Completing a comprehensive budgeting problemĂąÂÂmanufacturingcompany
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. ArthurĂąÂÂs 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 nextquarterĂąÂÂs 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 nextquarterĂąÂÂs 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 ArthurĂąÂÂs 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 ArthurĂąÂÂs annual financial budget for 2015, includingbudgeted income statement, budgeted
balance sheet, and budgeted statement of cash flows.
