Completing a comprehensive budgeting problem—manufacturing company The Arthur Ti
ID: 2427112 • Letter: C
Question
Completing a comprehensive budgeting problem—manufacturing company
The Arthur Tire Company manufactures racing tires for bicycles. Arthur sells tires for $55 each. Arthur is
planning for the next year by developing a master budget by quarters. Arthur’s balance sheet for December
31, 2014, follows:
ARTHUR TIRE COMPANY
Balance Sheet December 31, 2014
Assets
Current Assets:
Cash $ 22,000
Accounts Receivable 22,000
Raw Materials Inventory 3,200
Finished Goods Inventory 7,250
Total Current Assets $ 54,450
Property, Plant, and Equipment:
Equipment 175,000
Less: Accumulated Depreciation (55,000)120,000
Total Assets $ 174,450
Liabilities
Current Liabilities:
Accounts Payable $ 7,500
Stockholders' Equity
Common Stock $ 135,000
Retained Earnings 31,950
Total Stockholders' Equity 166,950
Total Liabilities and Stockholders' Equity $ 174,450
Other data for Arthur Tire Company:
a. Budgeted sales are 800 tires for the first quarter and expected to increase by 100 tires per quarter. Cash
sales are expected to be 30% of total sales, with the remaining 70% sales on account.
b. Finished Goods Inventory on December 31 consists of 250 tires at $29 each.
c. Desired ending Finished Goods Inventory is 30% of the next quarter’s sales; first quarter sales for 2016
are expected be 1,200 tires; FIFO inventory costing method is used.
d. Direct materials cost is $16 per tire.
e. Desired ending Raw Materials Inventory is 20% of the next quarter’s direct materials needed for
production; desired ending inventory for December 31 is $3,000; indirect materials are insignificant and not
considered for budgeting purposes.
f. Each tire requires 0.20 hours of direct labor; direct labor costs average $20 per hour.
g. Variable manufacturing overhead is $2 per tire.
h. Fixed manufacturing overhead includes $3,000 per quarter in depreciation and $4,820 per quarter for
other costs, such as utilities, insurance, and property taxes.
i. Fixed selling and administrative expenses include $10,000 per quarter for salaries; $1,800 per quarter for
rent; $500 per quarter for insurance; and $600 per quarter for depreciation.
j. Variable selling and administrative expenses include supplies at 1% of sales.
k. Capital expenditures include $30,000 for new manufacturing equipment, to be purchased and paid in the
first quarter.
l. Cash receipts for sales on account are 50% in the quarter of the sale and 50% in the quarter following the
sale; December 31, 2014, Accounts Receivable is received in the first quarter of 2015; uncollectible
accounts are considered insignificant and not considered for budgeting purposes.
m. Direct materials purchases are paid 75% in the quarter purchased and 25% in the following quarter;
December 31, 2014, Accounts Payable is paid in the first quarter of 2015.
n. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter
incurred.
o. Income tax expense is projected at $2,000 per quarter and is paid in the quarter incurred.
p. Arthur desires to maintain a minimum cash balance of $30,000 and borrows from the local bank as
needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the
beginning of the quarter when excess funds are available and in increments of $1,000; interest is 12% per
year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.
Requirements
1. Prepare Arthur’s operating budget and cash budget for 2015, by quarter. Required schedules and
budgets include: sales budget, production budget, direct materials budget, direct labor budget,
manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget,
cash receipts, cash payments, and cash budget. Manufacturing overhead costs are allocated based on
direct labor hours.
2. Prepare Arthur’s annual financial budget for 2015, including budgeted income statement, budgeted
balance sheet, and budgeted statement of cash flows.
Explanation / Answer
Sales Budget 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total For the year. Units 800 900 1000 1100 3800 Sales 44000 49500 55000 60500 209000 Credit sales 30800 34650 38500 42350 146300 Cash Sales 13200 14850 16500 18150 62700 Production Budget in Units Summary Op.Stock 250 270 300 330 250 Production 820 930 1030 1130 3910 Sales 800 900 1000 1100 3800 1200 Ending Inventory 270 300 330 360 360 Production 820 930 1030 1130 3910 (in Units) Direct Materials Cost Budget Summary Op.Stock 3200 2976 3296 3616 3200 Purchases 12896 15200 16800 17464 62360 Issued to Prodn. 13120 14880 16480 18080 62560 Ending Inventory 2976 3296 3616 3000 3000 Direct Material Purchases 12896 15200 16800 17464 62360 Direct labour Budget Total For the year. Production 820 930 1030 1130 3910 (in Units) Lab. Hrs. reqd.@ 0.20hrs./Tyre 164 186 206 226 782 Lab. Cost @ $ 20/Hr. 3280 3720 4120 4520 15640 Manufacturing overhead budget Production 820 930 1030 1130 3910 (in Units) VMOH @ $2/Tyre 1640 1860 2060 2260 7820 FMOH Depreciation 3000 3000 3000 3000 12000 Other Costs 4820 4820 4820 4820 19280 7820 7820 7820 7820 31280 Total MOH 9460 9680 9880 10080 39100 Allocated MOH@ D/L for the qtr. 8200 9300 10300 11300 39100 Selling & Administration Budget Fixed S&A 1 2 3 4 Total Salaries 10000 10000 10000 10000 40000 Rent 1800 1800 1800 1800 7200 Insurance 500 500 500 500 2000 Depreciation 600 600 600 600 2400 12900 12900 12900 12900 51600 Variable S&A 440 495 550 605 2090 TOTAL S&A 13340 13395 13450 13505 53690 Cost Of Goods Sold Budget Opening Stock of Finished Goods Inventory 7250 Raw Materials issued to production 62560 Direct Labour 15640 MOH 39100 117300 Cost of Goods Manufactured(4160Tyres) 124550 Less: Ending Finished goods Inventory360 Tyres-(117300)/3910*360 10800 Cost of Goods available for sale 113750 Selling &Administration expenses 53690 Cost Of Goods Sold 167440 Cash Receipts Budget 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total For the year. Cash Sales 13200 14850 16500 18150 62700 Credit Sales of: 0 Last Year 22000 22000 1st Qtr. 15400 15400 30800 2nd Qtr. 17325 17325 34650 3rd Qtr. 19250 19250 38500 4th Qtr. 21175 21175 21175 Total Collections 37400 32725 36575 40425 147125 Cash Payments Budget 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total For the year. Credit purchases of: Last Year 7500 7500 1st Qtr. 9672 3224 12896 2nd Qtr. 11400 3800 15200 3rd Qtr. 12600 4200 16800 4th Qtr. 13098 13098 Total Payments for raw materials 17172 14624 16400 17298 65494 Lab. Cost @ $ 20/Hr. 3280 3720 4120 4520 15640 VMOH @ $2/Tyre 1640 1860 2060 2260 7820 OtherFixed MOH 4820 4820 4820 4820 19280 S&A Exp. 12740 12795 12850 12905 51290 Capital expre. 30000 30000 Income Tax 2000 2000 2000 2000 8000 Total cash disbursements 88824 54443 58650 61101 263018 Cash Budget Balance Sheet &Inc.stat.items Opening Balance 22000 30576 30058 30493 22000 Collections 37400 32725 36575 40425 147125 Cash available 59400 63301 66633 70918 169125 Cash disbursements 88824 54443 58650 61101 263018 Excess of collecions over disburse ments -29424 8858 7983 9817 -93893 Int.on Borrowings 0 1800 2490 3240 7530 7530 Borrowings from bank - in '000s 60000 23000 25000 24000 132000 132000 Cl.Cash balance 30576 30058 30493 30577 30577 30577 Income Statement Sales 209000 Less: COGS 167440 Gross Profit 41560 Less: Interest on Bank Borrowings 7530 Income tax 8000 15530 Net Income 26030
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.