Question

Shah incorporated manufactures a product with a selling price of $50 per unit. unit and monthly cost data follow:(20POINT)

Variable:

Selling and administrative                                                                        $ 0.4 per unit sold

Direct material                                                                                           $10 per unit manufacture

Direct Laboure                                                                                              $10 per unit manufacture

Variable manufacturing overhead                                                               $ 5-unit manufacture

Fixed:

Selling and admirative                                                                              $ 15000 per month

Manufacturing (including depreciation of $10,000) ……30,000 per month

The company pays 75% of the bill in the month incurred and 25% in the following month. All sales are on account with 50 percent collected the month of sales and the balance collected the following month there no sales discount or bad debts

               The company desire to maintain an ending finished goods inventory equal to 20 percent of the following month’s sales and a raw materials inventory equal to 10 percent of the following months production. Jan 1, 2018 inventories are in line with these polices.

Actual unit sales for December and budget unit sales for January, February, and march of 2018 are as follows:

                                                                   Shah Incorporated

                             For the month of the January, February, and March 2018

Month                                  DEC                 Jan             Feb            March

Sales – units                  6,250                    5000       10,000          8000

Sales- Dollars              $312,500            $250,000    $500,000     400,000

Additional information:

·       The January 1 beginning cash is projected as $5000

·       For the purpose of the operational budgeting unit in January 1 inventory of finished goods are valued at a variable manufacturing cost

·       Each unit of the finished product require one unit of raw materials

·       Each unit of finished product required one unit of raw materials

·       Shah intends to pay a cash dividend of $10,000 in January

Required:

1.       A Production budget for January and February

2.       A purchase budget in unit for January

3.       A manufacturing cost budget for January

4.       A cash budget for January

5.       A budget contribution income statement for January

6.       Management is concern that their supplier of raw materials will have a strike. Determine the budget implication if management plans to increase the January-end raw materials inventory to 100 percent of the February’s production needs. Offer any recommendation you believe appropriate

Answer 1

1. Production Budget;

	January	February
Budgeted Unit Sales	5,000	10,000
Add: Desired Ending Inventory	2,000	1,600
Total Inventory Needs	7,000	11,600
Less: Beginning Inventory	1,000	2,000
Budgeted Production in Units	6,000	9,600

2. Purchase Budget:

	January
Units required in Production	6,000
Add: Desired Ending Inventory	960
Total Inventory Needs	6,960
Less: Beginning Inventory	600
Budgeted Purchases in Units	6,360
Cost per Unit	$ 10
Budgeted Dollar Purchases	$ 63,600

3. Manufacturing Cost Budget:

	January
Direct Materials	$ 60,000
Direct Labor	60,000
Variable Manufacturing Overhead	30,000
Fixed Manufacturing Overhead	30,000
Total Manufacturing Cost	$ 180,000

4. Cash Budget:

Beginning cash balance		$ 5,000
Add: Cash collected from customers
December Sales	$ 156,250
January Sales	125,000	281,250
Total Cash Available		286,250
Less: Cash Disbursements for
Raw Material Purchases	62,700
Direct Labor	60,000
Variable Manufacturing Overhead	30,000
Fixed Manufacturing Overhead	20,000
Variable Selling Expenses	2,000
Fixed Selling and Administrative Overhead	15,000
Cash Dividend	10,000
Total Cash Disbursements		199,700
Cash Surplus ( Deficiency)		86,550
Financing		NIL
Ending Cash Balance		$ 86,550

5. Budgeted Income Statement

For the month ended January 31....

	$	$
Sales		250,000
Variable Expenses
Variable Cost of Goods Sold
Beginning Inventory	25,000
Add: Cost of Goods Manufactured	150,000
Less: Ending Inventory	(50,000)	125,000
Variable Selling Expenses		2,000
Contribution Margin		123,000
Fixed Costs
Manufacturing	30,000
Selling and Administrative	15,000
Total Fixed Costs		45,000
Net Operating Income		$ 78,000

6. In that case, raw materials purchases for the month of January will go up to  $ 150,000. The amount needed to be paid during January for raw materials purchases would be $ 127,500 instead of $ 62,700. Therefore, ending cash balance would fall by $ 64,800 to $ 21,750.