Question

The Grilton Tire Company manufactures racing tires for bicycles. Grilton sells tires for $50 each. Grilton is planning for next year by developing a master budget by quarters. Grilton’s balance sheet for December 31, 2016 follows:

GRILTON TIRE COMPANY

Balance Sheet

December 31, 2016

Assets

Current Assets:

   Cash                                                                                            $  39,000

   Accounts Receivable                                                                    40,000

   Raw Materials Inventory                                                               2,400

   Finished Goods Inventory                                                             8,700

   Total Current Assets                                                                                               $  90,100

Property, Plant and Equipment:

   Equipment                                                                                  177,000

   Less: Accumulated Depreciation                                            (42,000)                135,000

Total Assets                                                                                                                $225,100

Liabilities

Current Liabilities:

   Accounts Payable                                                                                                   $  8,000

Stockholder’s Equity

Common Stock, no par                                                            $ 130,000

Retained Earnings                                                                          87,100

   Total Stockholder’s Equity                                                                                   217,100

Total Liabilities and Stockholder’s Equity                                                          $225,100

Other data for Grilton Tire Company:

a. Budgeted Sales are 1,500 for the first quarter and expected to increase by 200 tires per quarter. Cash Sales are expected to be 30% of total sales, with the remaining 70% of sales on account.

b. Finished Goods Inventory on December 31, 2016 consists of 300 tires at $29 each.

c. Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2018 are expected to be 2,300 tires and second quarter sales for 2018 are expected to be 2,500.  FIFO inventory costing method is used.

d. Direct Materials cost is $8 per tire.

e. Desired ending Raw Materials Inventory is 30% of the next quarter’s direct materials needed for production.

f. Each tire requires 0.40 hours of direct labor; direct labor costs average $16 per hour.

g. Variable manufacturing overhead is $2 per tire produced.

h. Fixed manufacturing overhead includes $4,500 per quarter in depreciation and $26,780 per quarter for other costs, such as utilities, insurance, and property taxes.

i. Fixed selling and administrative expenses include $8,000 per quarter for salaries; $1,800 per quarter for rent; $1,200 per quarter for insurance; and $500 per quarter for depreciation.

j. Variable selling and administrative expenses include supplies at 2% of sales.

k. Capital expenditures include $45,000 for new manufacturing equipment, to be purchased and paid in the first quarter.

l. Cash receipts for sales on account are 60% in the quarter of sale and 40% in the quarter following the sale; December 31, 2016, Accounts Receivable is received in the first quarter of 2017.

m. Direct materials purchases are paid 70% in the quarter purchased and 30% in the following quarter; December 31, 2016, Accounts Payable is paid in the first quarter of 2017.

n. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.

o. Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred.

p. Grilton desires to maintain a minimum cash balance of $35,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

Requirments:

1. Prepare a budgeted Income Statement for the year of 2017.

2. Prepare a cash budget for the year of 2017.

Answer 1

Sales Budget
	Q1	Q2	Q3	Q4	Total
Unit sales	1500	1700	1900	2100	7200
Unit Selling Price	50	50	50	50	50
Budgeted sales	75000	85000	95000	105000	360000
Cash sales	22500	25500	28500	31500	108000
Credit Sales	52500	59500	66500	73500	252000
Schedule of cash collections
	Q1	Q2	Q3	Q4	Total
Cash sales	22500	25500	28500	31500	108000
Credit Sales
2016 - Q4 sales	40000				40000
2017 - Q1 sales	31500	21000			52500
2017 - Q2 Sales		35700	23800		59500
2017 - Q3 Sales			39900	26600	66500
2017 - Q4 Sales				44100	44100
Total Collections	94000	82200	92200	102200	370600
Production Budget
	Q1	Q2	Q3	Q4	Total
Budgeted unit sales	1500	1700	1900	2100	7200
Add: Desired ending inventory	680	760	840	920	920
Total Units Required	2180	2460	2740	3020	8120
Less: Beginning Inventory	300	680	760	840	300
Budgeted Production Units	1880	1780	1980	2180	7820
Raw material budget
	Q1	Q2	Q3	Q4	Total
Budgeted Production Units	1880	1780	1980	2180	7820
Direct material cost per tire	8	8	8	8	8
Total direct material cost	15040	14240	15840	17440	62560
Add: Desired ending inventory	4272	4752	5232	5712	5712
Total Direct material needed	19312	18992	21072	23152	68272
Less: Beginning direct material	2400	4272	4752	5232	2400
Direct material purchases	16912	14720	16320	17920	65872
Payment for direct materials
	Q1	Q2	Q3	Q4	Total
December 31,2016 payables	8000				8000
2017 - Q1 purchsses	11838	5074			16912
2017 - Q2 purchsses		10304	4416		14720
2017 - Q3 purchsses			11424	4896	16320
2017 - Q4 purchsses				12544	12544
Total payments for materials	19838	15378	15840	17440	68496
Direct labor budget
	Q1	Q2	Q3	Q4	Total
Budgeted production units	1880	1780	1980	2180	7820
Direct labor hours per unit	0.40	0.40	0.40	0.40	0.40
Direct labor hours for production	752.00	712.00	792.00	872.00	3128.00
Direct labor rate per hour	$16.00	$16.00	$16.00	$16.00	$16.00
Budgeted Direct Labor	12032	11392	12672	13952	50048
Manufacturing overhead budget
	Q1	Q2	Q3	Q4	Total
Variable manufacturing overhead	3760	3560	3960	4360	15640
Fixed manufacturing overhead
Depreciation	4500	4500	4500	4500	18000
Other costs	26780	26780	26780	26780	107120
Total manufacturing overheads	35040	34840	35240	35640	140760
Cash payment for mfg. Overheads	30540	30340	30740	31140	122760
Selling and administration expenses
	Q1	Q2	Q3	Q4	Total
Supplies (2% of Sales)	1500	1700	1900	2100	7200
Fixed selling and admn. Expenses
Salaries	8000	8000	8000	8000	32000
Rent	1800	1800	1800	1800	7200
Insurance	1200	1200	1200	1200	4800
Depreciation	500	500	500	500	2000
Total selling and admn. Expenses	13000	13200	13400	13600	53200
Cash payment for S& A Expenses	12500	12700	12900	13100	51200
GRILTON TIRE COMPANY
Cash budget for the year 2017
	Q1	Q2	Q3	Q4	Total
Beginning cash balance	39000	35590	35090	35383	39000
Collections from sales	94000	82200	92200	102200	370600
Total cash available	133000	117789.6	127290	137583	409600
Cash disbursements:
For direct material	19838	15378	15840	17440	68496
For direct labor	12032	11392	12672	13952	50048
For manufacturing overheads	30540	30340	30740	31140	122760
For S & A expenses	12500	12700	12900	13100	51200
For capital expenditure	45000				45000
For income tax	3500	3500	3500	3500	14000
Total cash disbursements	123410	73310	75652	79132	351504
Excess of cash over disbursements	9590	44480	51638	58451	58096
Minimum cash balance	35000	35000	35000	35000	35000
Cash surplus / (deficit)	-25410	9480	16638	23451	23096
Financing
Borrowings / (Repayments)	26000	-9000	-16000	-1000	0
Interest		-390	-255	-15	-660
Total Financing	26000	-9390	-16255	-1015	-660
Ending cash balance	35590	35090	35383	57436	57436

GRILTON TIRE COMPANY
Income statement for the year 2017
Sales Revenue		360000
Cost of goods sold *		232260
Gross profit		127740
Selling and administration expenses
Supplies (2% of sales)	7200
Salaries	32000
Rent	7200
Insurance	4800
Depreciation	2000
Total selling and admn. Expenses		53200
Net income		74540
Cost of goods sold
Beginning direct material	2400
Purchases	65872
Total direct material available	68272
Less: Ending direct material	5712
Direct material used	62560
direct labor cost	50048
Manufacturing overhead	140760
Manufacturing cost	253368
Production units	7820
Cost per unit	32.40
Manufacturing cost	253368
Add: beginning inventory	8700
Cost of goods available for sale	262068
Less: Ending inventory (920 x 32.40)	29808
Cost of goods sold *	232260