Integration Exercise 9 Master Budgeting. LO 8-2, LO 8-3, LO 8-4, LO 8-5, LO 8-6,

Question

Integration Exercise 9 Master Budgeting. LO 8-2, LO 8-3, LO 8-4, LO 8-5, LO 8-6, LO 8-7, LO8-9, LO 8-10

Endless Mountain Company manufactures a single product that is popular with recreation enthusiasts. The company sells its product to retailers throughout the quadrant of the United States. It is in the process of creating a master budget for reports a balance sheet as December 31, 2016 as follows:

Endless Mountain Company

The company's chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2017 budget:

1. The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units and 25,000 units for quarters 1-4, respectively. Notice that the company experiences peak sales in the second and fourth quarters. The budgeted selling price for the year is $32 per unit. The budgeted unit sales for the first quarter of 2018 in 13,000 units.

2. All sales are on credit. Uncollectible accounts are negligible and can be ignored. Seventy-five percent of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter.

3. Each quarter's ending finished goods inventory should equal 15% of the next quarter's unit sales.

4. Each unit of finished goods requires 3.5 yards of raw material that costs $3.00 per yard. Each quarter's ending raw materials inventory should equal 10% of the next quarter's production needs. The estimated ending raw materials inventory on Decmeber 31, 2017, is 5,000 yards.

5. Seventy percent of each quarter's purchases are paid for in the quarter of purchase. The remaining 30% of each quarter's purchases are paid in the following quarter.

6. Direct laboreres are paid $18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete. All direct labor costs are paid in the quarter incurred.

7. The budgeted variable manufacturing overhead per direct labor-hour is $3.00. The quarterly fixed manufacturing overhad is $150,000 including $20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred.

8. The budgeted variable selling and administrative expense is $1.25 per unit sold. The fixed selling and administrative expenses per quarter include advertising ($25,000), executive salaries ($64,000), insurance ($12,000), property tax ($8,000), and depreciaition expense ($8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred.

9. The company plans to maintain a minimum cash balance at the end of each quarter of $30,000. Assume that any borrowings take place on the first day of the quarter. To the extent possible, the company will repay principal and interest on any borrowings on the last day of the fourth quarter. The company's lender imposes a simple interest rate of 3% per quarter on any borrowings.

10. Dividends of $15,000 will be declared and paid in each quarter.

11. The company uses a last-in, first-out (LIFO) inventry flow assumption. This means that the most recenly purchased raw materials are the "first-out" to production and the most recently completed finished goods are "first-out" to customers.

Required:

1. Quarterly sales budget including a schedule of expected cash collections.

2. Quarterly production budget.

3. Quarterly direct materials budget including a schedule of expected cash disbursements for purchases of materials.

4. Quarterly direct labor budget.

5. Quarterly manufacturing overhead budget.

6. Ending finished goods inventory budget at December 31, 2017.

7. Quarterly selling and administrative expense budget.

8. Quarterly cash budget.

9. Income statement for the year ended December 31, 2017.

10. Balance sheet at December 31, 2017.  

Endless Mountain Company

Balance Sheet December 31, 2016 Assets Current Assets: Cash $46,200 Accounts receivable 260,000 Raw material inventory (4,500 yds) 11,250 Finished goods inventory (1,500 units) 32,250 Total current assets $349,700 Plant and equipment: Buildings and equipment 900,000 Accumulated deprectiation (292,000) Plant and equipment, net 608,000 Total assets 957,700 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $158,000 Stockholders' equity Common stock $419,800 Retained earnings 379,900 Total stockholders' equity 799,700 Total liabilities and stockholders equity 957,700

Explanation / Answer

1a. Quarterly Sales budget Q1 Q2 Q3 Q4 Next Year Q1 Full Year Budgeted Units 12000 37000 15000 25000 13000 89000 Per Unit Price 32 32 32 32 32 32 Quarterly Sales budget 384000 1184000 480000 800000 416000 2848000 1b. Expected Cash Collection' Q1 Q2 Q3 Q4 Next Year Q1 Full Year Quarterly Sales budget 384000 1184000 480000 800000 416000 2848000 -Credit Sale 75% in same quarter 288000 888000 360000 600000 2136000 25% in next quarter 72000 222000 90000 384000 Opening Accounts Receivable 260000 260000 Total Cash Collection (A+B+C+D+E+F) 548000 960000 582000 690000 2780000 2. Production budget Q1 Q2 Q3 Q4 Next Year Q1 Full Year Budgeted Units 12000 37000 15000 25000 13000 Add: Ending Inventory 15% of subsequent month 5550 2250 3750 1950 Total Needs 17550 39250 18750 26950 Less: Beginning Inventory Closing of last month is beginging 1500 5550 2250 3750 Production Budget 16050 33700 16500 23200 3a. Direct Material Budget Q1 Q2 Q3 Q4 Next Year Q1 Full Year Production Budget 16050 33700 16500 23200 Direct Material needed for Production 3.5 yeards per unit of production 56175 117950 57750 81200 Add: Ending Inventory 10% of next Q prod needs 11795 5775 8120 5000 Total Needs 67970 123725 65870 86200 Less: Beginning Inventory 4500 11795 5775 8120 Direct Material Budget 63470 111930 60095 78080 Total Cost of Material of purchase Purchase Price-3 per yard 190410 335790 180285 234240 3b. Cash Disbursment Schedule Q1 Q2 Q3 Q4 Next Year Q1 Full Year Opening Accoutns Payable 158000 70% same quartr 133287 235053 126200 163968 30% next quarter 57123 100737 54086 Total Cash Disbursment 291287 292176 226937 218054 4. Direct Labor Hour budget Q1 Q2 Q3 Q4 Next Year Q1 Full Year Production Budget units 16050 33700 16500 23200 Labor Hours needed for Production 0.25 Labor hour per unit of production 4013 8425 4125 5800 Cost per Labor Hour 18 18 18 18 Total Direct Labor Cost 72225 151650 74250 104400

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