Problem 20-4A Manufacturing: Preparation of a complete master budget LO P1, P2,

Question

Problem 20-4A Manufacturing: Preparation of a complete master budget LO P1, P2, P3

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The management of Zigby Manufacturing prepared the following estimated balance sheet for March, 2015:

To prepare a master budget for April, May, and June of 2015, management gathers the following information.

Sales for March total 20,500 units. Forecasted sales in units are as follows: April, 20,500; May, 19,500; June, 20,000; July, 20,500. Sales of 240,000 units are forecasted for the entire year. The product’s selling price is $23.85 per unit and its total product cost is $19.85 per unit.

Company policy calls for a given month’s ending raw materials inventory to equal 50% of the next month’s materials requirements. The March 31 raw materials inventory is 4,925 units, which complies with the policy. The expected June 30 ending raw materials inventory is 4,000 units. Raw materials cost $20 per unit. Each finished unit requires 0.50 units of raw materials.

Company policy calls for a given month’s ending finished goods inventory to equal 80% of the next month’s expected unit sales. The March 31 finished goods inventory is 16,400 units, which complies with the policy.

Each finished unit requires 0.50 hours of direct labor at a rate of $15 per hour.

Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is $2.70 per direct labor hour. Depreciation of $20,000 per month is treated as fixed factory overhead.

Sales representatives’ commissions are 8% of sales and are paid in the month of the sales. The sales manager’s monthly salary is $3,000.

Monthly general and administrative expenses include $12,000 administrative salaries and 0.9% monthly interest on the long-term note payable.

The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none is collected in the month of the sale).

All raw materials purchases are on credit, and no payables arise from any other transactions. One month’s raw materials purchases are fully paid in the next month.

The minimum ending cash balance for all months is $40,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.

No cash payments for income taxes are to be made during the second calendar quarter. Income tax will be assessed at 35% in the quarter and paid in the third calendar quarter.

The management of Zigby Manufacturing prepared the following estimated balance sheet for March, 2015:

Explanation / Answer

Sales Budget for the Quarter Months March April May June Number of units sold 20500 20500 19500 20000 selling price per unit ($) 23.85 23.85 23.85 23.85 sales revenue ($) 488925 488925 465075 477000 Cost of goods sold Budget Months March April May June Units sold 20500 20500 19500 20000 product cost per unit ($) 19.85 19.85 19.85 19.85 Cost of goods sold ($) 406925 406925 387075 397000 Production Budget Months March April May June July Number of units sold 20500 20500 19500 20000 20500 Add: Ending FG inventory 15600 16000 16400 Total FG goods required 36100 35500 36400 Less: beginning FG 16400 15600 16000 Units to be produced 19700 19900 20400 Raw Material Purchase Budget Months April May June Number of units to be produced 19700 19900 20400 units of raw material required 9850 9950 10200 Add: Ending raw material 4975 5100 4000 Total raw material required 14825 15050 14200 Less: Beginning raw material 4925 4975 5100 Purchase of raw material 9900 10075 9100 Price per unit ($) 20 20 20 Total purchase price ($) 198000 201500 182000 Direct labour Budget Months April May June Units to be produced 19700 19900 20400 Direct labour hour required per unit 0.5 0.5 0.5 Total labour hours required 9850 9950 10200 Rate per labour hour ($) 15 15 15 Direct labour cost ($) 147750 149250 153000 Overhead cost budget Months April May June Total labour hours required 9850 9950 10200 Variable overhead rate per hour 2.7 2.7 2.7 Total variable overhead cost($) 26595 26865 27540 Sales representative commissions Months April May June Sales($) 488925 465075 477000 Sales commissions @ 8% ($) 39114 37206 38160 Collection from sales Months April May June Total sales ($) 488925 465075 477000 Cash sales ($) 146678 139523 143100 Credit sales ($) 342247 325552 333900 Colection from credit sales ($) 342248 342247 325552 Total collection (cash + credit) 488926 481770 468652 Payment for merchandise Months April May June Purchase of materials ($) 198000 201500 182000 Payment for materials ($) 200500 198000 201500 Cash Budget April May June Beginning Cash balance 40000 83347 124296 Collection from sales 488926 481770 468652 Total cash available 528926 565117 592948 Cash Disbursements Payment for merchandise 200500 198000 201500 direct labour 147750 149250 153000 Variable overhead 26595 26865 27540 Sales commissions 39114 37206 38160 Salary to manager 3000 3000 3000 dividend 10000 Equipment Purchase 130000 Admin salary 12000 12000 12000 Interest on short term notes 120 Interest on notes payable 4500 4500 4500 Total disbursement 433579 440821 569700 Surplus/deffciency ($) 95347 124296 23248 Borrowing 0 0 0 Repayment of borrowing 12000 0 0 Closing cash balance 83347 124296 23248

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