Orton Company prepares monthly cash budgets. Relevant to the operating budgets for 2014 are: January February Sales $320,000 $400,000 Direct materials purchases 80,000 110,000 Direct labor 85,000 115,000 Manufacturing overhead 60,000 75,000 Selling and Administrative Exps 75,000 80,000 All sales are on account. Collections are expected to be 60% in the month of sale. 30% in the first month following the sale, and 10% in the second month following the sale. Thirty percent (30%) of direct materials purchases are paid in cash in the month of purchase, and the balance due is paid the month following the purchase. All other items above are paid in the month incurred. Depreciation has been excluded from manufacturing overhead and selling and administrative expenses. Other data: Credit sales: November 2013 $200,000, December 2013 $280,000 Purchases of direct materials: December 2013, $90,000 Other receipts: January - Collection of December 31, 2013 interest receivable $3,000; February –proceeds from sale of securities $5,000. Other disbursements: February –payment of $20,000 for land The company’s cash balance of January 1, 2014, is expected to be $60,000. The company wants to maintain a minimum cash balance $50,000. Instructions Prepare schedules for (1) expected collections from customers and (2) expected payments for direct materials purchases Prepare a cash budget for January and February in columnar form.
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.
Orton Company prepares monthly cash budgets. Relevant to the operating budgets for 2014 are:
January February
Sales $320,000 $400,000
Direct materials purchases 80,000 110,000
Direct labor 85,000 115,000
Manufacturing overhead 60,000 75,000
Selling and Administrative Exps 75,000 80,000
All sales are on account. Collections are expected to be 60% in the month of sale. 30% in the first month following the sale, and 10% in the second month following the sale. Thirty percent (30%) of direct materials purchases are paid in cash in the month of purchase, and the balance due is paid the month following the purchase. All other items above are paid in the month incurred.
Other data:
- Credit sales: November 2013 $200,000, December 2013 $280,000
- Purchases of direct materials: December 2013, $90,000
- Other receipts: January - Collection of December 31, 2013 interest receivable $3,000; February –proceeds from sale of securities $5,000.
- Other disbursements: February –payment of $20,000 for land
The company’s cash balance of January 1, 2014, is expected to be $60,000. The company wants to maintain a minimum cash balance $50,000.
Instructions
- Prepare schedules for (1) expected collections from customers and (2) expected payments for direct materials purchases
- Prepare a
cash budget for January and February in columnar form.
Additional Exercise in Operational Budgeting
Stephanie Inc. is preparing its annual budgets for the year ending December 31, 2020. Accounting assistants furnish the data shown below:
Product JB50 Product JB 60
Sales budget
Anticipated volume in units 400,000 200,000
Unit selling price $20 $25
Production budget
Desired ending FGU’s 25,000 15,000
Beginning FGU’s 30,000 10,000’
Direct materials budget
Direct materials per unit (pounds) 2 3
Desired ending direct materials (lbs) 30,000 15,000
Beginning direct materials pounds 40,000 10,000
Cost per pound $3 $4
Direct labor budget
Direct labor time per unit 0.4 0.6
Direct labor rate per hour $12 $12
Total unit cost $12 $21
An accounting assistant has prepared the detailed manufacturing overhead budget and the selling and administrative expense budget. The latter shows selling expenses of $660,000 for product JB 50 and $360,000 for product JB 60, and administrative expenses of $540,000 for product JB 50 and $340,000 for product JB 60. Income taxes are expected to be 30%.
Instructions
Prepare the following budgets for the year. Show data for each product. Quarterly budgets should not be prepared.
- sales (d) direct labor
- production
- ( e) Income statement (Note: income taxes are not allocated to
- direct materials ) the products
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