Creative Shirts, Inc. CreativeShirts Inc. produces T-shirts. The company\'s fisc

Question

Creative Shirts, Inc. CreativeShirts Inc. produces T-shirts. The company's fiscal year ends on December 31. Information to be used for the operating budget this coming year follows. Sales and Production-Related Budget Information • Average sales price for each T-shirt is estimated to be $15. Un it sales for this coming year, ending December 31, are expected to be as follows: First quarter: 20,000 Second quarter: 24,000 Third quarter: 28,000 Fourth quarter: 18,000 • Finished goods inventory is maintained at a level equal to 10 percent of the next quarter 's sales. Finished goods inventory at the end of the fourth quarter budget period is estimated to be 2,000 unit • Each unit of product requires 3 yards of direct materials, at a cost of 2 per yard. Management prefers to maintain ending raw materials inventory equal to 20 percent of next quarter's materials needed in production. Raw materials inventory at the end of the fourth quarter budget period is estimated to be 12,200 yards. • Each unit of product requires 0.1 direct labor h ours at a cost of $14 per hour. • Variable manufacturing overhead costs are: Indirect materials: $0.70 per unit Indirect labor: $0.90 per unit Other: $0.50 per unit • Fixed manufacturing overhead costs per quarter are: Salaries: $18,000 Other: $20,000 Depreciation: $11,950 Selling and Administrative Budget Information • Management estimates all selling and administrative costs are fixed. • Quarterly selling and administrative cost estimates for the coming year are: Salaries: $15,000 Rent: $5,000 Advertising: $4,000 Depreciation: $9,000 Other: $10,000 Capital Expenditures and Cash Budget Information • The company plans to pay cash for selling and administrative equipment totaling $15,000 and production equipment totaling $9,000. Both will be purchased at the end of the fourth quarter, and will not affect depreciation expense for the coming year. • All sales are made on credit. The company expects to collect 70 percent of sales in the quarter of sale and 30 percent the quarter following the sale. Accounts receivable at the end of last year totaled $80,000, all of which will be collected during the first quarter of this coming year. • All direct materials purchases are on credit. The company expects to pay 80 percent of purchases in the quarter of purchase and 20 percent the following quart e r. Accounts payable at the end of last year totaled $25,000, all of which will be paid during the first quarter of this coming year. • The cash balance at the beginning of this coming year is expected to be $30,000. Budgeted Balance Sheet Information • Assume 30 percent of fourth quarter budgeted sales will be collected in full the following year (this represents accounts receivable at the end of the fourth quarter). • Expected account balances at the end of the fourth quarter are: Property, plant, and equipment (net): $100,000 Common stock: $250,000 • Actual retained earnings at the end of last year totaled $42,720, and no cash dividends will be paid during the current budget period ending December 31. Required: a. Prepare the quarterly sales and production-related budgets using the exhibit formats referenced below. • Sales budget • Production budget • Direct materials purchases budget • Direct labor budget • Manufacturing overhead budget b. Prepare a quarterly selling and administrative budget. c. Prepare a quarterly budgeted income statement. d. Prepare a quarterly capital expenditures budget. e. Prepare a quarterly cash budget. f. Prepare a budgeted balance sheet at December 31. g. Why does management at Creative Shirts Inc. prepare a master budget?

Explanation / Answer

Direct Material Budget sales budget units 20000 24000 28000 18000 sale price 15 15 15 15 revenue 300000 360000 420000 270000 production budget Q1 Q3 Q3 Q4 sale 20000 24000 28000 18000 less opening(10% of current sale) 2000 2400 2800 1800 add closing (10% of next quarter sale) 2400 2800 1800 2000 20400 24400 27000 18200 raw material budget f.g units (A) 20400 24400 27000 18200 Rm units /f.g units (B) 3 3 3 3 production(A*B) 61200 73200 81000 54600 add closing stock of Rm 14640 16200 10920 12200 less opening stock 12240 14640 16200 10920 total RM units required 63600 74760 75720 55880 cost/unit 2 2 2 2 raw material cost 127200 149520 151440 111760 labour cost q1 q2 q3 q4 no. of units of FG 20400 24400 27000 18200 labour hr/unit 0.1 0.1 0.1 0.1 labour hr required 2040 2440 2700 1820 labour rate 14 14 14 14 labour cost 28560 34160 37800 25480 manufacturing overhead units of f.g   (A) 20400 24400 27000 18200 VARIABLE      Indirect material cost / unit 0.7 0.7 0.7 0.7      indirect labour 0.9 0.9 0.9 0.9      other 0.5 0.5 0.5 0.5 total cost/unit   (B) 2.1 2.1 2.1 2.1 total variable cost (A*B)           C 42840 51240 56700 38220 FIXED COST salary 18000 18000 18000 18000 other 20000 20000 20000 20000 depriciation 11950 11950 11950 11950 total fixed manufact cost (D) 49950 49950 49950 49950 manufacturing overhead (C + D) 92790 101190 106650 88170

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