Question

Case #1

Sienna Corporation is preparing budgets for the upcoming quarter ending June 30. Budgeted sales (in units) for the next five months are:

April	30,000
May	90,000
June	75,000
July	51,000
August	52,500

Below is additional information that may be relevant in preparing the budgets.

• The company produces professional quality bowls that sell for $31.50 per unit.
• To guard against inventory stockouts, the company has a policy of maintaining an ending inventory of 18 percent of the following month’s budgeted sales. At the beginning of April, Sienna Corp. had 15,000 units in inventory.
• Each unit of output requires 2 kilograms of direct material. To guard against stockouts of raw materials, the company has a policy of maintaining a raw materials inventory of 20 percent of the following month’s production. At the beginning of April, Sienna Corp. has 32,000 kilograms of direct materials on hand. Each kilogram of direct materials costs $1.00.
• Each unit of output requires 0.2 hours (12 minutes) of direct labour and employees are paid a standard rate of $22 per hour
• Sienna Corp. applies overhead using a variable rate of $15 per direct labour hour. The fixed overhead is $94,590 per month. Of that amount, $20,000 are non-cash costs, such as depreciation on assets.
• Sienna Corp. has both fixed and variable components to the selling and administrative expenses. Accountants at Sienna Corp. estimate that the variable selling and administrative expenses are $0.50 per unit sold. Fixed selling and administrative expenses are $140,000 per month, $20,000 are non-cash costs, such as depreciation on assets.
• Fifty percent of sales are made in cash. The remaining 50% of sales are made on account. The company collects 60% of sales made on account in the month of the sale, 20% in the month following the sale, and 15% in the second month following the sale. Sienna Corporation had total sales of $882,000 in February and $756,000 in March
• Sienna Corporation pays $1.00 per kilogram of direct materials. The company pays of half of its purchases in the month of the purchase and the remaining half in the month following the purchase. At the beginning of the quarter, Sienna Corporation owed its creditors $42,400 for purchases of direct materials.

Required:

1. Prepare the overhead budget for the months of April, May and June, and for the quarter-end.

2. Prepare the ending finished goods inventory budget for the quarter ending June 30.

3. Prepare the accounts receivable collections schedule for the months of April, May and June.

4. Prepare the cash payments on accounts payable schedule for the months of April, May, and June.

Answer 1

Solution A) Overhead budget for the months of April, May and June, and for the quarter-end

	April	May	June
Inventory to be manufactured (Units)	31,200	87,300	70,680
Labour Hours (0.2 Hours per Unit)	6,240	17,460	14,136
Labour Cost ($22 per Hour)	1,37,280.00	3,84,120.00	3,10,992.00
Manufacturing Overheads
Variable Overheads $15 per labour hour	93,600.00	2,61,900.00	2,12,040.00
Fixed Overheads	74,590.00	74,590.00	74,590.00
Total Manufacturing Overheads	1,68,190.00	3,36,490.00	2,86,630.00
Selling and Administrative Expenses
Variable Overheads $0.5 per unit sold	15,000.00	45,000.00	37,500.00
Fixed Overheads	1,20,000.00	1,20,000.00	1,20,000.00
Total Selling and Administrative Expenses	1,35,000.00	1,65,000.00	1,57,500.00
Total Overheads = Total Manufacturing Overheads +Total Selling and Administrative Expenses	3,03,190.00	5,01,490.00	4,44,130.00

Solution b) Finished goods inventory budget for the quarter ending June 30

	April	May	June
Sales (units)	30,000.00	90,000.00	75,000.00
Opening Stock Of Inventory (units)	15,000.00	16,200.00	13,500.00
Closing Stock Of Inventory (units)	16,200.00	13,500.00	9,180.00
Inventory to be manufactured (units)	31,200.00	87,300.00	70,680.00

Solution c) Accounts receivable collections schedule for the months of April, May and June.

	February	March	April	May	June
Sales (Units)			30,000	90,000	75,000
Sales $ ($31.50 per unit)	8,82,000	7,56,000	9,45,000	28,35,000	23,62,500
Cash Sales (50% of Total Sales)	4,41,000	3,78,000	4,72,500	14,17,500	11,81,250
Sales on Account (50% of Total Sales)	4,41,000	3,78,000	4,72,500	14,17,500	11,81,250
60% of Same Month's Sale	2,64,600	2,26,800	2,83,500	8,50,500	7,08,750
20% of Previous Month's Sale		88,200	75,600	94,500	2,83,500
15% of 2 months prior Credit Sales			66,150	56,700	70,875
Total Collection From Sales on Account	2,64,600	3,15,000	4,25,250	10,01,700	10,63,125

Note: Figures for the month of February and March are given as the accounts receivables for those will be collected in the month of April and May.

Solution d) Cash payments on accounts payable schedule for the months of April, May, and June.

	April	May	June
Raw Material Required (Units) (2 Units per unit manufactured)	62,400	1,74,600	1,41,360
Closing Stock Of Raw Material (20% of Next Month's Production)	34,920	28,272	20,508
Opening Stock Of Raw Material	32,000	34,920	28,272
Raw Material to be purchased = Raw Material Required + Closing Stock Of Raw Material - Opening Stock Of Raw Material	65,320	1,67,952	1,33,596
Cost of Raw Material = $1 per Unit of Raw Material Purchased	65,320.00	1,67,952.00	1,33,596.00
Payment of Accounts Payable 50% in Same Month	32,660.00	83,976.00	66,798.00
50% of Accounts Payable of previous Month		32,660.00	83,976.00
Total Payment of Accounts Payable	32,660.00	1,16,636.00	1,50,774.00