Question

ABC Company manufactures and sells a single product. The following information is available concerning the operations for 1999. a. The company's single product sells for $60 per unit. Budgeted sales in units for the next four quarters are: 1999 Quarter 1 3,000 Budgeted sales in units 1999 Quarter 2 3,500 Budgeted sales in units 1999 Quarter 3 4,000 Budgeted sales in units 1999 Quarter 4 4,500 Budgeted sales in units 2000 Quarter 1 5,000 Budgeted sales in units b. Sales are collected in the following pattern: 80% in the quarter in which the sale is made, 19% in the following quarter. On January 1, 1999, the company's balance sheet showed $60,000 in account receivables, all of which will be collected in the first quarter of the year 1999. Bad debts are projected at 1% of quarterly sales. There is a -0- balance in the AFDA account. c. The company requires an ending inventory of finished units on hand at the end of each quarter equal to 20% of the budgeted sales for the next quarter. This requirement was met on December 31, 19x8. (The company had 600 units on hand to start the new-year). d. Two pounds (2lbs) of raw materials are required to complete one unit of product. The company requires an ending inventory of raw materials on hand at the end of each quarter equal to 10% of the production needs of the following quarter. This requirement was met on December 31, 19x8. (The company had 620 lbs of raw materials on hand to start the new-year). Quarter 1 of the next year (year 2000) is estimated at 10,200 lbs needed for production. e. The raw material costs $4.00 per pound. Purchases of raw material are paid for in the following pattern: 50% paid in the quarter in which the purchase was made, and the remaining 50% is paid in the following quarter. On January 1, 1999, the company's balance sheet showed $10,600 in accounts payable for raw material purchases. All of which will be paid for in the first quarter of the year 1999. f. Manufacturing overhead and selling & administrative expenses are paid in the quarter incurred. The only exception is depreciation. g. The manufacturing overhead budget distinguishes between variable and fixed overhead costs. Variable costs fluctuate with production volume on the basis of the following rates per direct labor hour: indirect materials $1.00, indirect labor $1.40, utilities $0.40, and maintenance $0.20. Fixed costs per quarter are: Supervisory Salaries $20,000, Depreciation $3,800, Property Taxes & Insurance $9,000 and Maintenance $5,700. Overhead is applied to production on the basis of direct labor hours. The annual rate is $8 per hour. (Hint: Total Manufacturing Overhead for 1999 $246,400 / Direct Labor hours 30,800 hours = $8/direct labor hour). h. Selling & administrative expense budget distinguishes between variable and fixed overhead costs. Variable costs are Sales Commissions of $3.00 and Freight-Out $1.00. Variable expenses per quarter are based on the unit sales projected in the sales budget. Fixed costs, per quarter, are: Advertising $5,000, Sales Salaries $15,000, Office Salaries $7,500 Depreciation $1,000 and Property Taxes & Insurance $1,500. i. January 1, 1999, cash balance is expected to be $38,000. j. Marketable securities are expected to be sold for $2,000 cash in the first quarter. k. 2 hours of direct labor are required to produce each unit of finished goods and the anticipated hourly wage rate is $10. Direct Labor is paid 100% in the quarter incurred. l. Management plans to purchase new factory equipment in the second quarter for $50,000. m. Management plans to purchase new office computers in the third quarter for $12,000. n. Assume depreciation on new purchases is accounted for quarterly budgeted depreciation amounts. o. Management plans to sell old equipment at the end of the fourth quarter for $3,000. Purchase price is $20,000, on January 1, 1996. Depreciation is calculated using the straight-line method, useful life estimated at five years, with no residual value. p. The company makes equal quarterly payments of its estimated annual income taxes in the amount of $3,000 per quarter. q. Loans are repaid in the first subsequent quarter in which there is sufficient cash (incurring 8% interest if funds are borrowed.) r. A minimum cash balance of $20,000 is maintained per quarter. s. Budgeted balance sheet information as of December 31, 1998 were: Building & Equipment $ 182,000, Common Stock $ 225,000, Accumulated Depreciation$ 28,800 and Retained Earnings of $ 46,480. prepare the following budgets and schedules for the year 1999, showing both quarterly and the year total figures Manufacturing overhead budget Selling & administrative expense budget Cash budget Finished goods inventory budget (Schedule) Budgeted income statement (Budgeted financial statement) Budgeted balance sheet (Budgeted financial statement)

Answer 1

1. a.

Sales Budget
	Q1	Q2	Q3	Q4
Budgeted Sales in Units	3,000	3,500	4,000	4,500
Unit Selling Price	$ 60	$ 60	$ 60	$ 60
Budgeted Sales Revenue	$ 180,000	$ 210,000	$ 240,000	$ 270,000

1.b.

Schedule of Expected Cash Collections from Sales
	Q1	Q2	Q3	Q4
Q4, 1998 Sales	60,000	0	0	0
Q1, 1999 Sales	144,000	34,200	0	0
Q2,1999 Sales	0	168,000	39,900	0
Q3,1999 Sales	0	0	192,000	45,600
Q4,1999 Sales	0	0	0	216,000
Expected Cash Collections	$ 204,000	$ 202,200	$ 231,900	$ 261,600

2.

Production Budget
	Q1	Q2	Q3	Q4
Budgeted Sales in Units	3,000	3,500	4,000	4,500
Add: Desired Ending Inventory	700	800	900	1,000
Total Needs	3,700	4,300	4,900	5,500
Less: Estimated Beginning Inventory	600	700	800	900
Required Production in Units	3,100	3,600	4,100	4,600

3. a.

Direct Materials Purchases Budget
	Q1	Q2	Q3	Q4
Production in Units	3,100	3,600	4,100	4,600
Raw materials per unit	2 lbs	2 lbs	2 lbs	2 lbs
Raw materials needed in production	6,200	7,200	8,200	9,200
Add: Desired ending inventory	720	820	920	1,020
Total needs	6,920	8,020	9,120	10,220
Less: Estimated beginning inventory	620	720	820	920
Required purchases in Units	6,300	7,300	8,300	9,300
Cost per pound	$ 4	$ 4	$ 4	$ 4
Required purchases of raw materials in dollars	$ 25,200	$ 29,200	$ 33,200	$ 37,200

3. b.

Schedule of Expected Cash Disbursements for Direct Materials Purchases
	Q1	Q2	Q3	Q4	Total
Q4,1998 purchases	10,600	0	0	0	10,600
Q1, 1999 purchases	12,600	12,600	0	0	25,200
Q2, 1999 purchases	0	14,600	14,600	0	29,200
Q3, 1999 purchases	0	0	16,600	16,600	33,200
Q4, 1999 purchases	0	0	0	18,600	18,600
Total Cash Disbursements	23,200	27,200	31,200	35,200	116,800

4.

Direct Labor Budget
	Q1	Q2	Q3	Q4	Total
Production in Units	3,100	3,600	4,100	4,600	15,400
DLH per unit produced	2	2	2	2	2
DLH required	6,200	7,200	8,200	9,200	30,800
DLH rate	$ 10	$ 10	$ 10	$ 10	$ 10
Total Direct Labor Cost	$ 62,000	$ 72,000	$ 82,000	$ 92,000	$ 308,000

5.

Manufacturing Overhead Budget
	Q1	Q2	Q3	Q4
Variable Manufacturing Overhead	18,600	21,600	24,600	27,600
Fixed Manufacturing Overhead ( Cash)	34,700	34,700	34,700	34,700
Total Cash Manufacturing Overheads	53,300	56,300	59,300	62,300
Non-cash Manufacturing Overhead ( Depreciation )	3,800	3,800	3,800	3,800
Total Budgeted Manufacturing Overhead	57,100	60,100	63,100	66,100

6.

Cash Budget
	Q1	Q2	Q3	Q4	Total
Beginning cash balance	38,000	61,500	20,000	20,000	38,000
Add: Cash Receipts	204,000	202,200	231,900	261,600	899,700
Cash from Sale of Marketable Securities	2,000	0	0	0	2,000
Cash from sale of Equipment	0	0	0	3,000	3,000
Total Cash Available	244,000	263,700	251,900	284,600	942,700
Less: Cash Disbursements for
Merchandise Purchases	23,200	27,200	31,200	35,200	116,800
Direct Labor	62,000	72,000	82,000	92,000	308,000
Manufacturing Overheads	53,300	56,300	59,300	62,300	231,200
Sales Commission	9,000	10,500	12,000	13,500	45,000
Freight-out	3,000	3,500	4,000	4,500	15,000
Fixed Selling and Administrative Expenses	29,000	29,000	29,000	29,000	116,000
Purchase of Factory Equipment	0	50,000	0	0	50,000
Purchase of Office Computers	0	0	12,000	0	12,000
Income Taxes	3,000	3,000	3,000	3,000	12,000
Total Cash Disbursements	182,500	251,500	232,500	239,500	906,000
Cash Surplus ( Deficiency)	61,500	12,200	19,400	45,100	36,700
Financing
Borrowing	0	7,800	600		8,400
Repayment	0	0	0	(8,400)	(8,400)
Interest	0	0	0	164	(164)
Total Financing	0	7,800	8,400	0
Ending Cash Balance	61,500	20,000	26,496	36,536	36,536

7. Schedule of Finished Goods Inventory:

Direct Materials ( 1,000 x 2 lbs. x $ 4)	$ 8,000
Direct Labor ( 1,000 x 2 hrs. x $ 10)	20,000
Variable Manufacturing Overhead ( 1,000 x 2 hrs x $ 3 per hr)	6,000
Fixed Manufacturing Overhead ( 1,000 x 2 hrs x $ 1.25 per DLH)	2,500
Total Cost of Finished Goods Inventory	$ 36,500