Question

Exercise 8-14 Sales and Production Budgets [LO8-2, LO8-3]

The marketing department of Jessi Corporation has submitted the following sales forecast for the upcoming fiscal year (all sales are on account):

	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Budgeted unit sales	11,200	12,200	14,200	13,200

The selling price of the company’s product is $11 per unit. Management expects to collect 65% of sales in the quarter in which the sales are made, 30% in the following quarter, and 5% of sales are expected to be uncollectible. The beginning balance of accounts receivable, all of which is expected to be collected in the first quarter, is $70,600.

The company expects to start the first quarter with 1,680 units in finished goods inventory. Management desires an ending finished goods inventory in each quarter equal to 15% of the next quarter’s budgeted sales. The desired ending finished goods inventory for the fourth quarter is 1,880 units.

Required:

1. Calculate the estimated sales for each quarter of the fiscal year and for the year as a whole.

2. Calculate the expected cash collections for each quarter of the fiscal year and for the year as a whole.

3. Calculate the required production in units of finished goods for each quarter of the fiscal year and for the year as a whole.

Answer 1

The above question can be answered very simply with the help of following tabular chart. All the three parts to the question is answered below:

Formula	Particulars	Q1	Q2	Q3	Q4	Total
A	Budget Sale Units	11200	12200	14200	13200	50800
B	Selling price per unit	11	11	11	11	11
C = A*B	Estimated Sales amount (Budgeted sale units x price per unit)	123200	134200	156200	145200	558800	Answer 1
D = C*0.65	Cash collected out of current quarter sales	80080	87230	101530	94380	363220
E	Cash collected out of prevous quarter sales	70600	36960	40260	46860	194680
	Q1 - specified = 70600
	Q2 - .30 * C of Q1 = .30*123200
	Q3 - .30 * C of Q2 = .30*134200
	Q4 - .30 * C of Q3 = .30*156200
F = D+E	Total Cash Collected	150680	124190	141790	141240	557900	Answer 2
Formula	Particulars	Q1	Q2	Q3	Q4	Year
G	Budgeted Sales Units	11200	12200	14200	13200	50800
H	Closing stock required	1830	2130	1980	1880	1880
	Q1 - .15 of Q2 budgeted sales = .15*12200
	Q2 - .15 of Q3 budgeted sales = .15*14200
	Q3 - .15 of Q4 budgeted sales = .15*13200
	Q4 - specified = 1880
I	Opening stock in hand	1680	1830	2130	1980	1680
	Q1 - specified = 1680
	Q2 - .15 of Q2 budgeted sales
	Q3 - .15 of Q3 budgeted sales
	Q4 - .15 of Q4 budgeted sales
J = G+H-I	Required Production of finished goods	11350	12500	14050	13100	51000	Answer 3

P.S. Please be careful while putting the closing stock and opening stock for the year as a whole. This is a common silly point of mistake. Do not total the opening/closing stock of all quarters. Opening stock for year will be equal to opening stock of Q1 and closing stock of year will be equal to closing stock of Q4.