Question

Optima Company is a high-technology organisation that produces a mass-storage system. The design of Optima’s system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (2017). The budget will detail each quarter’s activity and the activity for the year in total. The master budget will be based on the following information:
a Fourth-quarter sales for 2016 are 65 000 units.
b Unit sales by quarter (for 2017) are projected as follows:
First quarter 75 000
Second quarter 80 000
Third quarter 85 000
Fourth quarter 95 000
The selling price is $500 per unit. All sales are credit sales. Optima collects 85% of all sales within the quarter in which they are realised; the other 15% is collected in the following quarter. There are no bad debts.
c There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter:
First quarter 13 000 units
Second quarter 15 000 units
Third quarter 20 000 units
Fourth quarter 10 000 units

d Each mass-storage unit uses five hours of direct labour and three units of direct materials. Workers are paid $25 per hour, and one unit of direct materials costs $80.

e There are 65 700 units of direct materials in beginning inventory as at 1 January 2017. At the end of each quarter, Optima plans to have 30% of the direct materials needed for next quarter’s unit sales. Optima will end the year with the same amount of direct materials found in this year’s beginning inventory.

f Optima buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition and the remaining half are paid for in the following quarter. Wages and salaries are paid on the 15th and 30th of each month.

g Fixed overhead totals $1 million each quarter. Of this total, $350 000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year’s total fixed overhead by the year’s budgeted production in units.
HVariable overhead is budgeted at $6 per direct labour hour. All variable overhead expenses are paid for in the quarter incurred.
i Fixed selling and administrative expenses total $250 000 per quarter, including $50 000 depreciation.
j Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.
k The balance sheet as at 31 December 2017 is as follows:

ASSETS

Cash

$ 250 000

Direct materials inventory

5 256 000

Accounts receivable

3 300 000

Plant and equipment, net

33 500 000

Total assets

$42 306 000

LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts payable

$ 7248000*

Capital share

27 000 000

Retained earnings

8 058 000

Total liabilities and shareholders’ equity

$42 306 000

* For purchase of direct materials only.

l Optima will pay quarterly dividends of $300 000. At the end of the fourth quarter, $2 million of equipment will be purchased.

REQUIRED:

Prepare a master budget for Optima Company for each quarter of 2017 and for the year in total. The following component budgets must be included:

1 Sales budget
2 Production budget
3 Direct materials purchases budget
4 Direct labour budget
5 Overhead budget
6 Selling and administrative expenses budget
7 Ending finished goods inventory budget
8 Cost of goods sold budget (Note: Assume that there is no change in work in process inventories.)
9 Cash budget
10 Pro forma income statement (using absorption costing) (Note: Ignore income taxes.)
11 Pro forma balance sheet (Note: Ignore income taxes.)

Answer 1

1. Sales Budget

Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
Units Sold	75,000	80,000	85,000	95,000	335,000
Sale Price/unit	$ 500	$ 500	$ 500	$ 500	$ 500
Total Sales( $)	$ 37500000	$40000000	$42500000	$47500000	$167500000

2. Production Budget

Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
Sales Units	75000	80,000	85,000	95,000	3,35,000
Add: Closing Inventory	13,000	15,000	20,000	10,000	10,000
Total Requirement	88000	95000	105000	105000	345000
Less : Opening Stock	( 0)	(13000)	(15000)	(20000)	( 0)
Units Produced	88,000	82,000	90,000	85,000	345000

3. Direct Materials Purchases Budget

Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
Materials required for Production(units) (output produced*3units/output)	2,64,000	2,46,000	2,70,000`	2,55,000	10,35,000
Add:Closing Stock of Material (30% of direct materials needed For next quarter’s sales units)	72,000	76,500	85,500	65,700	65700
Materials Needed	3,36,000	3,22,500	3,55,500	3,20,700	1100700
Less:Opening Stock of Materials	( 65700)	( 72000)	(76500)	( 85500)	(65700)
Materials Purchased( units )	270300	250500	279000	235200	1035000
Materials Cost ( $ )(units* $80/unit)	21624000	20040000	22320000	18816000	82800000

4. Direct Labour Budget

Particulars	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
Direct Labour Hours (5 hours*units produced)	4,40,000	4,10,000	4,50,000	4,25,000	1725000
Cost/labour hour	$ 25/hour	$ 25/hour	$ 25/hour	$ 25/hour	$ 25/hour
Total Direct Labour Cost( $ )	1000000	102,50,000	112,50,000	106,25,000	$43125000