Optima Company is a high-technology organization that produces a mass-storage system. The design of Optima’s system is unique and represents a breakthrough in the
industry. The units Optima produces combine positive features of both compact and
hard disks. The company is completing its fifth year of operations and is preparing to
build its master budget for the coming year (2019). The budget will detail each quarter’s
activity and the activity for the year in total. The master budget will be based on the
a. Fourth-quarter sales for 2018 are 55,000 units.
b. 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. Optima collects 85 percent of all sales within the quarter in which they 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 is planning the following ending finished goods inventories for each quarter:
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 and three 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 beginning inventory as of January 1,
2010. At the end of each quarter, Optima plans to have 30 percent of the direct
materials needed for next quarter’s unit sales. Optima will end the year with the
same level of direct materials found in this year’s beginning inventory.
f. Optima buys direct materials on account. Half of the purchases are paid for in the
quarter of acquisition, and the remaining half are paid for in the following quarter.
Wages and salaries are paid on 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 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.
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 per quarter, including
j. Variable selling and administrative expenses are budgeted at $10 per unit sold. All
selling and administrative expenses are paid for in the quarter incurred.
k. The balance sheet as of December 31, 2009, is as follows:
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 Stockholders’ Equity
Accounts payable $ 7,248,000*
Capital stock 27,000,000
Retained earnings 8,058,000
Total liabilities and stockholders’ equity $42,306,000
*For purchase of direct materials only.
l. Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter,
$2 million of equipment will be purchased.
Prepare a master budget for Optima Company for each quarter of 2010 and for the year
in total. The following component budgets must be included:
1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
5. Overhead budget
6. Selling and administrative expenses budget
7. Ending finished goods inventory budget
8. Cost of goods sold budget (Assume that there is no change in work-in-process
9. Cash budget
10. Pro forma income statement (using absorption costing)
11. Pro forma balance sheet
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Budgets are prepared for the planning and controlling purposes. Budgets facilitate planning and making decisions to achieve the desired objectives and are prepared to enable comparison between actual and expected outcomes.
1. Prepare a sales budget for Optima Company for each quart...
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