Operating Budget, Comprehensive Analysis Ponderosa, Inc., produces wiring harness assemblies used in the production of semi-trailer trucks. The wiring harness assemblies are sold to various truck manufacturers around the world. Projected sales in units for the coming five months are given below. January 10,000 February 10,500 March 13,000 April 16,000 May 18,500 The following data pertain to production policies and manufacturing specifications followed by Ponderosa: Finished goods inventory on January 1 is 900 units. The desired ending inventory for each month is 20 percent of the next month's sales. The data on materials used are as follows: Direct Material Per-Unit Usage Unit Cost Part #K298 2 $4 Part #C30 3 7 Inventory policy dictates that sufficient materials be on hand at the beginning of the month to satisfy 30 percent of the next month's production needs. This is exactly the amount of material on hand on January 1.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Operating Budget, Comprehensive Analysis
Ponderosa, Inc., produces wiring harness assemblies used in the production of semi-trailer trucks. The wiring harness assemblies are sold to various truck manufacturers around the world. Projected sales in units for the coming five months are given below.
| January | 10,000 |
| February | 10,500 |
| March | 13,000 |
| April | 16,000 |
| May | 18,500 |
The following data pertain to production policies and manufacturing specifications followed by Ponderosa:
- Finished goods inventory on January 1 is 900 units. The desired ending inventory for each month is 20 percent of the next month's sales.
- The data on materials used are as follows:
Direct Material Per-Unit Usage Unit Cost Part #K298 2 $4 Part #C30 3 7 Inventory policy dictates that sufficient materials be on hand at the beginning of the month to satisfy 30 percent of the next month's production needs. This is exactly the amount of material on hand on January 1.
- The direct labor used per unit of output is one and one-half hours. The average direct labor cost per hour is $20.
Overhead each month is estimated using a flexible budget formula. (Activity is measured in direct labor hours.)Fixed Cost
ComponentVariable Cost
ComponentSupplies $ — $1.00 Power — 0.20 Maintenance 12,500 1.10 Supervision 14,000 — Depreciation 45,000 — Taxes 4,300 — Other 86,000 1.60 - Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. (Activity is measured in units sold.)
Fixed Costs Variable Costs Salaries $ 88,500 — Commissions — $1.40 Depreciation 25,000 — Shipping — 3.60 Other 137,000 1.60 - The unit selling price of the wiring harness assembly is $110.
- In February, the company plans to purchase land for future expansion. The land costs $68,000.
- All sales and purchases are for cash. The cash balance on January 1 equals $62,900. The firm wants to have an ending cash balance of at least $25,000. If a cash shortage develops, sufficient cash is borrowed to cover the shortage and provide the desired ending balance. Any cash borrowed must be borrowed in $1,000 increments and is repaid the following month, as is the interest due. The interest rate is 12 percent per annum.
3. Direct materials purchases budget
| January | February | March | Total | |||||
|---|---|---|---|---|---|---|---|---|
| Part K298 | Part C30 | Part K298 | Part C30 | Part K298 | Part C30 | Part K298 | Part C30 | |
| Units produced | ||||||||
| Dir. mat. per unit | ||||||||
| Production needs | ||||||||
| Desired EI | ||||||||
| Total needed | ||||||||
| Less: BI | ||||||||
| Dir. mat. to purchase | ||||||||
| Cost per unit | ||||||||
| Total purchase cost |
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