Question

PROBLEM ONE The following information pertains to Life Corporation

Month Sales (units) Sales (dollars)

July 1,500 $30,000

August 1,700 34,000

September 1,600 32,000

October 1,700 40,800

November 2,100 54,600

December 2,350 51,700

January 2,300 57,000

February 1,900 51,000

March 1,750 44,000

April 1,600 41,600

May 1,500 30,000

June 1,400 32,200

Of sales, 30% are in cash with the remainder on account.

Accounts Receivable is collected from customers in the following manner:

Month of sale 30%

Month following sale 60%

Second month following sale 10%

Life Corporation desires ending inventory for finished goods to be 30% of next month’s sales.

Each unit requires three pounds of material, each pound costs $2.75. Life Corporation desires ending inventory of raw materials should be 50% of next month’s needs. Materials are purchased on account. Payments are 40% in the month of purchase with the remainder paid in the following month. The previous month’s ending Accounts Payable balance was $11,162. In addition, each unit requires one hour of labor, each labor hour costs $15.

REQUIRED:

1. Prepare a Revenue budget for December, including revenue, cash collections, and accounts receivable.

2. Prepare a Production Budget for December.

3. Prepare a Raw Materials Purchases Budget for December, including cash disbursements.

4. Prepare the Direct Labor Budget including payments.

Answer 1

(1)

Sales Revenue		$ 51,700
Cash collection :
Cash sales ($51700 * 30%)	$ 15,510
Credit sale for October collected in December ($40800 * 70% * 10%)	$   2,856
Credit sale for November collected in December ($54600 * 70% * 60%)	$ 22,932
Credit sale for December collected in December ($51700 * 70% * 30%)	$ 10,857
Total cash collected in December		$ 52,155
Accounts Receivable :
Uncollectible credit sales for November ($54600 * 70% * 10%)	$   3,822
Uncollectible credit sales for December ($51700 * 70% * 70%)	$ 25,333
Net Accounts Receivable at the end of December		$ 29,155

(2)

Production Budget
Units sold in December	2350
Add: Desired ending inventory (2300 * 30%)	690
Less: Expected Beginning Inventory (2350 * 30%)	705
Units to be produced	2335

(3)

Raw Materials purchases Budget
Units to be produced	2335
X Pound requires per unit	3
Total Pounds required	7005
Add: Desired ending inventory (2300 + [1900*30%] - [2300*30%]) * 50%	1090
Less: Expected beginning inventory (2335 * 50%)	1167.5
Total Pounds to be purchased	6927.5
X Cost per pound	$     2.75
Total cost of Raw materials purchases in December	$ 19,051
Cash Disbursement
December purchases paid in December ($19051 * 40%)	$   7,620
November purchases paid in December	$ 11,162
	$ 18,782

(4)

Direct labor Budget
Units to be produced	2335
X DL require per unit	1
Total DL requires	2335
X Rate per DLH	$        15
Diredt Labor cost	$ 35,025