,200	318,075
Less: Beginning Inventory	4,500	11,795	5,775	8,120	4,500
Budgeted Purchases in Yards	63,470	111,930	60,095	78,080	313,575
Cost per Yard	$ 3.00	$ 3.00	$ 3.00	$ 3.00	$ 3.00
Expected Dollar Purchases	190,410	335,790	180,285	234,240	940,725

3.b.

Schedule of Expected Cash Disbursements
	Q1	Q2	Q3	Q4	Total
Q4: 2016	158,000				158,000
Q1:2017	133,287	57,123			190,410
Q2:2017		235,053	100,737		335,790
Q3:2017			126,200	54,085	180,285
Q4:2017				163,968	163,968
Total Cash Disbursements	291,287	292,176	226,937	218,053	1,028,453

4.

Direct Labor Budget
	Q1	Q2	Q3	Q3	Total
Direct labor hours needed in production	4,012.50	8,425	4,125	5,800	22,362.50
Direct labor hour rate	$ 18	$ 18	$ 18	$ 18	$ 18
Budgeted Direct Labor Cost	$ 72,225	$ 151,650	$74,250	$ 104,400	$402,525