Question

Integration Exercise 9 Master Budgeting. LO 8-2, LO 8-3, LO 8-4, LO 8-5, LO 8-6, LO 8-7, LO8-9, LO 8-10

Endless Mountain Company manufactures a single product that is popular with recreation enthusiasts. The company sells its product to retailers throughout the quadrant of the United States. It is in the process of creating a master budget for reports a balance sheet as December 31, 2016 as follows:

	Endless Mountain Company
	Balance Sheet
	December 31, 2016
	Assets
Current Assets:
Cash	$46,200
Accounts receivable	260,000
Raw material inventory (4,500 yds)	11,250
Finished goods inventory (1,500 units)	32,250
Total current assets		$349,700
Plant and equipment:
Buildings and equipment	900,000
Accumulated deprectiation	(292,000)
Plant and equipment, net		608,000
Total assets		957,700
	Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$158,000
Stockholders' equity
Common stock	$419,800
Retained earnings	379,900
Total stockholders' equity		799,700
Total liabilities and stockholders equity		957,700

The company's chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2017 budget:

1. The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units and 25,000 units for quarters 1-4, respectively. Notice that the company experiences peak sales in the second and fourth quarters. The budgeted selling price for the year is $32 per unit. The budgeted unit sales for the first quarter of 2018 in 13,000 units.

2. All sales are on credit. Uncollectible accounts are negligible and can be ignored. Seventy-five percent of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter.

3. Each quarter's ending finished goods inventory should equal 15% of the next quarter's unit sales.

4. Each unit of finished goods requires 3.5 yards of raw material that costs $3.00 per yard. Each quarter's ending raw materials inventory should equal 10% of the next quarter's production needs. The estimated ending raw materials inventory on Decmeber 31, 2017, is 5,000 yards.

5. Seventy percent of each quarter's purchases are paid for in the quarter of purchase. The remaining 30% of each quarter's purchases are paid in the following quarter.

6. Direct laboreres are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred.

7. The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhad is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred.

8. The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciaition expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred.

9. The company plans to maintain a minimum cash balance at the end of each quarter of $30,000. Assume that any borrowings take place on the first day of the quarter. To the extent possible, the company will repay principal and interest on any borrowings on the last day of the fourth quarter. The company's lender imposes a simple interest rate of 3% per quarter on any borrowings.

10. Dividends of $15,000 will be declared and paid in each quarter.

11. The company uses a last-in, first-out (LIFO) inventry flow assumption. This means that the most recenly purchased raw materials are the "first-out" to production and the most recently completed finished goods are "first-out" to customers.

Required:

1. Quarterly sales budget including a schedule of expected cash collections.

2. Quarterly production budget.

3. Quarterly direct materials budget including a schedule of expected cash disbursements for purchases of materials.

4. Quarterly direct labor budget.

5. Quarterly manufacturing overhead budget.

6. Ending finished goods inventory budget at December 31, 2017.

7. Quarterly selling and administrative expense budget.

8. Quarterly cash budget.

9. Income statement for the year ended December 31, 2017.

10. Balance sheet at December 31, 2017.  

Answer 1

1a. Quarterly Sales budget			Q1	Q2	Q3	Q4	Next Year Q1	Full Year
Budgeted Units			12000	37000	15000	25000	13000	89000
Per Unit Price			32	32	32	32	32	32
Quarterly Sales budget			384000	1184000	480000	800000	416000	2848000
1b. Expected Cash Collection'
			Q1	Q2	Q3	Q4	Next Year Q1	Full Year
Quarterly Sales budget			384000	1184000	480000	800000	416000	2848000
-Credit Sale
75% in same quarter			288000	888000	360000	600000		2136000
25% in next quarter				72000	222000	90000		384000
Opening Accounts Receivable			260000					260000
Total Cash Collection	(A+B+C+D+E+F)		548000	960000	582000	690000		2780000
2. Production budget			Q1	Q2	Q3	Q4	Next Year Q1	Full Year
Budgeted Units			12000	37000	15000	25000	13000
Add: Ending Inventory	15% of subsequent month		5550	2250	3750	1950
Total Needs			17550	39250	18750	26950
Less: Beginning Inventory	Closing of last month is beginging		1500	5550	2250	3750
Production Budget			16050	33700	16500	23200
3a. Direct Material Budget			Q1	Q2	Q3	Q4	Next Year Q1	Full Year
Production Budget			16050	33700	16500	23200
Direct Material needed for Production	3.5 yeards per unit of production		56175	117950	57750	81200
Add: Ending Inventory	10% of next Q prod needs		11795	5775	8120	5000
Total Needs			67970	123725	65870	86200
Less: Beginning Inventory			4500	11795	5775	8120
Direct Material Budget			63470	111930	60095	78080
Total Cost of Material of purchase	Purchase Price-3 per yard		190410	335790	180285	234240
3b. Cash Disbursment Schedule			Q1	Q2	Q3	Q4	Next Year Q1	Full Year
Opening Accoutns Payable			158000
70% same quartr			133287	235053	126200	163968
30% next quarter				57123	100737	54086
Total Cash Disbursment			291287	292176	226937	218054
4. Direct Labor Hour budget			Q1	Q2	Q3	Q4	Next Year Q1	Full Year
Production Budget units			16050	33700	16500	23200
Labor Hours needed for Production	0.25 Labor hour per unit of production		4013	8425	4125	5800
Cost per Labor Hour			18	18	18	18
Total Direct Labor Cost			72225	151650	74250	104400