Question

Renfro Company is preparing its master budget for May. Renfro’s sales budget shows expected sales for May of 100,000 units. The beginning finished goods inventory is an estimated 12,000 units and the desired ending inventory is 9,000 units. Materials are expected to be purchased at $2 per pound and each unit of product requires 3 pounds of material. Beginning and ending materials inventories are expected to be 24,000 and 20,000 pounds, respectively. Direct labor for each unit produced requires 0.5 hours at an hourly rate of $12. At $20 each, unit sales are expected to be 80,000 and 100,000 for April and May, respectively. Total sales are typically 20% for cash and 80% on credit; 30% of credit sales are collected in the month of sale, with the balance collected in the following month. Merchandise purchases are expected to be $118,000 and $226,000 for April and May, respectively. Typically, 25% of total purchases are paid for in the month of purchase with a 2% cash discount. The balance of purchases is paid for (without discount) in the following month. Required: Compute each of the following, showing all work for partial credit. 1. Number of units to be produced. 2. Cost of direct materials to be purchased. 3. Direct labor cost for May. 4. Expected cash receipts for May. 5. Expected cash payments in May for purchases.

Answer 1

1. Calculation of Number of Units to be produced:

	May
Estimated sales	100,000 units
Ending finished goods inventory	9,000 units
Total Units required	109,000 units
Less: Units available in beginning inventory	12,000 units
Units to be produced	97,000 units

2. Calculation of Cost of direct material to be purchased:

Number of units to be produced in May = 97,000 units

Direct material required to produce one unit of finished good = 3 pounds

Direct material required to produce 97,000 units of finished goods = 97,000 units x 3 = 291,000 pounds

ADD: Estimated closing direct material = 20,000 pounds

Estimated direct material needed = 311,000 pounds

LESS: Material available in Opening inventory = 24,000 pounds

Material to be purchased duering may = 287,000 pounds

Cost of material per pound = $2 per pound

Cost of 291,000 pounds of raw material = 287,000 pounds x $2 per pound = $574,000

therefore cost of direct materials to be purchased during may = $574,000

3. Calculation of direct labor cost

Number of units to be produced during May = 97,000 units

Direct labor hours required to produce one unit = 0.5 hours

Direct labor hours required to produce 97,000 units = 97,000 x 0.5 hours = 48,500 hours

Direct labor cost per = $12

Direct labor cost for 48,500 hours = 48,500 hours x $12 = $582,000

Therefore difrect labor cost during may = $582,000

4. Calculation of Expected cash receipts during May

	April	May
Total sales	$1,600,000 [80,000 unitsx $20]	$2,000,000 [100,000 units x $20]
a. Cash sales @20%	$320,000	$400,000 [$2,000,000 x 20%]
Credit sales @80%	$1,280,000	$1,600,000
b. Cash collected from the credit sales @30% in the same month	$384,000 [$1,280,000 x 30%]	$480,000 [$1,600,000 x 30%]
c. Cash collected from the credit sales made in the previous month		$896,000 [$1,280,000 x 70%]
Total Expected cash receipts (a + b + c)		$1,776,000

5. Calculation of expected Cash payments for purchases during May

	April	May
Total Purchases	$118,000	$226,000
Cash purchases @25%	$29,500 $118,000x 25%]	$56,500 [$226,000 x 25%]
Less; Cash discount @2%	$590 [29,500 x 2%]	$1,130 [56,500 x 2%]
a. Net cash payment	$28,910	$55,370
b. Cash payment for the credit purchases in the previous month		$88,500 [$118,000 x 75%]
Expected cash payment [a + b]		$143,870