Optima Company is a high-technology organization that produces amass-storage system. The design of Optimaâs system is unique andrepresents a breakthrough in the
industry. The units Optima produces combine positive features ofboth compact and
hard disks. The company is completing its fifth year ofoperations and is preparing to
build its master budget for the coming year (2010). The budgetwill detail each quarterâs
activity and the activity for the year in total. The masterbudget will be based on the
following information:
a. Fourth-quarter sales for 2009 are 55,000 units.
b. Unit sales by quarter (for 2010) are projected asfollows:
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.Optima collects 85 percent of all sales within the quarter in whichthey are realized; the other 15 percent is
collected in the following quarter. There are no bad debts.
c. There is no beginning inventory of finished goods. Optima isplanning the following ending finished goods inventories for eachquarter:
First quarter 13,000 units
Second quarter 15,000 units
Third quarter 20,000 units
Fourth quarter 10,000 units
d. Each mass-storage unit uses five hours of direct labor andthree units of direct materials. Laborers are paid $10 per hour,and one unit of direct materials costs $80.
e. There are 65,700 units of direct materials in beginninginventory as of January 1,
2010. At the end of each quarter, Optima plans to have 30percent of the direct
materials needed for next quarterâs unit sales. Optima will endthe year with the
same level of direct materials found in this yearâs beginninginventory.
f. Optima buys direct materials on account. Half of thepurchases are paid for in the
quarter of acquisition, and the remaining half are paid for inthe following quarter.
Wages and salaries are paid on the 15th and 30th of eachmonth.
g. Fixed overhead totals $1 million each quarter. Of this total,$350,000 represents
depreciation. All other fixed expenses are paid for in cash inthe quarter incurred.
The fixed overhead rate is computed by dividing the yearâs totalfixed overhead by
the yearâs expected actual units produced.
h. Variable overhead is budgeted at $6 per direct labor hour.All variable overhead
expenses are paid for in the quarter incurred.
i. Fixed selling and administrative expenses total $250,000 perquarter, including
$50,000 depreciation.
j. Variable selling and administrative expenses are budgeted at$10 per unit sold. All
selling and administrative expenses are paid for in the quarterincurred.
k. The balance sheet as of December 31, 2009, is as follows:
Assets
Cash $ 250,000
Direct materials inventory 5,256,000
Accounts receivable 3,300,000
Plant and equipment 33,500,000
Total assets $42,306,000
Liabilities and Stockholdersâ Equity
Accounts payable $ 7,248,000*
Capital stock 27,000,000
Retained earnings 8,058,000
Total liabilities and stockholdersâ equity $42,306,000
*For purchase of direct materials only.
l. Optima will pay quarterly dividends of $300,000. At the endof the fourth quarter,
$2 million of equipment will be purchased.
Required:
Prepare a master budget for Optima Company for each quarter of2010 and for the year
in total. The following component budgets must be included:
-Direct labor budget
-Overhead budget
-Selling and administrative expenses budget
-Ending finished goods inventorybudget
-Cost of goods sold budget (Assume that there is no change inwork-in-process
inventories.)
-Cash budget
-Pro forma income statement (using absorption costing)
-Pro forma balance sheet
Optima Company is a high-technology organization that produces amass-storage system. The design of Optimaâs system is unique andrepresents a breakthrough in the
industry. The units Optima produces combine positive features ofboth compact and
hard disks. The company is completing its fifth year ofoperations and is preparing to
build its master budget for the coming year (2010). The budgetwill detail each quarterâs
activity and the activity for the year in total. The masterbudget will be based on the
following information:
a. Fourth-quarter sales for 2009 are 55,000 units.
b. Unit sales by quarter (for 2010) are projected asfollows:
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.Optima collects 85 percent of all sales within the quarter in whichthey are realized; the other 15 percent is
collected in the following quarter. There are no bad debts.
c. There is no beginning inventory of finished goods. Optima isplanning the following ending finished goods inventories for eachquarter:
First quarter 13,000 units
Second quarter 15,000 units
Third quarter 20,000 units
Fourth quarter 10,000 units
d. Each mass-storage unit uses five hours of direct labor andthree units of direct materials. Laborers are paid $10 per hour,and one unit of direct materials costs $80.
e. There are 65,700 units of direct materials in beginninginventory as of January 1,
2010. At the end of each quarter, Optima plans to have 30percent of the direct
materials needed for next quarterâs unit sales. Optima will endthe year with the
same level of direct materials found in this yearâs beginninginventory.
f. Optima buys direct materials on account. Half of thepurchases are paid for in the
quarter of acquisition, and the remaining half are paid for inthe following quarter.
Wages and salaries are paid on the 15th and 30th of eachmonth.
g. Fixed overhead totals $1 million each quarter. Of this total,$350,000 represents
depreciation. All other fixed expenses are paid for in cash inthe quarter incurred.
The fixed overhead rate is computed by dividing the yearâs totalfixed overhead by
the yearâs expected actual units produced.
h. Variable overhead is budgeted at $6 per direct labor hour.All variable overhead
expenses are paid for in the quarter incurred.
i. Fixed selling and administrative expenses total $250,000 perquarter, including
$50,000 depreciation.
j. Variable selling and administrative expenses are budgeted at$10 per unit sold. All
selling and administrative expenses are paid for in the quarterincurred.
k. The balance sheet as of December 31, 2009, is as follows:
Assets
Cash $ 250,000
Direct materials inventory 5,256,000
Accounts receivable 3,300,000
Plant and equipment 33,500,000
Total assets $42,306,000
Liabilities and Stockholdersâ Equity
Accounts payable $ 7,248,000*
Capital stock 27,000,000
Retained earnings 8,058,000
Total liabilities and stockholdersâ equity $42,306,000
*For purchase of direct materials only.
l. Optima will pay quarterly dividends of $300,000. At the endof the fourth quarter,
$2 million of equipment will be purchased.
Required:
Prepare a master budget for Optima Company for each quarter of2010 and for the year
in total. The following component budgets must be included:
-Direct labor budget
-Overhead budget
-Selling and administrative expenses budget
-Ending finished goods inventorybudget
-Cost of goods sold budget (Assume that there is no change inwork-in-process
inventories.)
-Cash budget
-Pro forma income statement (using absorption costing)
-Pro forma balance sheet
Related questions
Optima Company is a high-technology organisation that produces amass-storage system. The design of Optimaâs system is unique andrepresents a breakthrough in the industry. The units Optimaproduces combine positive features of both compact and hard disks.The company is completing its fifth year of operations and ispreparing to build its master budget for the coming year (2017).The budget will detail each quarterâs activity and the activity forthe year in total. The master budget will be based on the followinginformation:
a Fourth-quarter sales for 2016 are 65 000 units.
b Unit sales by quarter (for 2017) are projected as follows:
First quarter | 75 000 |
Second quarter | 80 000 |
Third quarter | 85 000 |
Fourth quarter | 95 000 |
The selling price is $500 per unit. All sales are credit sales.Optima collects 85% of all sales within the quarter in which theyare realised; the other 15% is collected in the following quarter.There are no bad debts.
c There is no beginning inventory of finished goods. Optima isplanning the following ending finished goods inventories for eachquarter:
First quarter | 13 000 units |
Second quarter | 15 000 units |
Third quarter | 20 000 units |
Fourth quarter | 10 000 units |
d Each mass-storage unit uses five hours of direct labour andthree units of direct materials. Workers are paid $25 per hour, andone unit of direct materials costs $80.
e There are 65 700 units of direct materials in beginninginventory as at 1 January 2017. At the end of each quarter, Optimaplans to have 30% of the direct materials needed for next quarterâsunit sales. Optima will end the year with the same amount of directmaterials found in this yearâs beginning inventory.
f Optima buys direct materials on account. Half of the purchasesare paid for in the quarter of acquisition and the remaining halfare paid for in the following quarter. Wages and salaries are paidon the 15th and 30th of each month.
g Fixed overhead totals $1 million each quarter. Of this total,$350 000 represents depreciation. All other fixed expenses are paidfor in cash in the quarter incurred. The fixed overhead rate iscomputed by dividing the yearâs total fixed overhead by the yearâsbudgeted production in units.
h Variable overhead is budgeted at $6 per direct labour hour.All variable overhead expenses are paid for in the quarterincurred.
i Fixed selling and administrative expenses total $250 000 perquarter, including $50 000 depreciation.
j Variable selling and administrative expenses are budgeted at$10 per unit sold. All selling and
administrative expenses are paid for in the quarterincurred.
k The balance sheet as at 31 December 2017 is as follows:
ASSETS | |
Cash | $ 250 000 |
Direct materials inventory | 5 256 000 |
Accounts receivable | 3 300 000 |
Plant and equipment, net | 33 500 000 |
Total assets | $42 306 000 |
LIABILITIES AND SHAREHOLDERSâ EQUITY | |
Accounts payable | $ 7248000* |
Capital share | 27 000 000 |
Retained earnings | 8 058 000 |
Total liabilities and shareholdersâ equity | $42 306 000 |
* For purchase of direct materials only.
l Optima will pay quarterly dividends of $300 000. At the end ofthe fourth quarter, $2 million of equipment will be purchased.
REQUIRED:
Prepare a master budget for Optima Company for each quarter of2017 and for the year in total. The following component budgetsmust be included:
1 Sales budget
2 Production budget
3 Direct materials purchases budget
4 Direct labour budget
5 Overhead budget
6 Selling and administrative expenses budget
7 Ending finished goods inventory budget
8 Cost of goods sold budget (Note: Assume that there is nochange in work in process inventories.)
9 Cash budget
10 Pro forma income statement (using absorption costing) (Note:Ignore income taxes.)
11 Pro forma balance sheet (Note: Ignore income taxes.)
Required information
[The following information applies to the questionsdisplayed below.]
Endless Mountain Company manufactures a single product that ispopular with outdoor recreation enthusiasts. The company sells itsproduct to retailers throughout the northeastern quadrant of theUnited States. It is in the process of creating a master budget for2017 and reports a balance sheet at December 31, 2016 asfollows:
| Endless Mountain Company | ||||||
| Balance Sheet | ||||||
| December 31, 2016 | ||||||
| Assets | ||||||
| Current assets: | ||||||
| Cash | $ | 46,200 | ||||
| Accounts receivable (net) | 260,000 | |||||
| Raw materials inventory (4,500yards) | 11,250 | |||||
| Finished goods inventory (1,500units) | 32,250 | |||||
| Total current assets | $ | 349,700 | ||||
| Plant and equipment: | ||||||
| Buildings and equipment | 900,000 | |||||
| Accumulated depreciation | (292,000 | ) | ||||
| Plant and equipment, net | 608,000 | |||||
| Total assets | $ | 957,700 | ||||
| Liabilities and Stockholdersâ Equity | ||||||
| Currentliabilities: | ||||||
| Accounts payable | $ | 158,000 | ||||
| Stockholdersâ equity: | ||||||
| Common stock | $ | 419,800 | ||||
| Retained earnings | 379,900 | |||||
| Total stockholdersâ equity | 799,700 | |||||
| Total liabilities andstockholdersâ equity | $ | 957,700 | ||||
The companyâs chief financial officer (CFO), in consultationwith various managers across the organization has developed thefollowing set of assumptions to help create the 2017 budget:
The budgeted unit sales are 12,000 units, 37,000 units, 15,000units, and 25,000 units for quarters 1-4, respectively. Notice thatthe company experiences peak sales in the second and fourthquarters. The budgeted selling price for the year is $32 per unit.The budgeted unit sales for the first quarter of 2018 is 13,000units.
All sales are on credit. Uncollectible accounts are negligibleand can be ignored. Seventy-five percent of all credit sales arecollected in the quarter of the sale and 25% are collected in thesubsequent quarter.
Each quarterâs ending finished goods inventory should equal 15%of the next quarterâs unit sales.
Each unit of finished goods requires 3.5 yards of raw materialthat costs $3.00 per yard. Each quarterâs ending raw materialsinventory should equal 10% of the next quarterâs production needs.The estimated ending raw materials inventory on December 31, 2017is 5,000 yards.
Seventy percent of each quarterâs purchases are paid for in thequarter of purchase. The remaining 30% of each quarterâs purchasesare paid in the following quarter.
Direct laborers are paid $18 an hour and each unit of finishedgoods requires 0.25 direct labor-hours to complete. All directlabor costs are paid in the quarter incurred.
The budgeted variable manufacturing overhead per directlabor-hour is $3.00. The quarterly fixed manufacturing overhead is$150,000 including $20,000 of depreciation on equipment. The numberof direct labor-hours is used as the allocation base for thebudgeted plantwide overhead rate. All overhead costs (excludingdepreciation) are paid in the quarter incurred.
The budgeted variable selling and administrative expense is$1.25 per unit sold. The fixed selling and administrative expensesper quarter include advertising ($25,000), executive salaries($64,000), insurance ($12,000), property tax ($8,000), anddepreciation expense ($8,000). All selling and administrativeexpenses (excluding depreciation) are paid in the quarterincurred.
The company plans to maintain a minimum cash balance at the endof each quarter of $30,000. Assume that any borrowings take placeon the first day of the quarter. To the extent possible, thecompany will repay principal and interest on any borrowings on thelast day of the fourth quarter. The companyâs lender imposes asimple interest rate of 3% per quarter on any borrowings.
Dividends of $15,000 will be declared and paid in eachquarter.
The company uses a last-in, first-out (LIFO) inventory flowassumption. This means that the most recently purchased rawmaterials are the âfirst-outâ to production and the most recentlycompleted finished goods are the âfirst-outâ to customers.
Required:
The companyâs CFO has asked you to prepare the 2017 masterbudget. To fulfill this request, prepare the following budgetschedules and financial statements.
1. Income statement for the year ended December 31, 2017.
2. Balance sheet at December 31, 2017.
Tell me what information you need, first.
