Concept explainers
Comprehensive Budget Plan
Brighton, Inc., manufactures kitchen tiles. The company recently expanded, and the controller believes that it will need to borrow cash to continue operations. It began negotiating for a one-month bank loan of $500,000 starting May 1. The bank would charge interest at the rate of 1 percent per month and require the company to repay interest and principal on May 31. In considering the loan, the bank requested a
The following information is available:
- The company budgeted sales at 600,000 units per month in April, June, and July and at 450,000 units in May. The selling price is $4 per unit.
- The inventory of finished goods on April 1 was 120,000 units. The finished goods inventory at the end of each month equals 20 percent of sales anticipated for the following month. There is no work in process.
- The inventory of raw materials on April 1 was 57,000 pounds. At the end of each month, the raw materials inventory equals no less than 40 percent of production requirements for the following month. The company purchases materials in quantities of 62,500 pounds per shipment.
- Selling expenses are 10 percent of gross sales. Administrative expenses, which include
depreciation of $2,500 per month on office furniture and fixtures, total $165,000 per month. - The manufacturing budget for tiles, based on normal production of 500,000 units per month, follows:
Required
- a. Prepare schedules computing inventory budgets by months for:
- 1. Production in units for April, May, and June.
- 2. Raw materials purchases in pounds for April and May.
- b. Prepare a projected income statement for May. Cost of goods sold should equal the variable
manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period. Assume cash discounts of 1 percent andbad debt expense of 0.5 percent.
a.
Prepare schedules computing inventory budgets by months for:
1. Production in units for April, May and June.
2. Raw materials purchases in pounds for April and May.
Answer to Problem 61P
The estimated level of production is 570,000, 480,000 and 600,000 for April, May and June. The estimated level of purchase is $133,500 and $78,000 for April and May.
Explanation of Solution
1.
Budgeted production:
Budgeted production is the total number of goods that need to be produced to attain the targeted sales for the budgeted period. It is calculated by adjusting the beginning and closing inventory.
Calculate the production in units for April, May and June:
Company B Budgeted Production statement For the month end 31 June (in units) | |||
Particulars | April | May | June |
Estimated sales | 600,000 | 450,000 | 600,000 |
Add: closing stock required (1) | 90,000 | 120,000 | 120,000 |
Total requirement of units | 690,000 | 570,000 | 720,000 |
Less: opening stock | 120,000 | 90,000 | 120,000 |
Estimated level of production | 570,000 | 480,000 | 600,000 |
Table: (1)
Thus, the estimated level of production is 570,000, 480,000 and 600,000 for April, May and June.
Working note 1:
Calculate the closing stock required:
Particulars |
Sales (a) |
% of sales (b) |
Closing stock |
April | 450,000 | 20% | 90,000 |
May | 600,000 | 20% | 120,000 |
June | 600,000 | 20% | 120,000 |
Table: (2)
2.
Budgeted purchase:
Budgeted purchase is the total amount of goods that is needed to purchase in order to attain the targeted sales. It is calculated by adjusting the inventory.
Calculate the budgeted purchase of raw material for April and May:
Company B Budgeted Purchase Statement For the month end 30 May | ||
Particulars | April | May |
Estimated level of production (2) | $142,500 | $120,000 |
Add: closing stock required (3) | $48,000 | $60,000 |
Total requirement of units | $190,500 | $180,000 |
Less: opening stock | $57,000 | $102,000 (4) |
Estimated level of purchase | $133,500 | $78,000 |
Table: (3)
Thus, the estimated level of purchase is $133,500 and $78,000 for April and May.
Working note 2:
Calculate the estimated level of production ($):
Particulars |
Total units (a) |
Rate per unit (b) |
Amount |
April | 570,000 | $0.25 | $142,500 |
May | 480,000 | $0.25 | $120,000 |
June | 600,000 | 0.25 | $150,000 |
Table: (4)
Working note 3:
Calculate the closing stock required:
Month |
Production for next month ($) (a) |
% requirement (b) |
Amount |
April | $120,000 (2) | 40% | $48,000 |
May | $150,000 (2) | 40% | $60,000 |
Table: (5)
Working note 4:
Calculate the opening stock for May:
Closing stock of April will be the opening stock of May so the value can be found out with the calculation of closing stock of April.
b.
Prepare a projected income statement for May. Cost of goods sold should equal the variable manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period.
Answer to Problem 61P
The net profit for the month of May is $33,000.
Explanation of Solution
Projected income statement:
Projected income statement is a statement that shows the total income and expenses of the budgeted period. The last year’s income statement is used and some estimates are made for the items that may change in the budgeted period.
Projected income statement for Company B:
Company B Projected Income Statement For the month of May | ||
Particulars | Amount | Total amount |
Net Sales revenue (a) (5) | $1,773,000 | |
Less: cost of goods sold: | ||
Variable cost of sales (7) | $990,000 | |
Fixed cost of sales | $400,000 | |
Total cost of goods sold (b) | $1,390,000 | |
Gross profit | $383,000 | |
Less: expenses: | ||
Selling expenses (8) | $180,000 | |
Administrative expenses | $165,000 | |
Interest expenses (9) | $5,000 | |
Total expenses (f) | $350,000 | |
Net profit | $33,000 |
Table: (6)
Thus, the net profit for the month of May is $33,000.
Working note 5:
Calculate the sales revenue:
Particulars | Amount | Total amount |
Sales revenue | $1,800,000 | |
Less: cash discount | $18,000 | |
Less: estimated bad debts (6) | $9,000 | $27,000 |
Net sales | $1,773,000 |
Table: (7)
Working note 6:
Calculate the estimated bed debts:
Working note 7:
Calculate variable cost:
Working note 8:
Calculate the selling expenses:
Working note 9:
Calculate the interest expense:
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Chapter 13 Solutions
FUNDAMENTALS OF COST ACCOUNTING W/CONNE
- Cash budget The controller of Bridgeport Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information: The company expects to sell about 10% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month following the sale and the remainder the following month (second month following sale). Depreciation, insurance, and property tax expense represent 50,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in January, and the annual property taxes are paid in December. Of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month. Current assets as of September 1 include cash of 40,000, marketable securities of 75,000, and accounts receivable of 300,000 (60,000 from July sales and 240,000 from August sales). Sales on account for July and August were 200,000 and 240,000, respectively. Current liabilities as of September 1 include 40,000 of accounts payable incurred in August for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of 55,000 will be made in October. Bridgeports regular quarterly dividend of 25,000 is expected to be declared in October and paid in November. Management desires to maintain a minimum cash balance of 50,000. Instructions Prepare a monthly cash budget and supporting schedules for September, October, and November. On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller?arrow_forwardCash budget The controller of Mercury Shoes Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information: The company expects to sell about 10% of its merchandise for cash. Of sales on account, 60% are expected to be collected in the month following the sale and the remainder the following month (second month after sale). Depreciation, insurance, and property tax expense represent 12,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in February, and the annual property taxes are paid in November. Of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month. Current assets as of June 1 include cash of 42,000, marketable securities of 25,000, and accounts receivable of 198,000 (150,000 from May sales and 48,000 from April sales). Sales on account in April and May were 120,000 and 150,000, respectively. Current liabilities as of June 1 include 13,000 of accounts payable incurred in May for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of 24,000 will be made in July. Mercury Shoes regular quarterly dividend of 15,000 is expected to be declared in July and paid in August. Management desires to maintain a minimum cash balance of 40,000. Instructions Prepare a monthly cash budget and supporting schedules for June, July, and August. On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller?arrow_forwardRelevant data from the Poster Companys operating budgets are: Additional data: Capital assets were sold in January for $10,000 and $4,500 in May. Dividends of $4,500 were paid in February. The beginning cash balance was $60,359 and a required minimum cash balance is $59,000. Use this information to prepare a cash budget for the first two quarters of the yeararrow_forward
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- Carmichael Corporation is in the process of preparing next years budget. The pro forma income statement for the current year is as follows: Required: 1. What is the break-even sales revenue (rounded to the nearest dollar) for Carmichael Corporation for the current year? 2. For the coming year, the management of Carmichael Corporation anticipates an 8 percent increase in variable costs and a 60,000 increase in fixed expenses. What is the break-even point in dollars for next year? (CMA adapted)arrow_forwardA companys sales for the coming months are as follows: About 20 percent of sales are cash sales, and the remainder are credit sales. The company finds that typically 10 percent of a months credit sales are paid in the month of sale, 70 percent are paid the next month, and 15 percent are paid in the second month after sale. Expected cash receipts in July are budgeted at what amount? a. 114,520 b. 143,150 c. 145,720 d. 156,000arrow_forwardCASH BUDGETING Helen Bowers, owner of Helens Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2016 and 2017. May 2016 180,000 June 180,000 July 360,000 August 540,000 September 720,000 October 360,000 November 360,000 December 90,000 January 2017 180,000 Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale. 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials: May 2016 90,000 June 90,000 July 126,000 August 882,000 September 306,000 October 234,000 November 162,000 December 90,000 General and administrative salaries are approximately 27,000 a month. Lease payments under long-term leases are 9,000 a month. Depredation charges are 36,000 a month. Miscellaneous expenses are 2,700 a month. Income tax payments of 63,000 are due in September and December. A progress payment of 180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be 132,000, and a minimum cash balance of 90,000 should be maintained throughout the cash budget period. a. Prepare a monthly cash budget for the last 6 months of 2016. b. Prepare monthly estimates of the required financing or excess fundsthat is, the amount of money Bowers will need to borrow or will have available to invest. c. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects. d. Bowers sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the companys current and debt ratios would vary during the year if ail financial requirements were met with short-term bank loans. Could changes in these ratios affect the firms ability to obtain bank credit? Explain.arrow_forward
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