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, 2017 follows:

GRILTON TIRE COMPANY

Balance Sheet

December 31, 2017

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:

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.

Finished Goods Inventory on December 31, 2017 consists of 300 tires at $29 each.

Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2019 are expected to be 2,300 tires and second quarter sales for 2019 are expected to be 2,500. FIFO inventory costing method is used.

Direct Materials cost is $8 per tire.

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

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

Variable manufacturing overhead is $2 per tire produced.

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.

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.

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

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

Cash receipts for sales on account are 60% in the quarter of sale and 40% in the quarter following the sale. The December 31, 2017 Accounts Receivable ($40,000) is received in the first quarter of 2018.

Direct materials purchases are paid 70% in the quarter purchased and 30% in the following quarter. The December 31, 2017 Accounts Payable ($8,000) is paid in the first quarter of 2018.

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

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

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. Interest must be paid at the beginning of each quarter.

Prepare a budgeted Schedule of Cost of Goods Manufactured for the year of 2018. (5 pts.)

Answer 1

	Budgetd schedule of cost of goods manufactured
	Direct materials used (Note:1)				7788
	Direct labor		(Note:2)		50048
	Manufacturing overhead
	Variable		(Note:3)		15640
	Fixed		(4500+26780)*4		125120
	Total manufacturing costs				198596
	Add: Beginning work in process inventory				0
					198596
	Les: Ending work in process inventory				0
	Cost of goods manufactured				198596
	Note:1 -Direct material used
				Q1	Q2	Q3	Q4	Total
	Budgeted sales (in units)			1500	1700	1900	2100
	Add: Desired finished goods inventory			680	760	840	920
				(1700*40%)	(1900*40%)	(2100*40%)	(2300*40%)
				2180	2460	2740	3020
	Less: Beginning inventory			300	680	760	840
	Tires to be produced			1880	1780	1980	2180
	Material cost per tire ($)			8	8	8	8
	Material cost			1872	1772	1972	2172	7788
	Note:2-Direct labor cost
				Q1	Q2	Q3	Q4	Total
	Tires to be produced			1880	1780	1980	2180
	Labor hours required oer tire			0.4	0.4	0.4	0.4
	Direct labor hours required			752	712	792	872
	Labor cost per hour ($)			16	16	16	16
	Direct labor cost			12032	11392	12672	13952	50048
	Note:3- Variable manufacturing overhead
				Q1	Q2	Q3	Q4	Total
	Tires to be produced			1880	1780	1980	2180
	Variable overhead per tire ($)			2	2	2	2
	Variable manufacturing overhead			3760	3560	3960	4360	15640