Question

Comprehensive master budget in a manufacturing setting

(LO 3, 4, 5) Klandon Company manufactures decorative rocks for aquariums. Kim Klandon is preparing the budget for the quarter ended June 30. She has gathered the following information.1.Klandon's sales manager reported that the company sold 12,000 bags of rocks in March. He has developed the following sales forecast. The expected sales price is $10 per bag.

April	20,000 bags
May	50,000 bags
June	30,000 bags
July	25,000 bags
August	15,000 bags

2.Sales personnel receive a 5% commission on every bag of rocks sold. The following monthly fixed selling and administrative expenses are planned for the quarter. However, these amounts do not include the depreciation increase resulting from the budgeted equipment purchase in June (see part 7).

	Monthly Fixed Selling and Administrative Costs	Variable Cost/Unit
Depreciation	$10,000
Salaries of sales personnel	?25,000	$?.50
Advertising	??1,000
Management salaries	?10,000
Miscellaneous	????500
Bad debts		??.50
Total costs	$46,500	$1.00

3.After experiencing difficulty in supplying customers in a timely fashion due to inventory shortages, the company established a policy requiring the ending Finished Goods Inventory to equal 20% of the following month's budgeted sales, in units. On March 31, 4,000 bags were on hand.

4.Five pounds of raw materials are required to fill each bag of finished rocks. The company wants to have raw materials on hand at the end of each month equal to 10% of the following month's production needs. On March 31, 13,000 pounds of materials were on hand.

5.The raw materials used in production cost $0.40 per pound. Half of the month's purchases is paid for in the month of purchase; the other half, in the following month. No discount is available.

6.The standard labor allowed for one bag of rocks is 15 minutes. The current direct labor rate is $10 per hour.

7.On June 1, the company plans to spend $48,000 to upgrade its office equipment that is fully depreciated. The new equipment is expected to have a five-year life, with no residual value.

8.The budgeted monthly variable and fixed overhead amounts are as follows. Variable overhead is based on the number of units produced. The fixed overhead budget is based on an annual production of 400,000 bags.

	Monthly Fixed Overhead	Variable Cost/Unit
Depreciation	$?8,000
Indirect materials	??1,000	$0.05
Indirect labor	?10,000	?0.20
Utilities	?20,000	?0.10
Property taxes	??5,000
Maintenance	??6,000	?0.15
Total costs	$50,000	$0.50

9.All sales are made on account. Historically, the company has collected 70% of its sales in the month of sale and 25% in the month following the sale. The remaining 5% of sales is uncollectible.

10.Klandon must maintain a minimum cash balance of $30,000. An open line of credit at a local bank allows the company to borrow up to $175,000 per quarter in $1,000 increments.

11.All borrowing is done at the beginning of the month, and all repayments are made at the end of a month in $1,000 increments. Accrued interest is paid any time a principal payment is made. The interest rate is 12% per year.

12.A quarterly dividend of $49,000 will be declared and paid in April.

13.Income taxes payable for the first quarter will be paid on April 15. Klandon's tax rate is 30%.

14.The March 31 balance sheet is as follows:

	March 31
Cash	$??40,000?
Accounts receivable	30,000?
Finished goods inventory	26,000?
Raw materials inventory	5,200?
Plant & equipment	200,000?
Accumulated depreciation	(50,000)
Total assets	$?251,200?
Accounts payable	$??12,000?
Income taxes payable	50,000?
Common stock	52,000?
Retained earnings	137,200?
Total liabilities and equities	$?251,200?

Required

a.

Prepare all components of Klandon's master budget for the second quarter.

b.

Prepare a pro-forma income statement for the second quarter.

c.

Prepare a pro-forma balance sheet as of June 30.

Answer 1

Solution

1a
The Blandon Company
The Sales Budget
For the quarter ended June 30
	Month
The Particulars	April	May	June	Total
The Budgeted Unit sales	20,000	50,000	30,000	100000
Sale Price	10	10	10	10
The Budgeted sales	200000	500000	300000	1000000
1b.
The Klandon Company
The Schedule of expected Cash collections
For the quarter ended June 30
	Month
The Particulars	April	May	June	Total
The Beginning Accounts Receivable
The March sales	30,000			30,000
The April Credit Sales	140000	50,000		190000
The May Credit Sales		350000	125,000	475000
The June Credit sales			210000	210000
Total collections	170,000	400,000	335,000	905,000
The Accounts Receivable 300000*25%	75000
1c.
The Klandon Company
The Production Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
The Budgeted Unit Sales	20,000	50,000	30,000	100,000
Add: Desired Ending merchandise inventory	10,000	6,000	5,000	5,000
Total needs	30,000	56,000	35,000	1,05,000
Less: beginning merchandise inventory	4,000	10,000	6,000	4,000
The Planned production	26,000	46,000	29,000	1,01,000
3. Raw material Budget
The Klandon Company
The Raw Material Purchase Budget
For the quarter ended June 30,2015
	Month
Particulars	April	May	June	Total
The Planned production units (a)	26,000	46,000	29,000	1,01,000
*Direct Material required per unit (b)	5	5	5	5
Direct Material Required for production (c )	1,30,000	2,30,000	1,45,000	5,05,000
The Budgeted ending Direct Material (d)	23,000	14,500	11,500	11,500
The Beginning Direct Material (e )	13,000	23,000	14,500	13,000
The Budgeted direct material purchase f= c+d-e	1,40,000	2,21,500	1,42,000	5,03,500
The Cost per pound (g)	$0.40	$0.40	$0.40	$0.40
The Budgeted purchases	$56,000	$88,600	$56,800	2,01,400
The Klandon Company
Schedule of expected Cash payments
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
The Beginning Accounts Payable (a)	$12,000			$12,000
The April Purchases (b)	$28,000	$28,000		$56,000
The May Purchases (c )		$44,300	$44,300	$88,600
The June Purchases (d)			$28,400	$28,400
Total payments (a+b+c+d)	$40,000	$72,300	$72,700	$1,85,000
4. Direct labour Budget
The Klandon Company
The Direct Labour Budget
For the quarter ended June 30,2015
	Month
Particulars	April	May	June	Total
The Planned production units (a)	26,000	46,000	29,000	1,01,000
*Direct labour required per unit (b)	0.3	0.3	0.3	0.3
The Budgeted Direct labour hours	6,500	11,500	7,250	25,250
The Cost per direct labour hour	10	10	10	10
The Budgeted Direct labour Cost	$65,000	$1,15,000	$72,500	$2,52,50
The Factory overhead Budget
No. of Units produced	26,000	46,000	29,000	101,000
Variable cost per unit
Indirect Material	0.05	0.05	0.05	0.05
Indirect labor	0.2	0.2	0.2	0.2
Utilities	0.1	0.1	0.1	0.1
Maintenance	0.15	0.15	0.15	0.15
Variable overhead rate	0.50	0.50	0.50	0.50
Total variable cost   `F	13000	23000	14500	50500
Fixed overhead
Depreciation	8000	8000	8000	24000
Indirect Material	1000	1000	1000	3000
Indirect labor	10000	10000	10000	30000
Utilities	20000	20000	20000	60000
Property Taxes	5000	5000	5000	15000
Maintenance	$6,000	6000	6000	$18,000
Total Fixed overhead Z	$50,000	$50,000	$50,000	$150,000
Total manufacturing overhead F+Z	$63,000	$73,000	$64,500	$200,500
Cash manufacturing overhead less dep	$55,000	$65,000	$56,500	$176,500
Selling & Adm Cost Budget
Variable cost
Sales	20,000	50,000	30,000	100,000
Variable cost per unit (10*5%)+.5+.5	1.5	$1.50	$1.50	$1.50
Total Variable cost	$30,000	$75,000	$45,000	$150,000
Fixed Selling & Adm Cost
Depreciation D	$10,000	$10,000	$10,800	$30,800
Salaries of Sales Personnel	$25,000	$25,000	$25,000	$25,000
Advertising	$1,000	$1,000	$1,000	$1,000
Management salaries	$10,000	$10,000	$10,000	$10,000
Mis	$500	$500	$500	$500
Fixed Selling & Adm Cost	$46,500	$46,500	$47,300	$67,300
Total selling & Adm cost S	$76,500	$121,500	$92,300	$217,300
selling & Adm cost without Dep S-D	$66,500	$111,500	$81,500	$186,500
Depreciation on new equipment for June=48000/60		800
	April	May J	June	Total
Beginning Cash balance	40000	$30,500	$32,780	40000
Cash receipt	170,000	400,000	335,000	905,000
Total cash available	210000	430500	367780	945000
Less: Cash Disbursements
Payment of Inventory	$40,000	$72,300	$72,700	$185,000
Payment of labor	$65,000	$1,15,000	$72,500	$137,500
Payment of Manu. Overhead	$55,000	$65,000	$56,500	$176,500
Payment of selling & Adm exp	$66,500	$111,500	$81,500	$259,500
Dividend payment	$49,000			$49,000
Income tax payable	$50,000			$50,000
Office equipment			48000	$48,000
Total cash Disbursements	$325,500	$248,800	$331,200	$905,500
Excess /(deficiency) of cash receipts over cash disbursements	($115,500)	$181,700	$36,580	$39,500
Minimum Cash balance (working)	30000	30000	30000	30000
Financing
Borrowed	146000			$146,000
Repaid		-146000		($146,000)
Interest Repaid (2%)		-2920		($2,920)
Ending Cash balance	$30,500	$32,780	$36,580	$36,580
Income Statement as on 3o June 2016
	April	May	June	Total
Sales	200000	500000	300000	1000000
Less Variable cost
Cost of Goods Sold (5*S)	100000	250000	150000	500000
Selling & adm. Expenses (1.5*S)	30000	75000	45000	150000
Total variable expenses	130000	325000	195000	650000
Contribution	70000	175000	105000	350000
Fixed Expenses
Fixed manufacturing expenses	50000	50000	50000	150000
Selling & adm. Expenses	$46,500	$46,500	$47,300	$67,300
Total fixed expenses	96500	96500	97300	217300
Net Operating g income	-26500	78500	7700	132700
Interest On Short Term Loan	1460	1460		2920
Profit before tax	-27960	77040	7700	129780
Income tax (30%)				38934
Net Income				90846
Cost per unit =(5*.4)+(10*.25)+.5	5.0
Please enter the totalcoloumn amount of Income statement April May and June is just shown for your understanding
Statement of Retained earnings
Opening balance	137200
Add: Net Income for the year	38934
Closing balance	176134
Balance Sheet as on 30 June
Assets
Cash		36580
Accounts Receivable		75000
Finished Goods Inventory		11088
Raw material Inventory (11500*.4)		4600
Property & Equipment	249000
Less: Accumulated Depreciation	80800	168200
		295468
Liabilities & Stockholder equity
Accounts payable		28400
IncomeTxa payable		38934
Total Liabilities		67334
Stockholder Equity
Common Stock	52000
Retained earnings	176134
Total Stockholder Equity		228134
Total Liabilities & Stockholder Equity		295468