Question

Budget Project - Master Budget for a Garneau Manufacturer Garneau Manufacturing Ltd. produces and distributes a special type of chemical compound called Compound WX. The information below about Garneau's operations has been assembled to assist budget preparation. The company is preparing its master budget for the first quarter of 2016. The budget will detail each month’s activity and the activity for the quarter in total. The master budget will be based on the following information:

1. Selling price is $60 per unit in 2015 and will not change for the first two quarters of 2016. Actual and estimated sales are as follows:

Actual 2015 Estimated 2016

November: 10 000 units January: 11 000 units

December: 12 000 units February: 10 000 units

March: 13 000 units

April: 11 000 units

May: 10 000 units

2. The company produces enough units each month to meet that month’s sales plus a desired inventory level equal to 20% of next month’s estimated sales. Finished Goods inventory at the end of 2015 consisted of 2,200 units at a variable cost of $33 each.

3. The company purchases enough raw materials each month for the current month’s production requirement and 25% of next month's production requirements. Each unit of product requires 5 kilograms of raw material at $0.60 per kilogram. There were 13,500 kilograms of raw materials in inventory at the end of 2015. Garneau pays 40% of raw material purchases in the month of purchase and the remaining 60% in the following month.

4. Each unit of finished product requires 1.25 labour-hours. The average wage rate is $16 per hour.

5. Variable manufacturing overhead is 50% of the direct labour cost.

6. Credit sales are 60% of total sales. The company collects 50% of the credit sales during the first month following the month of sale and 50% during the second month.

7. Fixed overhead costs (per month) are as follows:

Factory Supervisor's Salary: $75 000

Factory Insurance: $1 400

Factory Rent: $8 000

Deprciation of Factory Equipment: $1 200

8. Total fixed selling and administrative expenses are as follows:

Advertising: $300

Depreciation: $9 000

Insurance: $250

Salaries: $4 000

Other: $14 550

9. Variable selling and administrative expenses consist of $4 for shipping and 10% of sales for commissions.

10.The company will acquire assets for use in the sales office at a cost of $300,000, which will be paid at the end of January 2016. The monthly depreciation expense on the additional capital assets will be $6,000.

11.The balance sheet as of December 31, 2015, is as follows:

Assets

Cash $80 000

Accounts Recieveable 612 000

Inventory: Raw Matrerials $8 100

add

Finished Goods 72 600 = 80 700

Plant and Equipment 1 000 000

Less: Accumulation Depreciation (100 000) 900 000

Total Assets 1 672 700

Liabilities and Equity

Accounts Payable $24 000

6% Long Term Notes Payable 900 000

Common Shares 735 000

Retained Earnings 13 700

Total Liabilites and Shareholders' Equity 1 672 700

Additional information is as follows:

• All cash payments except purchases of raw materials are made monthly as incurred.

• All borrowings occur at the beginning of each month, and all repayments occur at the end of the month. Borrowings and repayments may occur in any amount.

• All interest on borrowed funds is paid at the end of each month at a rate of 0.5% per month.

• A minimum cash balance of $30,000 is required at the end of each month.

Required: Prepare the following budgets for each of the first three months of 2016:

1. Manufacturing overhead budget.

2. Selling and administrative budget.

3. Cash budget.

Answer 1

1	Manufacturing Overhead Budget
		January	February	March	Total
	Estimated sales	11,000	10,000	13000	34,000
	Ending inventory	2000	2600	2200	2,200
	Beginning Inventory	2200	2000	2600	2,200
	Production required	10800	10600	12600	34,000
	Raw material required per unit	5	5	5	5
	Raw material required for production	54,000	53,000	63,000	170,000
	Ending raw material inventory	13,250	15,750	13500	13,500
	Beginning raw material inventory	13,500	13,250	15750	13,500
	Raw material required for production	53,750	55,500	60,750	170,000
					0
	Direct labour per unit	1.25	1.25	1.25	1.25
	Total direct labour hours required	13,500	13,250	15,750	42,500
	Average wage rate	$16	$16	$16	$16
	Direct labor cost	$216,000	$212,000	$252,000	$680,000
	Variable manufacturing overhead (50% of direct labor cost)	$108,000	$106,000	$126,000	$340,000
	Fixed Overhead cost
	Factory supervisor's salary	$75,000	$75,000	$75,000	$225,000
	Factory Insurance	$1,400	$1,400	$1,400	$4,200
	Factory rent	$8,000	$8,000	$8,000	$24,000
	Depreciation on factory equipment	$1,200	$1,200	$1,200	$3,600
	Total fixed overheads	$85,600	$85,600	$85,600	$256,800
	Total manufacturing overheads	$193,600	$191,600	$211,600	$596,800
2	Selling and administrative budget
		January	February	March	Total
	Fixed selling and administrative expenses
	Advertising	$300	$300	$300	$900
	Depreciation	$9,000	$15,000	$15,000	$39,000
	Insurance	$250	$250	$250	$750
	Salaries	$4,000	$4,000	$4,000	$12,000
	Other	$14,550	$14,550	$14,550	$43,650
	Total fixed S&A expenses	$28,100	$34,100	$34,100	$96,300
	Variable selling and administrative expenses				$0
	Shipping (sales x $4)	$44,000	$40,000	$52,000	$136,000
	Sales commission (sales revenue x 10%)	$66,000	$60,000	$78,000	$204,000
	Total Variable S&A expenses	$110,000	$100,000	$130,000	$340,000
	Total selling and administrative expenses	$138,100	$134,100	$164,100	$436,300
3	Cash Budget
		January	February	March	Total
	Sales revenue	$660,000	$600,000	$780,000	$2,040,000
	Cash sales	$264,000	$240,000	$312,000	$816,000
	Cash receipt from credit sales of Nov	$180,000			$180,000
	Cash receipt from credit sales of Dec	$216,000	$216,000		$432,000
	Cash receipt from credit sales of Jan		$198,000	$198,000	$396,000
	Cash receipt from credit sales of Feb			$180,000	$180,000
	Total cash inflow	$660,000	$654,000	$690,000	$2,004,000
	Cash Outflow				$0
	cost of Raw material purchased	$32,250	$33,300	$36,450	$102,000
	Cash paid in the month of purchase	$12,900	$13,320	$14,580	$40,800
	Cash paid in the following month of purchase	$24,000	$19,350	$19,980	$63,330
	Cash paid for raw material	$36,900	$32,670	$34,560	$104,130
	Direct labor	$216,000	$212,000	$252,000	$680,000
	Manufactuing overheads (excluding depreciation)	$192,400	$190,400	$210,400	$593,200
	Selling and administrative expenses (excluding depreciation)	$129,100	$119,100	$149,100	$397,300
	Total cash outflow	$574,400	$554,170	$646,060	$1,774,630
	Capital expenditure	$300,000			$300,000
	Net cash inflow	-$214,400	$99,830	$43,940	-$70,630
	Minimum Cash balance	$30,000	$30,000	$30,000	$30,000
	Beginning Cash Balance	$80,000	$30,770	$30,770	$80,000
	Net cash inflow	-$214,400	$99,830	$43,940	-$70,630
	Loan required	$166,000			$166,000
	Loan repaid		$99,000	$44,000	$143,000
	Interest on loan	$830	$830	$335	$1,995
	Ending balance	$30,770	$30,770	$30,375	$30,375