Question

Endless Mountain Company manufactures a single product that is popular with outdoor recreation enthusiasts. The company sells its product to retailers throughout the northeastern quadrant of the United States. It is in the process of creating a master budget for 2017 and reports a balance sheet at December 31, 2016 as follows:

Endless Mountain Company
Balance Sheet
December 31, 2016
Assets
Current assets:
Cash	$	46,200
Accounts receivable (net)		260,000
Raw materials inventory (4,500 yards)		11,250
Finished goods inventory (1,500 units)		32,250
Total current assets				$	349,700
Plant and equipment:
Buildings and equipment		900,000
Accumulated depreciation		(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:

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 is 13,000 units.

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.

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

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 December 31, 2017 is 5,000 yards.

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.

Direct laborers 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.

The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhead 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.

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 depreciation expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred.

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.

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

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

Create:

1.Ending Finished Goods inventory budget (absorption costing basis) For year end December 2017

2. Quarterly Cash budget for Year ended dec 31, 2017

3. Budgeted Balance Sheet at Dec 31, 2017

Answer 1

Answer 1

Endless Mountain Company
Ending Finished Goods Inventory Budget (Absorption Costing)
31-Dec-17
Item	Quantity		Cost/unit	Total
Production cost per unit:
Direct materials:	3.50	yards	3.00	10.50
Direct Labour	0.25	hr	18.00	4.50
Manufacturing overhead	1.00	unit	7.46	7.46
Unit product cost( Current Production)				22.46
Budgeted finished goods inventory:
Ending finished goods inventory in units				450
Unit product costs				$                22.46
From Current Production				$              10,106
Ending finished goods inventory in units				1,500
Unit product costs				$                21.50
From Opening Stock				$              32,250
Total Ending finished goods inventory in dollars				$              42,356
Budgeted cost of goods sold:
Beginning finished goods inventory				32,250
Plus cost of goods manufactured				2,008,838
Less: ending inventory				42,356
Budgeted cost of goods sold in dollars:				1,998,732

answer 2

Endless Mountain Company
Cash Budget
December 31, 2017
	JAN - MAR	APR-JUN	JUL-SEP	OCT-DEC	Year
Cash balance, beginning	$   46,200	$      30,001	$    244,650	$ 314,338	$      46,200
Add receipts:
Collections from customers	548,000	984,000	656,000	720,000	2,908,000
Total cash available before financing	594,200	1,014,001	900,650	1,034,338	2,954,200
Less disbursements:
Direct materials	291,287	292,176	226,937	218,054	1,028,453
Direct labour	72,225	151,650	74,250	104,400	402,525
Manufacturing overhead	142,038	155,275	142,375	147,400	587,088
Selling and administrative expenses	124,000	155,250	127,750	140,250	547,250
Dividend payment	15,000	15,000	15,000	15,000	60,000
Total disbursements	644,550	769,351	586,312	625,104	2,625,316
Excess (deficiency) of cash available over disbursements	-     50,350	244,650	314,338	409,235	328,885
Financing:
Borrowing (at the beginning of the month)	82,835				82,835
Repayment (at the end of the month)				82,835	82,835
Interest expense (paid qtrly)	2,485	-	-	7,232	9,717
Total financing	80,350	-	-	-      90,067	-          9,717
Cash balance, ending	$   30,000	$    244,650	$    314,338	$ 319,168	$    319,168

answer 3

Endless Mountain ompany
Budgeted Income Statement
December 31, 2017
Sales		$            2,848,000
Cost of goods sold		1,998,732
Gross Margin		849,268
Less:
Selling & administrative expenses		579,250
Net operating income		270,018
Less: Interest expense		9,717
Net income before taxes		260,301
Income taxes		-
Net Income		$               260,301
Endless Mountain Company
Budgeted Statement of Retained Earnings
December 31, 2017
Retained earnings beginning of year		$               379,900
Plus: Net Income		260,301
Sub-total		640,201
Less: Dividends declared		60,000
Retained earnings end of year		$               580,201
Endless Mountain Company
Budgeted Balance Sheet
December 31, 2017
Assets
Cash		$               319,168
Accounts Receivable		200,000
Inventory: Raw Materials (5000 yards)		12,750
Inventory: Finished goods (1950 units)		42,356
Capital assets (net)		496,000
Total Assets		$            1,070,273
Liabilities and Shareholders' Equity
Liabilities
Bank Loan Payable		$                         -
Accounts payable		70,272
Income taxes payable		-
Total Liabilities		70,272
Shareholders' Equity
Capital stock		419,800
Retained earnings		580,201
Total Shareholders' equity		1,000,001
Total Liabilities & Shareholders' Equity		$            1,070,273

working notes

Sales Budget
	JAN - MAR	APR-JUN	JUL-SEP	OCT-DEC	Year
Expected sales in units	12,000	37,000	15,000	25,000	89,000
Selling price per unit	$          32.00	$          32.00	$        32.00	$        32.00	$            32.00
Total Budgeted Sales	$      384,000	$   1,184,000	$    480,000	$    800,000	$     2,848,000
Schedule of Expected Cash Collections
	JAN - MAR	APR-JUN	JUL-SEP	OCT-DEC	Year
Current Qtr sales 75%	$      288,000	$      888,000	$    360,000	$    600,000	2,136,000
Subsquent Qtr sales 25%	260,000	96,000	296,000	120,000	772,000
Total cash collections	$      548,000	$      984,000	$    656,000	$    720,000	$     2,908,000

Production Budget
	JAN - MAR	APR-JUN	JUL-SEP	OCT-DEC	Year
Budgeted sales in units	12,000	37,000	15,000	25,000	89,000
Add desired ending inventory of finished goods	5,550	2,250	3,750	1,950	1,950
Total needs	17,550	39,250	18,750	26,950	90,950
Less beginning inventory of finished goods	1,500	5,550	2,250	3,750	1,500
Required production	16,050	33,700	16,500	23,200	89,450

Direct Materials Budget -
	JAN - MAR	APR-JUN	JUL-SEP	OCT-DEC	Year
Units to be produced	16,050	33,700	16,500	23,200	89,450
Raw Materials needed per unit	3.50	3.50	3.50	3.50	3.50
Production needs	56,175	117,950	57,750	81,200	313,075
Add desired ending inventory	11,795	5,775	8,120	5,000	5,000
Total needs	67,970	123,725	65,870	86,200	318,075
Less beginning inventory	4,500	11,795	5,775	8,120	4,500
Raw materials to be purchased	63,470	111,930	60,095	78,080	313,575
Cost of RM per yards	$          3.00	$          3.00	$          3.00	$          3.00	$          3.00
Total cost of purchases of RM	$    190,410	$    335,790	$    180,285	$    234,240	$    940,725
Schedule of Expected Cash Disbursement for Purchases of Raw Material
	JAN - MAR	APR-JUN	JUL-SEP	OCT-DEC	Year
Current Qtr Purchase 70%	$    133,287	$    235,053	$    126,200	$    163,968	$    658,508
Subsquent Qtr purchases 30%	158,000	57,123	100,737	54,086	369,946
Total cash disbursements for purchases of raw material	$    291,287	$    292,176	$    226,937	$    218,054	$ 1,028,453

Direct Labour Budget
	JAN - MAR	APR-JUN	JUL-SEP	OCT-DEC	Year
Units to be Produced	16,050	33,700	16,500	23,200	89,450
Direct Labour time per unit (hours)	0.25	0.25	0.25	0.25	0.25
Total hours of direct labour time needed	4,013	8,425	4,125	5,800	22,363
Direct Labour cost per hour	$        18.00	$        18.00	$        18.00	$        18.00	$            18.00
Total direct labour cost	$      72,225	$    151,650	$      74,250	$    104,400	$        402,525

Manufacturing Overhead Budget
	JAN - MAR	APR-JUN	JUL-SEP	OCT-DEC	Year
Production in Units	16,050	33,700	16,500	23,200	89,450
Variable overhead rate per unit	$          0.75	$          0.75	$          0.75	$          0.75	$          0.75
Variable manufacturing overhead	$      12,038	$      25,275	$      12,375	$      17,400	$      67,088
Fixed manufacturing overhead:
Manufacturing overhead	130,000	130,000	130,000	130,000	520,000
Depreciation on equipment	20,000	20,000	20,000	20,000	80,000
Total fixed manufacturing OH	150,000	150,000	150,000	150,000	600,000
Total manufacturing OH	162,038	175,275	162,375	167,400	667,088
Less Depreciation on equipment	20,000	20,000	20,000	20,000	80,000
Cash disbursements for manufacturing OH	$    142,038	$    155,275	$    142,375	$    147,400	$    587,088

Selling and Administrative Expense Budget
	JAN - MAR	APR-JUN	JUL-SEP	OCT-DEC	Year
Budgeted sales in units	12,000	37,000	15,000	25,000	89,000
Variable selling and administrative expense per unit	$          1.25	$          1.25	$          1.25	$          1.25	$          1.25
Variable expenses	$      15,000	$      46,250	$      18,750	$      31,250	$    111,250
Fixed selling and adm exp.:-
Advertising	25,000	25,000	25,000	25,000	100,000
Executive salaries	64,000	64,000	64,000	64,000	256,000
Insurance	12,000	12,000	12,000	12,000	48,000
Property taxes	8,000	8,000	8,000	8,000	32,000
Depreciation Exp.	8,000	8,000	8,000	8,000	32,000
Total budgeted selling and administrative expenses	$    132,000	$    163,250	$    135,750	$    148,250	$    579,250
Less: non-cash items
Depreciation Exp.	$        8,000	$        8,000	$        8,000	$        8,000	32,000
	$    124,000	$    155,250	$    127,750	$    140,250	$    547,250