Question

4. Capstone, Inc. (Chapter 9)

Capstone, Inc. is preparing its budget for the coming year, 2020. The first step is to plan for the first quarter of that coming year. Capstone, Inc. gathered the following information from the managers.

Sales

Unit sales for November 2019                       113,000

Unit sales for December 2019                        103,000

Expected unit sales for January 2020                        115,000

Expected unit sales for February 2020           114,500

Expected unit sales for March 2020               118,000

Expected unit sales for April 2020                 130,000

Expected unit sales for May 2020                  140,000

Unit selling price                                              $12.50

Capstone, Inc. likes to keep 10% of the next month’s unit sales in ending inventory. All sales are on account. 85% of the Accounts Receivable are collected in the month of sale, and 15% of the Accounts Receivable are collected in the month after sale. Accounts receivable on December 31, 2019, totaled $175,000.

Direct Materials

Item                 Amount Used per Unit           Inventory, Dec. 31

Metal                  1 lb @ 58¢ per lb.                                5,177.5 lbs

Plastic             12 oz @ 6¢ per oz                              3,883.125 lbs

Rubber              12 oz @ 5¢ per oz                             1,294.375 lbs

2.5 lbs per unit total                10,355.0   lbs

Metal, plastic, and rubber together are 75¢ per pound per unit. (Hint: Do not prepare a separate materials purchases budget for each item of direct materials. Prepare a combined budget using the lbs per unit total applied to the budgeted production).

Capstone, Inc. likes to keep 5% of the materials needed for the next month in its ending inventory. Payment for materials is made within 15 days. 50% is paid in the month of purchase, and 50% is paid in the month after purchase. Accounts Payable on December 31, 2019, totaled $135,000. Raw Materials on December 31, 2019, totaled 10,355 pounds.

Direct Labor

Labor requires 15 minutes per unit for completion and is paid at a rate of $8 per hour.

Manufacturing Overhead

Indirect materials                   35¢ per labor hour

Indirect labor                          55¢ per labor hour

Utilities                                   40¢ per labor hour

Maintenance                           20¢ per labor hour

Salaries                                   $42,000 per month

Depreciation                           $16,800 per month

Property taxes                                     $ 2,675 per month

Insurance                                $ 1,200 per month

Janitorial                                 $ 1,300 per month

Selling and Administrative

Variable selling and administrative cost per unit is $1.60.

Advertising                             $15,500 a month

Insurance                                $ 1,250 a month

Salaries                                   $75,000 a month

            Depreciation                           $ 3,000 a month

Other fixed costs                     $ 3,500 a month

Other Information

The Cash balance on December 31, 2019, totaled $115,000, but management has decided it would like to maintain a cash balance of at least $800,000 beginning on January 31, 2020. Dividends are paid each month at the rate of $1.75 per share for 6,000 shares outstanding. The company has an open line of credit with Romney’s Bank. The terms of the agreement requires the borrowing to be in $1,000 increments at 8% interest. Capstone, Inc. borrows on the first day of the month and repays on the last day of the month. A $525,000 equipment purchase is planned for February.

Instructions

For the first quarter of 2020, do the following.

1. Prepare a sales budget.
2. Prepare a production budget.
3. Prepare a direct materials budget. (Round to nearest dollar)
4. Prepare a direct labor budget. (For calculations, round to the nearest hour.)
5. Prepare a manufacturing overhead budget. (Round amounts to the nearest dollar.)
6. Prepare a selling and administrative budget.
7. Prepare a schedule for expected cash collections from customers.
8. Prepare a schedule for expected payments for materials purchases. (Round totals to nearest dollar)
9. Prepare a cash budget.

Answer 1

a)			Sales budget
						Jan	Feb	Mar	Total
	Unit sales			a		115000	114500	118000	347500
	Unit selling price			b		12.5	12.5	12.5
	Sales in $			a*b		1437500	1431250	1475000	4343750
b)			Production budget
						Jan	Feb	Mar	Total	April
	Unit sales					115000	114500	118000	347500	130000
	Add: Desired ending inventory					11450	11800	13000		14000
	(10% of next month sales)					(114500*10%)	(118000*10%)	(130000*10%)		(140000*10%)
						126450	126300	131000	383750	144000
	Less: Beginning inventory					11500	11450	11800		13000
						(115000*10%)
	Units to be produced					114950	114850	119200	349000	131000
c)			Direct materials budget
						Jan	Feb	Mar	Total	April
	Units to be produced			a		114950	114850	119200	349000	131000
	Amount used per unit (in lbs.)			b		2.5	2.5	2.5		2.5
	Materials needed			c=a*b		287375	287125	298000	872500	327500
	Add: Desired ending inventory					14356	14900	16375
	(5% of materials needed for next month)					(287125*5%)	(298000*5%)	(327500*5%)
						301731	302025	314375	918131
	Less: Beginning inventory					10355	14356	14900
	Materials to be purchased			d		291376	287669	299475	878520
	Pound per unit			e		0.75	0.75	0.75
	Total material cost of purchase			d*e		218532	215752	224606	658890
d)			Direct labor budget
						Jan	Feb	Mar	Total
	Units to be produced				a	114950	114850	119200	349000
	Labor hours required per unit			(15/60)	b	0.25	0.25	0.25
	Total labor hours				c=a*b	28737.5	28712.5	29800	87250
	Rate per hour				d	8	8	8
	Total labor cost				c*d	229900	229700	238400	698000