Problem 8-24 Cash Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8]

Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter. The company usually has to borrow money during this quarter to support peak sales of lawn care equipment, which occur during May. The following information has been assembled to assist in preparing a cash budget for the quarter:

1. Budgeted monthly absorption costing income statements for April–July are:

*Includes $13,000 of depreciation each month.

2. Sales are 20% for cash and 80% on account.

3. Sales on account are collected over a three-month period with 10% collected in the month of sale; 80% collected in the first month following the month of sale; and the remaining 10% collected in the second month following the month of sale. February’s sales totaled $145,000, and March’s sales totaled $205,000.

4. Inventory purchases are paid for within 15 days. Therefore, 50% of a month’s inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $93,100.

5. Each month’s ending inventory must equal 20% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $71,400.

6. Dividends of $21,000 will be declared and paid in April.

7. Land costing $29,000 will be purchased for cash in May.

8. The cash balance at March 31 is $43,000; the company must maintain a cash balance of at least $40,000 at the end of each month.

9. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $200,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

2B.Prepare the following for merchandise inventory, a schedule of expected cash disbursements for merchandise purchases for April, May, and June, and for the quarter in total.

3.

Prepare a cash budget for April, May, and June as well as in total for the quarter. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Bakersfield Company makes and sells glare filters for microcomputer monitors. Steve Smith, the controller, is responsible for preparing Bakersfield’s master budget and assembled the following data for the upcoming year. The direct materials cost per unit was $18 in December of the current year. Labor saving machinery will be operational by March of the upcoming year. Also, as of March 1, the company plans to increase its direct labor rate. Direct labor for Bakersfield is considered variable because the company can call in its workers when needed and send them home when not needed. Bakersfield expects to have 5,600 filters in inventory on December 31 of the current year, and has a policy of carrying 35 percent of the following month’s projected sales in inventory. Information for the first four months of the upcoming year is as follows:

Requirements:

Prepare the following budgets for Bakersfield Company for each month in the first quarter (January through March) and for the entire first quarter of the upcoming year. Show supporting calculations.

Production budget

Direct labor cost budget

Direct materials usage budget in dollars

Sales revenue budget

Calculate the total budgeted contribution margin for Bakersfield by month (months of January through March) and in total for the first quarter of the upcoming year. Show supporting computations.

Exercise 2-11 Varying Plantwide Predetermined Overhead Rates [LO2-1, LO2-2, LO2-3]

Kingsport Containers Company makes a single product that is subject to wide seasonal variations in demand. The company uses a job-order costing system and computes plantwide predetermined overhead rates on a quarterly basis using the number of units to be produced as the allocation base. Its estimated costs, by quarter, for the coming year are given below:

Management finds the variation in quarterly unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead because it is the largest element of total manufacturing cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product.

Required:

1. Assuming the estimated variable manufacturing overhead cost per unit is $0.60, what must be the estimated total fixed manufacturing overhead cost per quarter?

2. Assuming the assumptions about cost behavior from the first three quarters hold constant, what is the estimated unit product cost for the fourth quarter?

3. What is causing the estimated unit product cost to fluctuate from one quarter to the next?

4. Assuming the company computes one predetermined overhead rate for the year rather than computing quarterly overhead rates, calculate the unit product cost for all units produced during the year.

The Xu Corporation uses a periodic inventory system. The company has a beginning inventory of 2,050 units at $23 each on January 1. Xu purchases 2,300 units at $22 each in February and 1,100 units at $24 each in March. There were no additional purchases or sales during the remainder of the year.

Xu sells 2,100 units during the quarter. If Xu uses the LIFO method, what is its cost of goods sold?

Roletter Company makes and sells artistic frames for pictures of​ weddings, graduations, and other special events. Ron Kyler​, the​ controller, is responsible for preparing Roletter​'s master budget and has accumulated the following information for 2018​: LOADING...​(Click the icon to view some of the financial​ information.)     LOADING...​(Click the icon to view additional​ information.) Read the requirements LOADING.... Requirement 1. Prepare a production budget and a direct manufacturing labor cost budget for Roletter Company by month and for the first quarter of 2018. You may combine both budgets in one schedule. The direct manufacturing labor cost budget should include​ labor-hours and show the details for each labor cost category. Start the schedule by preparing the production budget and calculating the total hours of direct manufacturing labor time needed for the three months in the​ quarter, then calculate the values for the quarter. Finish by preparing the bottom portion of the schedule for the direct manufacturing labor by​ month, then quarter. ​(Enter the direct manufacturing​ labor-hours per unit to one decimal​ place, X.X. Do not round interim​ calculations, and then enter all amounts in the budget​ [other than the direct manufacturing​ labor-hours per​ unit] to the nearest whole​ number.) Roletter Company Budget for Production and Direct Manufacturing Labor For the Quarter Ended March 31, 2018 January February March Budgeted sales (units) Add target ending finished goods inventory (units) Total requirements (units) Deduct beginning finished goods inventory (units) Units to be produced Direct manufacturing labor-hours per unit Total hours of direct manufacturing labor time needed Enter any number in the edit fields and then click Check Answer. 5 parts remaining Data Table 2018 January February March April May Estimated sales in units 12,000 13,000 9,000 10,000 10,000 Selling price $54.00 $52.50 $52.50 $52.50 $52.50 Direct manufacturing labor-hours per unit 2.0 2.0 1.5 1.5 1.5 Wage per direct manufacturing labor-hour $12.00 $12.00 $12.00 $14.00 $14.00 More Info In addition to​ wages, direct manufacturing​ labor-related costs include pension contributions of ​$0.60 per​ hour, worker's compensation insurance of ​$0.20 per​ hour, employee medical insurance of ​$0.40 per​ hour, and Social Security taxes. Assume that as of January​ 1, 2018​, the Social Security tax rates are​ 7.5% for employers and​ 7.5% for employees. The cost of employee benefits paid by Roletter on its direct manufacturing employees is treated as a direct manufacturing labor cost. Roletter has a labor contract that calls for a wage increase to $ 14 per hour on April​ 1, 2018. New​ labor-saving machinery has been installed and will be fully operational by March​ 1, 2018. Roletter expects to have 17 comma 500 frames on hand at December​ 31, 2017​, and it has a policy of carrying an​ end-of-month inventory of​ 100% of the following​ month's sales plus​ 50% of the second following​ month's sales.

FIFO Perpetual Inventory

The beginning inventory at Dunne Co. and data on purchases and sales for a three-month period ending June 30 are as follows:

Required:

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 3, using the first-in, first-out method. Under FIFO, if units are in inventory at two different costs, enter the units with the LOWER unit cost first in the Cost of Goods Sold Unit Cost column and in the Inventory Unit Cost column.

2. Determine the total sales and the total cost of goods sold for the period. Journalize the entries in the sales and cost of goods sold accounts. Assume that all sales were on account.

3. Determine the gross profit from sales for the period.
$

4. Determine the ending inventory cost as of June 30.
$

5. Based upon the preceding data, would you expect the ending inventory using the last-in, first-out method to be higher or lower?
Lower

Feedback

1. FIFO means that the first units purchased are assumed to be the first to be sold. Therefore, ending inventory is made up of the most recent purchases. Think of your inventory in terms of "layers." The first sale comes from the oldest layer, which is beginning inventory. When deciding which layer to use for costing of the next sale ask yourself: "Is the remaining amount of the beginning inventory layer enough to satisfy the second sale?" If not, the other units sold should be taken from the next purchase layer, which then contains the oldest costs. Continue this process for each transaction. If you have completed the problem correctly, the remaining units making up ending inventory should be costed at the May 25 unit purchase price.

2. Total sales are obtained by taking the number of units sold times their sale prices for all sales and adding these amounts together. The total cost of merchandise sold can be obtained by adding the FIFO costs in the perpetual inventory record.
When the perpetual inventory system is used, revenue is recorded each time a sale is made along with an entry to record the cost of the merchandise sold. For this problem, however, prepare one journal entry for the sale on account and one for the cost of merchandise sold.

3. Sales minus cost of merchandise sold equals gross profit.

4. The ending inventory is what is left after subtracting the cost of goods sold from the goods available for sale. Multiply the units remaining after the last sale by their corresponding most recent layer cost to determine the FIFO cost of the ending inventory.

5. Consider how prices were moving. Remember FIFO reports higher gross profit, net income, and ending inventory than the LIFO method when costs (prices) are increasing.

Learning Objective 2, Learning Objective 3.

Check My Work

Sales Budget
Summer Fun T-Shirt Shop has very seasonal sales. For 2014, management is trying to decide whether to establish a sales budget based on average sales or on sales estimated by quarter. The unit sales for 2014 are expected to be 10 percent higher than 2013 sales. Unit shirt sales by quarter for 2013 were as follows:

Children’s T-shirts sell for $13 each, women’s sell for $17, and men’s sell for $18.

Assuming a 10 percent increase in sales, prepare a sales budget for each quarter of 2014 using the following:

a. Average quarterly sales. (Hint: Winter quarter children’s shirts are 275 [1,000 X 1.10/4].)

b. Actual quarterly sales. (Hint: Winter quarter children’s shirts are 220 [200 X 1.10].)

c. Suggest advantages of each method.

Which one is not an advantage to preparing a sales budget using average quarterly sales.

Reduces the possibility of being out of stock in most quarters

Minimizes the investment in inventory during low-sales quarters

Smoothes the investment in inventory throughout the year

Simplifies the purchasing of inventory

Answer the following questions using TRUE, FALSE or UNCERTAIN. Make sure you provide a brief explanation for each of your answers. Your score will largely reflect the quality and relevance of your explanation.
(i) In the IS-LM model, equilibrium output is determined in the goods market, while equilibrium interest rate is determined in the bond market.
(ii) A $100 million increase in defense spending will have the same impact on equilibrium output as does a $100 million tax cut.

- Use the bathtub or water fall analogy to explain incidence and prevalence. Include factors that affect prevalence rising and falling

2. Under what conditions may nominal GDP be increasing while real GDP is falling at the same time?