Question

Synopsis

Camilla has just recently inherited her grandfather’s Ferrari factory. She has no accounting background, and at the young age of only 24 ½ , she has requested your expert help in creating a budget for next year (2018). The following information was obtained through an interview with her and her top management.

-Sales

Expected Sales (units): Management expect to sell 100 cars the first quarter with a 10% increase  each succeeding quarter.

Expected Sales price = $325,000

-Production

Since Ferrari cars are generally pre-ordered, each quarter the company manufactures the number of cars expected to be sold in the following quarter. Ferrari does not maintain any inventory. Production for the fourth quarter will be equal to expected sales in the first quarter 2019 or 140 units.

-Materials

Ferrari maintains an ending inventory of raw materials equal to 10% of the next quarter’s production requirements.

The manufacture of each car requires 2000 pounds of raw materials, and the expected cost per pound is $50/pound.

Assume that the desired ending direct materials amount is 28,000 pounds for the fourth quarter of 2018.

-Labor

Direct labor hours are determined from the production budget. At Ferrari, much is done by robots, however the final touches require twenty hours of direct labor to produce each car. The anticipated hourly wage rate is $25.

-Manufacturing overhead

Ferrari expects variable costs to fluctuate with production volume on the basis of the following rates per direct labor hour:

indirect materials                      $2,500

indirect labor                            $1,000

utilities                                     $500

maintenance                             $250.

-Ferrari expects Fixed Manufacturing Costs to be as follows (quarterly):

Supervisory salaries                   $50,000

Depreciation                             $21,250

Property taxes                          $40,000

Maintenance                            $15,000

Selling and Administrative

Variable expense rates per unit of sales are sales commissions $5,000 and freight-out $2,500.

Ferrari’s fixed selling and administrative costs are as follows (quarterly):

Camilla’s Salary and Bonus        $2,500,000

Advertising                               $1,000,000

Sales salaries                            $500,000

Office salaries                           $600,000

Depreciation                             $1,000,000

Property Taxes and Insurance    $1,500,000

-Other

Interest Expense for 2018          $100,000

Taxes are computed at 40% of pretax income

Question: Complete the 2018 budget as requested. You must create the following budgets:

Sales Budget – Quarterly

Production Budget – Quarterly

Materials Budget – Quarterly

Labor Budget – Quarterly

Manufacturing Overhead Budget – Quarterly

Administrative and Selling Budget – Quarterly

Income Statement – Annual

Answer 1

a.) Sales Budget

Particulars	Q-1	Q-2	Q-3	Q-4
Sales (units)	100	110	121	133
Sale Price	325000	325000	325000	325000
Sales Value	32500000	35750000	39325000	43225000

Expected sales in first quarter is 100 cars, 10% rise comes to 110, 121, 133 respectively for succeeding 3 quarters

b.) Production Budget

Quarter	Production of cars (units)
I	110
II	121
III	133
IV	140

c.) Material Purchase Budget

Particulars	Q-1	Q-2	Q-3	Q-4
Opening Inventory	22000	24200	26600	28000
+ Purchase (Balancing Figure)	222200	244400	267400	280000
- Consumption*	220000	242000	266000	280000
= Closing Inventory	24200	26600	28000	28000

*The manufacture of each car requires 2000 pounds of raw materials, so consumption = Production * 2000 pounds raw material.

Particulars	Q-1	Q-2	Q-3	Q-4
Material purchase	222200	244400	267400	280000
Rate per pound	50	50	50	50
Total cost	11110000	12220000	13370000	14000000

d.) Labor Budget:-

Particulars	Q-1	Q-2	Q-3	Q-4
Production	110	121	133	140
Labor hour per unit	20	20	20	20
Total Labor hours	2200	2420	2660	2800
Direct Labor Cost @ $25/hour	55000	60500	66500	70000

e.) Manufacturing Overhead Budget

Particulars	Q-1	Q-2	Q-3	Q-4
Indirect Material @ $2500/hour	5500000	6050000	6650000	7000000
Indirect Labor @ $1000/hour	2200000	2420000	2660000	2800000
Utilities @ $500/hour	1100000	1210000	1330000	1400000
Maintenance @ $250/hour	550000	605000	665000	700000
Total Variable Overheads (A)	9350000	10285000	11305000	11900000
Supervisor Salary	50000	50000	50000	50000
Depreciation	21250	21250	21250	21250
Property Tax	40000	40000	40000	40000
Maintenance	15000	15000	15000	15000
Total Fixed Overheads (B)	126250	126250	126250	126250
Total Manufacturing Overheads(A+B)	9476250	10411250	11431250	12026250

f.) Administrative & Selling Budget

Particulars	Q-1	Q-2	Q-3	Q-4
Sales Commission @ $5000/unit sold	500000	550000	605000	665000
Freight out @ $ 2500/unit sold	250000	275000	302500	332500
Total Variable overheads (A)	750000	825000	907500	997500
Camilla’s Salary and Bonus	2500000	2500000	2500000	2500000
Advertising	1000000	1000000	1000000	1000000
Sales salaries	500000	500000	500000	500000
Office salaries	600000	600000	600000	600000
Depreciation	1000000	1000000	1000000	1000000
Property Taxes and Insurance	1500000	1500000	1500000	1500000
Interest Expense	100000	100000	100000	100000
Total Fixed Overheads (B)	7200000	7200000	7200000	7200000
Total Admin & Selling Costs(A+B)	7950000	8025000	8107500	8197500

g.) Annual Income Statement

Particulars	Amount($)
Sales (Add all quarters)	150800000
Less:- Direct Material	50700000
Direct Labor	252000
Manufacturing Overhead	43345000
Selling & Admin Overhead	32280000
Pretax Income	24223000

Taxes = 40% of 24223000 = 9689200

Net Income after Tax = 24223000-9689200 = $14533800