Question

Leitner Manufacturing, Inc. produces control valves used in the production of oil field equipment. The control valves are sold to various gas and oil engineering companies throughout the US.

Projected sales in units for the coming four months are as follows:
January 20 000
February 25 000
March 30 000
April 30 000

The following data pertain to production policies and manufacturing specifications followed by Leitner:

a. Finished goods inventory on 1 January is 13 000 units. The desired ending inventory for each month is 70% of the next month’s sales.
b. The data on materials used are as follows:
Direct material
Per-unit usage
Unit cost

Part 714
5
R4

Part 50
3
R3

Inventory policy dictates that sufficient materials be on hand at the beginning of the month to produce 50% of that month’s estimated sales. This is exactly the amount of material on hand on 1 January.
c. The direct labour used per unit of output is 2 hours. The average direct labour rate per hour is R15.
d. Each month, overhead estimates are based on direct labour hours.

Fixed cost component
Variable cost component

Supplies
-
R1.00

Power
-
R0.20

Maintenance
R28 000
R1.10

Supervision
R14 000
-

Depreciation
R100 000
-

Taxes
R7 000
-

Other
R56 000
R1.60

e. Monthly selling and administrative expenses are also estimated based on units sold.

Fixed costs
Variable costs

Salaries
R30 000
-

Commissions
-
R0.75

Depreciation
R5 000
-

Shipping
-
R2.60

Other
R10 000
R0.40

f. The unit selling price of the control valve is R90
g. In February, the company plans to purchase land for future expansion. The land costs R90 000
h. All sales and purchases are for cash. Cash balance on 1 January equals R162 900. If the firm develops a cash shortage by the end of the month, sufficient cash is borrowed to cover the shortage. Any cash borrowed is repaid one month later, as is the interest due. The interest rate is 12% per annum.

Required:

Prepare the following for the first quarter:

1.1 Sales budget
1.2 Production budget
1.3 Direct materials purchases budget
1.4 Direct labour budget
1.5 Overhead budget
1.6 Selling and administrative budget
1.7 Ending finished goods inventory budget
1.8 Cost of goods sold budget
1.9 Budgeted income statement (ignore taxes)
1.10 Cash budget

Answer 1

1.1

Sales Budget
	January	February	March
Sales (Units)	20000	25000	30000
Sales (Amount)	$1,800,000	$2,250,000	$2,700,000

Sales = Units x $90 per unit

1.2

Production Budget
	January	February	March
Production (Units)	24500	28500	30000

1.3

Material Purchase Budget
	January	February	March
Purchases	783000	899000	870000

Working

	January	February	March
Opening	10000	12500	15000
Production	24500	28500	30000
Closing inventory	12500	15000	15000
Units to be Purchased	27000	31000	30000
Part 714 Units to be purchased	135000	155000	150000
Part502 Units to be purchased	81000	93000	90000
Part 714 (Amount)	540000	620000	600000
Part502 (Amount)	243000	279000	270000
Materials Purchase	783000	899000	870000

1.4

Direct Labour Budget
	January	February	March
Direct Labour Hours	49000	57000	60000
Direct Labour Cost	735000	855000	900000

1.5

Overhead Budget
	January	February	March
Supplies	24500	28500	30000
Power	4900	5700	6000
Maintenance	28000	28000	28000
Supervision	14000	14000	14000
Depreciation	100000	100000	100000
Taxes	7000	7000	7000
Others	95200	101600	104000
Total	273600	284800	289000

1.6

Selling and Administrative Budget
	January	February	March
Salaries	30000	30000	3000
Commissions	18375	21375	22500
Depreciation	5000	5000	5000
Shipping	63700	74100	78000
Other	19800	21400	22000
Total	136875	151875	157500

1.7

Finished goods Inventory Budget
	January	February	March
Opening inventory	13000	17500	21000
Closing inventory	17500	21000	21000

1.8

Cost of goods sold	Working
Opening inventory		897000		13000*69
Production		5727000		83000*69
Less Closing inventory		1449000		21000*69
Cost of goods sold		5175000

1.9

Budgeted income statement
	$	$
Sales		6750000
Less Cost of sales		5175000
Gross profit		1575000
Less Selling and Administrative cost		446250
Profit for the year		1128750

1.10

Cash Budget
	January	February	March
Receipts
sales	$1,800,000	$2,250,000	$2,700,000
Loan
Total	$1,800,000	$2,250,000	$2,700,000
Payments
Purchases	783000	899000	870000
Wages	735000	855000	900000
Overheads	273600	284800	289000
Selling and Administration	136875	151875	157500
Land		90000
Loan + Interest
Total	1928475	2280675	2216500
Monthly balance	-$128,475	-$30,675	$483,500
Opening Balance	162900	$34,425	$3,750
Closing Balance	$34,425	$3,750	$487,250