You have just been hired as a new management trainee by Terre Inc., a manufactur
ID: 2566138 • Letter: Y
Question
You have just been hired as a new management trainee by Terre Inc., a manufacturer of potato chips. In the past, the company did very little in the way of budgeting and at certain times of the year experienced a shortage of cash.
Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming quarter to show management the benefits that can be gained from an integrated budgeting program. To this end, you worked with accounting and other areas to gather the information assembled below.
The company sells a single type of potato chip with a budgeted selling price of $5 per packet. Actual and budgeted sales of potato chip are provided as below (in units):
2017
38,000
From their experience, 30% of the sales are on cash with 10% discount. The remainder are on account. Collections for sales on account follow a stable pattern: 75% of a month's credit sales are collected in the month of sale, and 20% are collected in the month following sale, and the remaining 5% are uncollectible.
Due to the unstable sales, the company has been experienced the shortage of inventory. Hence, you plan to suggest a new inventory policy; the ending inventory for each month should be equal to 30% of the next month's sales in units. This requirement had been met at the end of June.
Each packet of potato chip requires 500g of potato. The company has a policy of maintaining the raw material at the end of each month equal to 20% of the next month's production needs. This requirement had been met at the end of June. Potatoes cost $1.2 per kg. 70% of a month’s purchases is paid for in the month of purchase; the remaining is paid in the following month. At the end of June, the accounts payable balance is $6,400.
Each packet of potato chip requires 0.1 direct labor-hours. Due to the recent increase in minimum wage, factory workers are paid $14 per direct labor-hour.
Terre bases its manufacturing overhead budget on budgeted direct labor-hours. The variable overhead rate is $5 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $40,000 per month. Fixed manufacturing overhead includes depreciation on factory equipment, which is $27,000 per month.
At Terre, the selling and administrative (SG&A) expense budget is divided into variable and fixed components. The variable SG&A expense is $0.8 per unit sold. The budgeted fixed selling and administrative expense is $30,000 per month. This expense includes depreciation on office equipment, which is $10,000 per month.
Due to the recent customer claims on the packaging defects, Terre Inc. has decided to purchase a new packing equipment in August 2017. The new equipment costs $30,000 and will be paid in cash. Terre has declared a cash dividend of $0.50 per share, which will be paid on July 31, 2017. The company has 100,000 common shares outstanding. To finance potential cash deficit, Terre Inc. plans to borrow a $40,000 loan from a local bank in the beginning of July 2017 and repay the loan plus accumulated interest at the end of September 2017. The annual interest rate on the loan is 12% (i.e., 1% per month). At the end of June, the cash balance is $30,000.
Required:
2. Prepare the schedule of expected cash collections from sales, the schedule of expected cash disbursements for materials, manufacturing overhead, and SG&A expenses by each month and in total for the 3rd quarter of 2017.
May (Actual) 30,000 June (Actual) 33,000 July (Budgeted) 38,000 August (Budgeted) 42,000 September (Budgeted) 50,000 October (Budgeted) 40,000 November (Budgeted)38,000
Explanation / Answer
Solution:
Part 1 --- Schedule of Expected Cash Collection
Schedule of Expected Cash Collections
Total Credit Sales
(Refer Note 1)
July
August
September
Quarter
Sales on account:
June
$115,500
$23,100
(115,500*20%)
July
$133,000
$99,750
(133,000*75%)
$26,600
(133,000*20%)
August
$147,000
$110,250
(147,000*75%)
$29,400
(147,000*20%)
September
$175,000
$131,250
(175,000*75%)
Total Expected Cash Collection from Credit Sales
$122,850
$136,850
$160,650
$420,350
Net Cash from Cash Sales
$51,300
$56,700
$67,500
$458,750
Total Cash Collection
$174,150
$193,550
$228,150
$879,100
Note 1 --- Calculation of Cash and Credit Sales
Schedule of Expected Cash Collections
July
August
September
Total Budgeted Sales
$190,000
$210,000
$250,000
Cash Sales (30%)
$57,000
$63,000
$75,000
Less: Discount on Cash Sales 10%
$5,700
$6,300
$7,500
Net Expected Cash to be received from Cash Sales
$51,300
$56,700
$67,500
Sales on Credit (70%)
$133,000
$147,000
$175,000
Part 2 --- Schedule of expected cash disbursements for materials
Schedule of Expected Cash Disbursements for Purchases of Materials
Cash Disbursements
Total Budgeted Purchases
July
August
September
3rd Quarter
June Accounts Payable (given)
$6,400
July Purchases
$24,144
$16,901
(24144*70%)
$7,243
(24144*30%)
August Purchases
$26,952
$18,866
(26952*70%)
$8,086
(26952*30%)
September Purchases
$27,288
$19,102
(27288*70%)
Total cash disbursements for materials
$78,384
$23,301
$26,110
$27,187
$76,598
Note 2 --- Budgeted Cost of Raw material purchases
Budgeted Cost of Raw Material Purchases
June
July
August
September
October
November
Budgeted Sales Units
33000
38000
42000
50000
40000
38000
Add: Desired Ending Inventory (30% of next months sale)
11400
12600
15000
12000
11400
Total Needs
44400
50600
57000
62000
51400
Less: Beginning Inventory (Ending Inventory of last month)
9900
11400
12600
15000
12000
Budgeted Production Units
34,500
39,200
44,400
47,000
39,400
Per Unit Raw material required (in kg)
0.5
0.5
0.5
0.5
0.5
Total Raw material needs for production
17,250
19,600
22,200
23,500
19,700
Add: Budgeted ending direct material Inventory (20% of next month production need)
3,920
4,440
4,700
3,940
Total Direct material needed
21,170
24,040
26,900
27,440
Less: Beginning Direct material Inventory
3,450
3,920
4,440
4,700
Budgeted Direct material required purchases units
17,720
20,120
22,460
22,740
Cost per kg
$1.2
$1.2
$1.2
$1.2
Budgeted Cost of Raw Material Purchases
$21,264
$24,144
$26,952
$27,288
Part 3 --- Schedule of expected cash disbursements for manufacturing overhead
Cash Disbursement for Manufacturing Overheads
July
August
September
Budgeted Production Unit (Refer Note 2)
39,200
44,400
47,000
Required Labor Hours Per Unit
0.10
0.10
0.10
Total Required Labor Hours
3920
4440
4700
Variable Overhead Rate per labor hour
$5
$5
$5
Total Variable Overhead Costs
$19,600
$22,200
$23,500
Plus: Fixed Manufacturing Overhead (excluding Depreciation)
$13,000
$13,000
$13,000
Cash Disbursement for Manufacturing Overheads
$32,600
$35,200
$36,500
$104,300
Part 4 --- Schedule of expected cash disbursements for SG&A expenses
Cash Disbursement for Selling and Administrative Expenses
July
August
September
Expected Sales Unit
38000
42000
50000
variable SG&A expense per unit sold
$0.8
$0.8
$0.8
Total varibale SG&A expense
$30,400
$33,600
$40,000
Plus: Fixed SG&A Expense(excluding Depreciation)
$20,000
$20,000
$20,000
Cash Disbursement for Selling and Administrative Expenses
$50,400
$53,600
$60,000
$164,000
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Schedule of Expected Cash Collections
Total Credit Sales
(Refer Note 1)
July
August
September
Quarter
Sales on account:
June
$115,500
$23,100
(115,500*20%)
July
$133,000
$99,750
(133,000*75%)
$26,600
(133,000*20%)
August
$147,000
$110,250
(147,000*75%)
$29,400
(147,000*20%)
September
$175,000
$131,250
(175,000*75%)
Total Expected Cash Collection from Credit Sales
$122,850
$136,850
$160,650
$420,350
Net Cash from Cash Sales
$51,300
$56,700
$67,500
$458,750
Total Cash Collection
$174,150
$193,550
$228,150
$879,100
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