Question

Hawkins Engineering’s management wants to prepare budgets for one of its products, GalaxyRS, for July 2019. The firm sells the product for $800 per unit and has the following expected sales (in units) for these months in 2019:

April                       May                       June                      July                        August                  September

6,000                     4,000                     5,600                     6,500                     6,800                     7,800

Typically, cash sales for Hawkins represent 20% of sales while credit sales represent 80%. Hawkins bills customers on the first day of the month following the month of sale. Experience has shown that 85% of the company’s billings will be collected during the month of sale, 10% by the end of the month after the sale and 5% will ultimately be uncollectible.

The production process requires the following:

Standard Costs:

Galaxy-80                                                            4 lbs                       $1.25/lb

RS-360                                                                  2 lbs                       $5.00/lb

Direct labor                                                        

Skill level 1                                                        0.01 hours           $50/hour

Skill level 2                                                        0.10 hours           $20/hour

Variable manufacturing overhead is budgeted at $1,200 per batch (of 100 units) plus $80 per direct labor hour. In addition to variable overhead, the firm has a monthly fixed factory overhead of $60,000, of which $25,000 is depreciation expense. The firm pays all manufacturing labor and factory overhead when incurred.

The firm’s policy is to maintain an ending finished goods inventory each month equal to 10% of the following month’s budgeted sales, but in no case less than 500 units. All materials inventories are to be maintained at 5% of the production needs for the next month, but not to exceed 1,000 pounds. The firm expects all inventories at the end of June to be within the guidelines.

The purchase terms for materials are 3/10, n/30. Hawkings makes all payments within the discount period. Experience has shown that 80% of the purchases are paid in the month of the purchase and the remainder are paid in the month immediately following. In June 2019, the firm budgeted purchases of $30,000 for Galaxy-80 and $20,000 for RS-360.

Total budgeted marketing, distribution, customer service and administrative costs for 2019 are 1,850,000. Of this amount, $1,200,000 is considered fixed and includes depreciation expense of $150,000. The remainder varies with sales. The budgeted total sales for 2019 are $4 million. All marketing and administrative costs are paid in the month incurred.

Additional information follows:

                Cash balance                                                                      $40,000

Management desires to maintain an end-of-month minimum cash balance of $40,000. The firm has an agreement with a local bank to borrow its short-term needs in multiples of $1,000 up to $100,000 at an annual interest rate of 12%. Borrowings are assumed to occur at the end of the month. Bank borrowing at July 1 is $0.

Required:

On the basis of the preceding data and projections, prepare the following budgets:

1. Sales budget for July
2. Production budget for July
3. Production budget for August
4. Direct materials used budget for July (in units and dollars)

Answer 1

Sales Budget for July
	July
Budgeted Units	$                6,500
Price per unit	800
Total Budgeted Sales	$        5,200,000

Production Budget
	July	Aug
Sales in units	6500	6800
Add: Desired Ending inventory	680	780
Total Need	7180	7580
Less: Beginning Inventory	650	680
Units to be produced	6530	6900

Direct material Used	July
	Galaxy 80	RS 360
Units to be produced	6530	6530
Material per unit	4	2
Direct material Used (in units)	26120	13060
Price	1.25	5
Direct material Used (in dollar)	$         32,650	$        65,300

The above is direct material used budget. which is based on standard material requirement.

In cash Material purchase budget is needed, it is given below

	Galaxy 80	RS 360
Units to be produced	6530	6530
Material per unit	4	2
Material required for units to be produced	26120	13060
Add: Desired Ending Inventory	1000	680
Total Need	27120	13740
Less: Beginning Inventory	1000	560
Direct material purchased	26120	13180
Price	1.25	5
Material Purchased	32650	65900