Question

The East Division of Kensic Company manufactures a vital component that is used in one of Kensic's major product lines. The East Division has been experiencing some difficulty in coordinating activities between its various departments, which has resulted in some shortages of the component at critical times. To overcome the shortages, the manager of East Division has decided to initiate a monthly budgeting system that is integrated between departments. The first budget is to be for the second quarter of the current year (April, May and June). To assist in developing the budget figures, the divisional controller has accumulated the following information. Sales: Sales through the first three months of the current year were 30,000 units. Actual sales in units for January, February, and March, and planned sales in units over the next five months, are given below: January (actual) 6,000 February (actual) 10,000 March (actual) 14,000 April (planned) 20,000 May (planned) 34,000 June (planned) 51,000 July (planned) 45,000 August (planned) 30,000 In total, the East Division expects to produce and sell 250,000 units during the current year. Direct Material: Two different materials are used in production of the component. Data regarding these materials are given below: Units of Direct Cost Direct Materials per per Inventory at Material Finished Component lb/ft March 31 No. 208 4 pounds $5.00 46,000 pounds No. 311 9 feet 2.00 69,000 feet Material No. 208 is sometimes in short supply. Therefore, the East Division requires that enough of the material be on hand at the end of each month to provide for 50% of the following month's production needs. Material No. 311 is easier to get, so only one-third of the following month's production needs must be on hand at the end of each month. Direct Labor: The East Division has three department through which the components must past before they are completed. Information relating to direct labor in these departments is given below: Direct Labor-Hours Cost per Per Finished Direct Department Component Labor-Hour Shaping .25 $18.00 Assembly .70 16.00 Finishing .10 20.00 Direct labor is adjusted to the workload each month. Manufacturing Overhead: East Division manufactured 32,000 components during the first three months of the current year. The actual variable overhead costs incurred during this three-month period are shown below. Each Division's controller believes that the variable overhead costs incurred during the last nine months of the year will be at the same rate per component as experienced during the first three months. Utilities $ 57,000 Indirect Labor 31,000 Supplies 16,000 Other 8,000 Total variable overhead $112,000 The East Division has planned fixed manufacturing overhead costs for the entire year as follows: Supervision $ 872,000 Property Taxes 143,000 Depreciation 2,910,000 Insurance 631,000 Other 72,000 Total fixed manufacturing Overhead $4,628,000 Finished Goods Inventory: The desired monthly ending inventory of completed components is 20% of the next month's estimated sales. The East Division has 4,000 units in the finished goods inventory on March 31. Selling and Administrative Expenses: Selling and Administrative Expenses are budgeted at $400,000 per month plus 1% of total credit sales for the month.

REQUIRED:

6. Compute a new "selling price per unit" for the East Division that will enable them to accumulate a balance of $100,000 in their cash account by the end of the second quarter. Assume that the cash balance at March 31 was $10,000. (5 pts.) _____

7. Using the selling price per unit computed in #6 prepare a sales budget for the second quarter. Show computations by month and in total for the quarter. (5 pts.) _____

8. Prepare a schedule of expected cash collections for the second quarter using the selling price per unit calculated in question #6. Assume that the East Division collects on its credit sales as follows; 70% in the month of sale, 20% in the month following the credit sale, 10% in the second month following the credit sale. To compute the balance in Accounts Receivable at 3/31 assume that the selling price per unit prior to 3/31 was $75.00. (5 pts.) _____

9. Prepare a cash budget for the second quarter in month and in total for the East Division. (10 pts.)

Answer 1

6. Net change in cash would be = 100,000-10,000 = 90,000

Assuming that all expenses are in cash:

Direct Material Cost = 4,484,000

Direct Labour = 1,947,000

Variable OH costs = 385,000

Fixed OH costs = 1,157,000

Selling and Administrative Expenses(excluding the 1% charge on credit sales)= 1,200,000

Total expenses before 1% charge of selling expenses = 9,173,000

Total Sales during the 3 months: 105,000

Considering information in (8) cash sales would be 70% of total and credit sales would be 30%.

Credit sales = 105,000*0.30= 31,500

Assuming selling price to be x, the total cash collected on sales would be as below:

April= 20,000x

May=34,000x*90%(as 10% is only collected in July)= 30,600x

June= 51,000x*70%(as balance is collected in the following months)= 35,700x

Total Cash inflow from sales= 86,300x

Total cash outflow from expenses= 9,173,000+1%of 31,500x

Net should be equal to 90,000

Total Cash collected = 86,300x+285,000 (where x is the new selling price and 285,000 pertains to months of February and March)

New selling price = 8,978,000/85,985 = 104.41 (we tale 85,985 as there is a 1% charge on sales to be paid as expenses)

7. Sales Budget for the second quarter is as below:

Particulars	April	May	June	Total
Sales in units	20,000	34,000	51,000	105,000
Selling price	104.41	104.41	104.41
Sales Value	2,088,271	3,550,061	5,325,092	10,963,424

8. Expected Cash collections in the second quarter:

Particulars	Feb	March	April	May	June	Total
Sales	10,000	14,000	20,000	34,000	51,000
Selling price	75	75	104.41	104.41	104.41
Sale value	750,000	1,050,000	2,088,271	3,550,061	5,325,092
Cash
70%			1,461,790	2,485,043	3,727,564	7,674,397
20%			210,000	417,654	710,012	1,337,666
10%			75,000	105,000	208,827	388,827
Total			1,746,790	3,007,697	4,646,403	9,400,890

9.

Cash budget for the second quarter:

Cash budget particulars	April	May	June	Total
Expected Cash collections	1,746,790	3,007,697	4,646,403	9,400,890
Expected Cash outflow other than the 1% charge on credit sales	-1,965,827	-2,798,147	-3,209,027	-7,973,000
1% selling charge	-6,265	-10,650	-15,975	-32,890
Net change in cash	-225,302	198,900	1,421,402
Opening cash balance	10,000	-215,302	-16,402
Closing cash balance/overdraft	-215,302	-16,402	1,405,000