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Congratulations! You have just been hired as controller for agrowing company that manufactures green products. It is October 1and time for creation of the budget for the next year. The budgetwill be created in quarters using each month as a period ofsales/production. Your first task is to create the budget for thefirst quarter of 2016. This involves completing budgets forJanuary, February, March and the first quarter in total for 2016.You seek out last year’s data, recent costing information andfollow up on important assumptions. The CFO wants to see the firstquarter budget before you complete the rest of the year, asadjustments may be needed. You will need to create the followingsub-budgets as part of the overall master budget.

1. Sales Budget for the 1st quarter

2. Production Budget for the 1st quarter

3. Materials Purchases Budget for the 1st quarter

4. Direct Labor Budget for the 1st quarter

5. Overhead Budget for the 1st quarter

6. Cash Receipts of Sales Revenue for the 1st quarter

7. Cash Payments for Material Purchases for the 1st quarter

8. Overall Cash Budget for the 1st quarter

9. Income Statement for the quarter ended March 31, 2016

10. Statement of Cash Flows for the quarter ended March 31,2016

Several assumptions are needed to work into your models forcomputation. These are determined as follows and have been approvedby the CFO. These are summarized on the following page.

January Unit Sales 21,000

February Unit Sales 22,000

March Unit Sales 23,000

April Unit Sales 24,000

May Unit Sales 20,000

Sales Price $10

Desired Ending Inventory for Finished Goods 20% of next month'sunit sales

Desired Ending Inventory for Material Units 10% of next month'smaterials needed for production

Cost of one lb.of materials (1 lb =1 material unit) $0.25

Units of Direct Materials to make one unit 4

Minutes of Direct Labor to make one unit 12

Direct Labor Costs per Hour $15

Overhead Costs percentage of Direct Labor 150%

Minimum cash balance (Assume you start with this) $10,000

Cash collections in month of sale 65%

Cash collections in first month after sale 25%

Cash collections in second month after sale 10%

Cash Payments in month of purchase 60%

Cash Payments in the first month after purchase 40%

Selling Costs per month (for cash budget) $10,000

Administrative Costs per month (for cash budget) $15,000

Annual Interest Rate for Letter of Credit 12%

Annual Interest Rate Earned on Excess Cash 4%

Sales Revenue for November $300,000

Sales Revenue for December $250,000

Material Purchases for November $35,000

Material Purchases for December $26,000

Depreciation Expense for the quarter (Operating Exp) $5,000

Income Tax Rate 25%

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Lelia Lubowitz
Lelia LubowitzLv2
28 Sep 2019

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Completing a comprehensive budgeting problem—manufacturingcompany

The Arthur Tire Company manufactures racing tires for bicycles.Arthur sells tires for $55 each. Arthur is

planning for the next year by developing a master budget byquarters. Arthur’s balance sheet for December

31, 2014, follows:

ARTHUR TIRE COMPANY

Balance Sheet December 31, 2014

Assets

Current Assets:

Cash $ 22,000

Accounts Receivable 22,000

Raw Materials Inventory 3,200

Finished Goods Inventory 7,250

Total Current Assets $ 54,450

Property, Plant, and Equipment:

Equipment 175,000

Less: Accumulated Depreciation (55,000)120,000

Total Assets $ 174,450

Liabilities

Current Liabilities:

Accounts Payable $ 7,500

Stockholders' Equity

Common Stock $ 135,000

Retained Earnings 31,950

Total Stockholders' Equity 166,950

Total Liabilities and Stockholders' Equity $ 174,450

Other data for Arthur Tire Company:

a. Budgeted sales are 800 tires for the first quarter andexpected to increase by 100 tires per quarter. Cash

sales are expected to be 30% of total sales, with the remaining70% sales on account.

b. Finished Goods Inventory on December 31 consists of 250 tiresat $29 each.

c. Desired ending Finished Goods Inventory is 30% of the nextquarter’s sales; first quarter sales for 2016

are expected be 1,200 tires; FIFO inventory costing method isused.

d. Direct materials cost is $16 per tire.

e. Desired ending Raw Materials Inventory is 20% of the nextquarter’s direct materials needed for

production; desired ending inventory for December 31 is $3,000;indirect materials are insignificant and not

considered for budgeting purposes.

f. Each tire requires 0.20 hours of direct labor; direct laborcosts average $20 per hour.

g. Variable manufacturing overhead is $2 per tire.

h. Fixed manufacturing overhead includes $3,000 per quarter indepreciation and $4,820 per quarter for

other costs, such as utilities, insurance, and propertytaxes.

i. Fixed selling and administrative expenses include $10,000 perquarter for salaries; $1,800 per quarter for

rent; $500 per quarter for insurance; and $600 per quarter fordepreciation.

j. Variable selling and administrative expenses include suppliesat 1% of sales.

k. Capital expenditures include $30,000 for new manufacturingequipment, to be purchased and paid in the

first quarter.

l. Cash receipts for sales on account are 50% in the quarter ofthe sale and 50% in the quarter following the

sale; December 31, 2014, Accounts Receivable is received in thefirst quarter of 2015; uncollectible

accounts are considered insignificant and not considered forbudgeting purposes.

m. Direct materials purchases are paid 75% in the quarterpurchased and 25% in the following quarter;

December 31, 2014, Accounts Payable is paid in the first quarterof 2015.

n. Direct labor, manufacturing overhead, and selling andadministrative costs are paid in the quarter

incurred.

o. Income tax expense is projected at $2,000 per quarter and ispaid in the quarter incurred.

p. Arthur desires to maintain a minimum cash balance of $30,000and borrows from the local bank as

needed in increments of $1,000 at the beginning of the quarter;principal repayments are made at the

beginning of the quarter when excess funds are available and inincrements of $1,000; interest is 12% per

year and paid at the beginning of the quarter based on theamount outstanding from the previous quarter.

Requirements

1. Prepare Arthur’s operating budget and cash budget for 2015,by quarter. Required schedules and

budgets include: sales budget, production budget, directmaterials budget, direct labor budget,

manufacturing overhead budget, cost of goods sold budget,selling and administrative expense budget,

cash receipts, cash payments, and cash budget. Manufacturingoverhead costs are allocated based on

direct labor hours.

2. Prepare Arthur’s annual financial budget for 2015, includingbudgeted income statement, budgeted

balance sheet, and budgeted statement of cash flows.

Glow, Inc. is interested in purchasing some new manufacturingequipment right after the beginning of the new year. They wouldlike to finance the new equipment with cash and marketablesecurities, but if necessary they can get a short-term loan from alocal bank. You have been engaged to prepare a master budget forGlow, Inc. for the first quarter of 2016. Glow, Inc. is a small,rapidly growing manufacturer of lighting equipment. The company’smain product line is table lamps. The marketing manager hasrecently completed a sales forecast. She believes the company’ssales during the first quarter of 2016 will increase by 15 percenteach month over the previous month’s sales. Then sales are expectedto remain constant for several months. Glow Inc.’s projectedbalance sheet as of December 31, 2015 is as follows:

Cash $60,000

Accountsreceivable 312,000

Marketablesecurities 30,000

Inventory 261,625

Buildings and equipment (net of accumulateddepreciation) 1,298,519

Total assets $1,962,144

Accounts payable $366,844

Bond interestpayable 12,500

Property taxespayable 4,800

Bonds payable (10%; due in2020) 600,000

Common stock 750,000

Retainedearnings 228,000

Total liabilities and stockholders' equity $1,962,144

The controller is now preparing a budget for the first quarterof 2016. In the process, the following information has beenaccumulated:

1) Projected sales for December 2015 are $650,000. Credit salesare typically 60% of total sales. Glow, Inc.’s credit experienceindicates that 20% of credit sales are collected during the monthof sale, and the remainder are collected during the followingmonth.

2) Glow, Inc.’s cost of goods sold generally runs at 70% ofsales. Inventory is purchased on account and 25% of each month’spurchases are paid during the month of purchase. The remainder ispaid during the following month. In order to have adequate stocksof inventory on hand, the company attempts to have inventory onhand at the end of each month equal to half of the next month’sprojected cost of goods sold.

3) The controller has estimated that Glow Inc.’s other monthlyexpenses will be as follows:

Sales salaries $20,000

Advertising andpromotion 25,000

Administrativesalaries 35,000

Depreciation 15,000

Interest onbonds 2,500

Propertytaxes 1,200

In addition, sales commissions run at the rate of 3 percent ofsales and are paid in the same month as the sale.

4) The company president has indicated that the company shouldinvest $275,000 in state of the art manufacturing equipment justafter the new year begins. This equipment purchase will be financedprimarily from the company’s cash and marketable securities.However, the president believes the company needs to keep a minimumcash balance of $50,000. If necessary, the remainder of theequipment purchase will be financed using short-term credit from alocal bank. The minimum period for such a loan is three months. Thecurrent short-term interest rates are 8 percent per year and areexpected to remain at this rate through the time the equipment ispurchased. If a loan is necessary, the president has decided itshould be paid off by the end of the first quarter if possible.

5) Glow, Inc.’s board of directors has indicated an intention todeclare and pay dividends of $100,000 on the last day of eachquarter.

6) The interest on any short-term borrowing will be paid whenthe loan is repaid. Interest on Glow, Inc.’s bonds is paidsemiannually on January 31 and July 31 for the preceding six-monthperiod.

7) Property taxes are paid semiannually on February 28 andAugust 31 for the preceding six-month period.

Required: Prepare Glow, Inc.’s master budget for thefirst quarter of 2016 by completing the following schedules andstatements. Round all answers to the nearest dollar (do not includecents).

1.)

Sales budget:

2015

2016

Decemeber

January

February

March

1st Quarter

Total sales

Cash sales

Sale on account

2.)

Cash receipts budget:

2016

January

February

March

1st Quarter

Cash sales

Cash collections from credit sales made

During current month

Cash collections from credit sales made

During preceding month

Total cash receipts

3.)

Purchse budget:

2015

2016

Decemeber

January

February

March

1st Quarter

Budgeted cost of goods sold

Add: Desired ending

Inventory

Total goods needed

Less: Expected beginning

Inventory

Purchases

4.)

Cash disbursements budget:

2016

January

February

March

1st Quarter

Inventory purchses:

Cash payments for puschases during the current month

Cash payments for puschases during the preceding month

Total cash payments for inventory purchases

Other expenses:

Sales salaries

Advertising and promotion

Administrative salaries

Interest on bonds

Property taxes

Sales commissions

Total cash payments for other expenses

Total cash disbursements

Complete the first three lines of the summary budget. Then dothe analysis of short-term financing needs in requirement (6). Usethis answer to help complete requirement (5)

5.)

Summary cash budget:

20x1

Cash receipts (sch 2)

January

February

March

1st Quarter

Less: Cash disbursements (sch 4)

Change in cash balance during period due to operations

Sale of marketable securities (1/2/16)

Proceeds from bank loan (1/2/16)

Purchase of equipment

Repayment of bank loan (3/31/16)

Interest on bank loan

Payment of dividends

Change in cash balance during first quarter

XXXXX

XXXXX

XXXXX

Cash balance, 1/1/16

XXXXX

XXXXX

XXXXX

Cash balance, 3/31/16

XXXXX

XXXXX

XXXXX

6.) Analysis of short-term financing needs:

Projected cash balance as of December 31, 2015

$

Less: minimum cash balance

Cash available for equipment purchases

$

Projected proceeds from sale of marketable securities

Cash available

$

Less: Cost of investment in equipment

Required short-term borrowing

$

7) Prepare Glow, Inc.’s budgeted income statement for the firstquarter of 2016. (Ignore income taxes.)

8) Prepare Glow, Inc.’s budgeted statement of retained earningsfor the first quarter of 2016.

9) EXTRA CREDIT (5 points): Prepare Glow, Inc.’s budgetedbalance sheet as of March 31, 2016. (Hint: On March 31, 2016, BondInterest Payable is $5,000 and Property Taxes Payable is$1,200.)

Please show details for 1-6

PROBLEM 1 (60 Points)

Newtown Supply Company is preparing its master budget for 2017.Relevant data pertaining to its operating budgets are asfollows:

Sales Budget: Sales for the year are expectedto total 800,000 units. 20% of sales are expected to occur in the1st quarter, 25% in the 2nd quarter, 25% inthe 3rd quarter, and 30% in the 4th quarter.The unit selling price is expected to be $35 for the first 3quarters, and increasing to $38 beginning in the 4thquarter.

Production Budget: Management desires tomaintain the ending finished goods inventories at 25% of the nextquarter’s budgeted sales volume.

(Sales in the 1st quarter of 2018 areexpected to be the same as the 4th quarter of2017.)

Direct Materials Budget: Each unit requires 3pounds of raw materials at a cost of $3 per pound. Managementdesires to maintain raw materials inventories at 10% of the nextquarter’s production requirements. (Production in the1st quarter of 2018 is expected to be the same as the4th quarter of 2017.)

Direct Labor Budget: Durham budgets 0.5 hoursfor direct labor per unit. The direct labor rate is expected to $20per hour for the 1st, 2nd, and 3rdquarters, and increasing to $22 per hour in the 4thquarter.

Budgeted Income Statement: The budgeted unitcost including budgeted direct materials, budgeted direct labor,and budgeted manufacturing overhead for 2017 is $22. The totalbudgeted selling and administrative expenses for 2017 are$2,200,000. The company’s effective tax rate is 30%.

Instructions

Prepare the following budgets by quarters and in total for2017:

(a)Sales

(b)Production

(c) Directmaterials

(d) Direct labor

(e) Income statement (Totals only –detail by quarter is not required.)

PROBLEM 2 (40 Points)

HFC Corp. has budgeted sales revenues as follows for the firstquarter of 2017:

January February March

Cashsales $ 95,000 $260,000 $200,000

Creditsales 130,000 140,000 90,000

Total sales $225,000 $400,000 $290,000

Past experience indicates that 60% of the creditsales will be collected in the month of sale and theremaining 40% will be collected in the following month. Purchasesof direct materials are all on credit and 50% arepaid in the month of purchase and 50% in the month followingpurchase. Budgeted materials purchases are as follows:

January $300,000

February $250,000

March $105,000

Other cash receipts:

(a) Proceeds from the sale of marketable securities in Marchwill net $60,000

Other cash disbursements are budgeted asfollows:

(a) Direct labor $45,000 in February and $35,000 in March.

(b) Manufacturing overhead $20,000 in February and $16,000 inMarch.

(c) Selling and administrative expenses are $28,000, whichincludes $1,000

depreciation expense permonth.

(d) Dividends of $70,000 will be paid in February.

(e) Equipment purchase of $75,000 in March.

The company wishes to maintain a minimum cash balance of $50,000at the end of each month. If necessary, the company borrows moneyfrom the bank at 6% interest (.5% monthly rate) to maintain theminimum cash balance. Borrowed money is repaid in months when thereis an excess cash balance (that is, when the cash on hand exceedsthe $50,000 minimum balance).The beginning cash balance on February1 is expected to be $60,000.

Instructions

(a) Prepare schedules for (1) expectedcollections from customers and

(2) expected payments for directmaterial purchases for February and

March.

(b) Prepare a cash budget for Februaryand March in columnar form.

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