Question

Para Corp is preparing its Master Budget for 20XX. To complete this problem you need to prepare a selection of Para’s individual budgets. Specifically, the Production Budget, the Direct Materials Budget and Schedule of Cash Payments, the Direct Labor Budget and the Ending Finished Goods Budget.

REQUIRED

1.            PREPARE A PRODUCTION BUDGET (2 POINTS)

Prepare the Production Budget for the first three months of Para’s fiscal year (January, February, and March), along with the totals for the quarter using the format shown in the text book.

Relevant Information for preparing the Production Budget includes:

• Sales projections for the 3 months:
  • January – 75,000 units
  • February - 100,000 units
  • March – 90,000 units
  • April – 13,580 units
• Finished goods inventory on January 1, 20XX = 7,500 units
• Desired ending inventory for each month = 25% of the next month’s budgeted unit sales.

2.            PREPARE A DIRECT MATERIALS BUDGET (3 POINTS)

(TO INSURE CONSISTENCY IN GRADING – USE THE REQUIRED PRODUCTION GIVEN HERE, NOT THE AMOUNTS YOU COMPUTED FOR QUESTION 1.)

Prepare the Direct Materials Budget for the first three months of Para’s fiscal year (January, February, and March), along with the totals for the quarter, using the format shown in the text book. Relevant Information for preparing the Direct Materials Budget includes:

Required Production for the 3 months:

• January – 95,000 units
• February - 120,000 units
• March – 110,000 units
• April – 13,580 units

Number of gallons needed per unit = 3

Raw materials inventory on January 1, 20XX = 30,000 gallons

Desired ending inventory for each month = 10% of the next month’s budgeted production

Raw materials cost per gallon = $2.00

3.            PREPARE A SCHEDULE OF CASH PAYMENTS FOR RAW MATERIALS (3 POINTS)

(TO INSURE CONSISTENCY IN GRADING – USE THE COST OF GALLON PURCHASED GIVEN HERE, NOT THE AMOUNTS YOU COMPUTED IN PART 2.)

Prepare the Schedule of Cash Payments for the first three months of Para’s fiscal year (January, February, and March), along with the totals for the quarter, using the format shown in the textbook. Relevant information for the Schedule of Cash Payments includes:

• January cost of gallons purchased - $350,000

• February cost of gallons purchased - $400,000 units
• March cost of gallons purchased – $450,000
• Para pays for 40% of its purchases in the month of purchase, 50% in the month after purchase and 10% in the second month after purchase.
• Beginning Accounts Payable = $40,000

4.            PREPARE A DIRECT LABOR BUDGET (2 POINTS)

Prepare the Direct Labor Budget for the first three months of Para’s fiscal year (January, February, and March), along with the totals for the quarter, using the format shown in the text book. Relevant information for the Direct Labor Budget includes:

• Use the required production amounts given for the Direct Materials Budget in Question #2.
• Each unit requires .5 hours of direct labor at a rate of $20 per hour.

5.            PREPARE AN ENDING FINISHED GOODS BUDGET (2 POINTS)

Prepare the Ending Finished Goods Budget using the format shown in the text book. Be sure to compute an amount for ending finished goods inventory.

• Use the per unit amounts and costs given for Question 2 (Direct Materials Budget) and Question 4 (Direct Labor Budget)
• Assume Manufacturing Overhead is based on direct labor hours at a cost of $10 per hour.
• Assume ending finished goods inventory = 50,000 units.

Answer 1

Para Corp

1. PREPARE A PRODUCTION BUDGET

Production Budget
			January	February	March	Quarter
Unit Sales			75,000	1,00,000	90,000	2,65,000
(+) Desired Ending Inventory		25,000	22,500	3,395	3,395
Total Needed			1,00,000	1,22,500	93,395	2,68,395
(-) Beginning Inventory		7,500	25,000	22,500	7,500
Units to Produce		92,500	97,500	70,895	2,60,895

March ending inventory – (April month’s units) 13,580 X 25% = 3395

2. PREPARE A DIRECT MATERIALS BUDGET

Direct Materials Budget
			January	February	March	Quarter
Units to be Produced		95,000	1,20,000	1,10,000	3,25,000
(*)Multiply by: Number of Gallons Needed Per Unit	3	3	3	3
Quantity of DM Needed for Production	2,85,000	3,60,000	3,30,000	9,75,000
(+)Plus: Desired Ending Inventory of DM	36,000	33,000	4,074	4,074
Total Quantity of DM Needed		3,21,000	3,93,000	3,34,074	9,79,074
(-)Less: Beginning Inventory of DM		30,000	36,000	33,000	30,000
Quantity of DM to Purchase		2,91,000	3,57,000	3,01,074	9,49,074
(*)Multiply by: Cost Per Gallon		$2.0	$2.0	$2.0	$2.0
Total Cost of DM Purchases		$5,82,000	$7,14,000	$6,02,148	$18,98,148

Ending inventory of DM of March – April units to be produced – 13580 x 3 = 40740 , 10% of 40740 = 4074

3. PREPARE A SCHEDULE OF CASH PAYMENTS FOR RAW MATERIALS

Cash Payments for Direct Material Purchases Budget
			January	February	March	Quarter
Cost of Gallons Purchased		$3,50,000	$4,00,000	$4,50,000	$12,00,000
40% of Current Month DM Purchases		$1,40,000	$1,60,000	$1,80,000	$4,80,000
50% of Previous Month DM Purchases	$30,000	$1,75,000	$2,00,000	$4,05,000
10% of two Month's back of DM Purchases	$4,000	$6,000	$35,000	$45,000
Total Cash Payments DM Purchases	$1,74,000	$3,41,000	$4,15,000	$9,30,000

Note = Beginning balance of $40,000 must be included 10% of November’s due and 60% (50% + 10% ) for month of December

First find out November dues = $40,000 / 10 = $4000 and remaining i.e $36000 ($40,000 – 4000) for December)

That means $36,000 is 60%, so in the month of January, company will pay = ($36000 / 60) x 50 = $30000

February = ($36000 / 60) x10 = $6000

4 PREPARE A DIRECT LABOR BUDGET

Cash Payments for Direct Labor Budget
			January	February	March	Quarter
Units Produced			95,000	1,20,000	1,10,000	3,25,000
(*)Multiply by: Hours Per Unit		0.5	0.5	0.5	0.5
Direct Labor Hours		47500	60000	55000	162500
(*)Multiply by: Direct Labor Rate Per Hour	$20	$20	$20	$20
Direct Labor Cost		$9,50,000	$12,00,000	$11,00,000	$32,50,000

5. PREPARE AN ENDING FINISHED GOODS BUDGET

Budgeted Manufacturing Cost per Unit
Direct Materials Cost Per Unit (Gallons needed per unit X cost per unit) (3 x$2)	$6.00
Direct Labor Cost Per Unit (Labour Hours per unit X Direct labour rate per hour) (0.5 x$20)	$10.00
Manufacturing Overhead Costs Per Unit (Hours per unit x Rate per hour) (0.5 x$10)	$5.00
Cost of Manufacturing Each Unit					$21.00

Cost of Ending Finished Goods Budget = 50,000 units x $21 = $10,50,000