Cutting Edge Technology is a high-technology organization that produces a mass s
ID: 2599777 • Letter: C
Question
Cutting Edge Technology is a high-technology organization that produces a mass storage system. The design of Cutting Edge’s system is unique and represents a breakthrough in the industry. The units Cutting Edge produces combine positive features of both wireless internet and hard drives. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (2018). The budget will detail each quarter’s activity and the activity for the year in total. The master budget will be based on the following information.
Fourth quarter sales for 2017 are 55,000 units
Unit sales by quarter for 2018 are projected as follows:
First quarter 65,000
Second quarter 70,000
Third quarter 75,000
Fourth quarter 90,000
The selling price is $400 per unit. All sales are credit sales. Cutting Edge collects 85 percent of all sales within the quarter in which they are realized; the other 15 percent are collected in the following quarter. There are no bad debts.
There is no beginning inventory of finished goods. Cutting Edge is planning the following ending finished goods inventories (in units) for each quarter:
First quarter 13,000
Second quarter 15,000
Third quarter 20,000
Fourth quarter 10,000
Each mass storage unit uses five hours of direct labor and three units of direct materials. Laborers are paid $10 per hour, and one unit of direct materials costs $80.
There are 65,700 units of direct materials in beginning inventory as of January 1, 2018. at the end of each quarter, Cutting Edge plans to have 30 percent of the direct materials needed for next quarter’s unit sales. Cutting Edge will end the year with the same level of direct materials found in this year’s beginning inventory.
Cutting Edge buys direct materials on account. Half of the purchases are paid for in the quarter. Wages and salaries are paid on the 15th and 30th of each month.
Fixed overhead totals $1 million each quarter. Of this total, $350,000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year’s total fixed overhead by the year’s expected actual units produced.
Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred.
Fixed selling and administrative expenses total $250,000 per quarter, including $50,000 depreciation.
Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.
Cutting Edge will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2,000,000 of equipment will be purchased.
Management has set a policy requiring a minimum cash balance of $5,000. An open line of credit is available at a local bank for any borrowing that may be needed during the quarter. All borrowing is done at the beginning of the quarter and all repayments are made at the end of the quarter. Borrowings and repayments must be in multiples of $1,000. Interest is due and paid at the end of each quarter. Cutting Edge makes principle payments when the cash balance exceeds the minimum by at least $1,000. The annual interest rate is 12%.
Required:
Prepare the following budgets:
Sales Budget for 2018
Production in Units Budget
Direct Materials Purchase Budget in Dollars
Direct Labor Budget in Dollars
Manufacturing Overhead Budget
Selling and Administrative Budget
Ending Finished Goods Budget
Cost of Goods Budget
Cash Budget
Explanation / Answer
Solution:
Part 1 – Sales Budget
Sales Budget
Quarter
1
2
3
4
Year
Expected Sales units
65,000
70,000
75,000
90,000
300,000
Budgeted Unit Selling Price
$400
$400
$400
$400
$400
Budgeted Sales in dollars
$26,000,000
$28,000,000
$30,000,000
$36,000,000
$120,000,000
Part 2 – Production in units Budget
Production Budget in Units
Quarter
1
2
3
4
Year
Sales in units
65000
70000
75000
90000
Plus: Desired Finished Goods Ending Inventory
13000
15000
20000
10000
Total Needs
78000
85000
95000
100000
Less Beginning Finished Goods Inventory
0
13000
15000
20000
Units to be produced
78000
72000
80000
80000
310000
Part 3 – Direct Materials purchases budget in dollars
Direct Materials purchases budget in dollars
Quarter
1
2
3
4
Year
Budgeted Production Units (Refer part 2)
78000
72000
80000
80000
Raw material units needed per unit of finished goods
3
3
3
3
Total Raw material needs for production
234000
216000
240000
240000
Add: Ending raw materials inventory (30% of next month production need)
64800
72000
72000
65700
Total Direct material needed
298800
288000
312000
305700
Less: Beginning Direct material Inventory
65700
64800
72000
72000
Budgeted Direct material required purchases units
233100
223200
240000
233700
Cost per unit
$80
$80
$80
$80
Budgeted Purchases Cost
$18,648,000
$17,856,000
$19,200,000
$18,696,000
$74,400,000
Part 4 -- Direct Labor Budget in Dollars
Direct Labor Budget
Quarter
1
2
3
4
Year
Budgeted Production Units (Refer part 2)
78000
72000
80000
80000
Per Unit Direct Labor Hours required
5
5
5
5
Total Required Direct Labor Hours for production units
390000
360000
400000
400000
Direct Labor Rate per hour
$10
$10
$10
$10
Budgeted Direct Labor Cost
$3,900,000
$3,600,000
$4,000,000
$4,000,000
$15,500,000
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question. Please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Pls ask separate question for remaining parts..
Sales Budget
Quarter
1
2
3
4
Year
Expected Sales units
65,000
70,000
75,000
90,000
300,000
Budgeted Unit Selling Price
$400
$400
$400
$400
$400
Budgeted Sales in dollars
$26,000,000
$28,000,000
$30,000,000
$36,000,000
$120,000,000
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