Question

The management of Zigby Manufacturing prepared the following estimated balance sheet for March 2017:

ZIGBY MANUFACTURING Estimated Balance Sheet March 31, 2017
Assets
Cash	$	54,000
Accounts receivable		354,375
Raw materials inventory		100,495
Finished goods inventory		333,000
Total current assets		841,870
Equipment, gross		628,000
Accumulated depreciation		(164,000	)
Equipment, net		464,000
Total assets	$	1,305,870
Liabilities and Equity
Accounts payable	$	212,195
Short-term notes payable		26,000
Total current liabilities		238,195
Long-term note payable		514,000
Total liabilities		752,195
Common stock		349,000
Retained earnings		204,675
Total stockholders’ equity		553,675
Total liabilities and equity	$	1,305,870

To prepare a master budget for April, May, and June of 2017, management gathers the following information:

Sales for March total 22,500 units. Forecasted sales in units are as follows: April, 22,500; May, 19,500; June, 21,700; and July, 22,500. Sales of 254,000 units are forecasted for the entire year. The product’s selling price is $22.50 per unit and its total product cost is $18.50 per unit.

Company policy calls for a given month’s ending raw materials inventory to equal 50% of the next month’s materials requirements. The March 31 raw materials inventory is 5,025 units, which complies with the policy. The expected June 30 ending raw materials inventory is 5,400 units. Raw materials cost $20 per unit. Each finished unit requires 0.50 units of raw materials.

Company policy calls for a given month’s ending finished goods inventory to equal 80% of the next month’s expected unit sales. The March 31 finished goods inventory is 18,000 units, which complies with the policy.

Each finished unit requires 0.50 hours of direct labor at a rate of $10 per hour.

Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is $4.10 per direct labor hour. Depreciation of $30,790 per month is treated as fixed factory overhead.

Sales representatives’ commissions are 6% of sales and are paid in the month of the sales. The sales manager’s monthly salary is $4,400.

Monthly general and administrative expenses include $26,000 administrative salaries and 0.5% monthly interest on the long-term note payable.

The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none are collected in the month of the sale).

All raw materials purchases are on credit, and no payables arise from any other transactions. One month’s raw materials purchases are fully paid in the next month.

The minimum ending cash balance for all months is $54,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.

Dividends of $24,000 are to be declared and paid in May.

No cash payments for income taxes are to be made during the second calendar quarter. Income tax will be assessed at 40% in the quarter and paid in the third calendar quarter.

Equipment purchases of $144,000 are budgeted for the last day of June.

Required:
Prepare the following budgets and other financial information as required. All budgets and other financial information should be prepared for the second calendar quarter, except as otherwise noted below. (Round calculations up to the nearest whole dollar, except for the amount of cash sales, which should be rounded down to the nearest whole dollar.):

1. Sales budget.
2. Production budget.
3. Raw materials budget.
4. Direct labor budget.
5. Factory overhead budget.
6. Selling expense budget.
7. General and administrative expense budget.
8. Cash budget.
9. Budgeted income statement for the entire second quarter (not for each month separately).
10. Budgeted balance sheet.

Answer 1

1.

	Sales budget
	Budgeted unit sales	budgeted unit price	budgeted sales dollar
April	22500	22.5	506250
May	19500	22.5	438750
June	21700	22.5	488250
2.
	Production budget
	April	May	June
Next month budgeted sales unit	19500	21700	22500
Ratio of inventory to future sales	80%	80%	80%
Budgeted ending inventory	15600	17360	18000
Budgeted unit sales for month	22500	19500	21700
Required units of available production	38100	36860	39700
Beginning inventory	-18000	-15600	-17360
Units to be produced	20100	21260	22340
3.
	Raw materials budget
	April	May	June
Production budget(a)	20100	21260	22340
Material req. per unit(b)	0.5	0.5	0.5
Materials needed for production (c = a X b)	10050	10630	11170
Budget ending inventory(d)	5315	5585	5400
	(50% X 10630)	(50 % X 11170)	given
Total material requirement (e = c + d)	15365	16215	16570
beg. Inventory(f)	5025	5315	5585
	given	april closing	may closing
Materials to be purchased(g = e-f)	10340	10900	10985
Material price per unit(h)	20	20	20
budgeted raw material purchases(g X h)	206,800	218,000	219,700
4.
	direct labor budget
	April	May	June
Budgeted production (a)	20100	21260	22340
Labor hr. required per unit(b)	0.5	0.5	0.5
Total labor hrs needed(c = a x b)	10050	10630	11170
Labor rate per hr (d)	10	10	10
Budgeted direct labor cost (c X d)	100,500	106,300	111,700
5.
	Factory overhead budget
	April	May	June
Labor hours needed(a)	10050	10630	11170
Variable overhead rate per hr.(b)	4.1	4.1	4.1
Budgeted variable overhead(c = a x b)	41205	43583	45797
budgeted fixed overhead(d)	30790	30790	30790
Budgeted total overhead(c+d)	71995	74373	76587
6.
	Selling expense budget
	April	May	June
Budgeted sales(a)	506250	438750	488250
commision rate(b)	6%	6%	6%
Sales commission(c = axb)	30375	26325	29295
sales manager salary(d)	4400	4400	4400
Total selling expense(c+d)	34775	30725	33695
7.
	General & administrative expense budget
	April	May	June
G&A salary	26000	26000	26000
Interes on long term note payable (514000 X .5%)	2570	2570	2570
Total budgeted G&A expense	28570	28570	28570