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Chapter 22: Q14RQ (page 1228)
What is the capital expenditures budget?
The capital expenditure budget estimates the amount for the purchase of property, buildings, machinery, and equipment.
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Question: Completing a comprehensive budgeting problem鈥攎anufacturing company
The Gerard Tire Company manufactures racing tires for bicycles. Gerard sells tires for \(90 each. Gerard is planning for the next year by developing a master budget by quarters. Gerard鈥檚 balance sheet for December 31, 2018, follows:
Other data for Gerard Tire Company:
a. Budgeted sales are 1,500 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 10% of total sales, with the remaining 90% of sales on account.
b. Finished Goods Inventory on December 31, 2018, consists of 300 tires at \)33 each.
c. Desired ending Finished Goods Inventory is 30% of the next quarter鈥檚 sales; first quarter sales for 2020 are expected to be 2,300 tires. FIFO inventory costing method is used.
d. Raw Materials Inventory on December 31, 2018, consists of 600 pounds of rubber compound used to manufature the tires.
e. Direct materials requirements are 2 pounds of a rubber compound per tire. The cost of the compound is \(8.50 per pound.
f. Desired ending Raw Materials Inventory is 40% of the next quarter鈥檚 direct materials needed for production; desired ending inventory for December 31, 2019 is 600 pounds; indirect materials are insignificant and not considered for budgeting purposes.
g. Each tire requires 0.4 hours of direct labor; direct labor costs average \)12 per hour.
h. Variable manufacturing overhead is \(4 per tire.
i. Fixed manufacturing overhead includes \)6,000 per quarter in depreciation and \(16,770 per quarter for other costs, such as utilities, insurance, and property taxes.
j. Fixed selling and administrative expenses include \)12,500 per quarter for salaries; \(3,000 per quarter for rent; \)450 per quarter for insurance; and \(2,000 per quarter for depreciation.
k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include \)15,000 for new manufacturing equipment, to be purchased and paid in the first quarter.
m. Cash receipts for sales on account are 70% in the quarter of the sale and 30% in the quarter following the sale; December 31, 2018, Accounts Receivable is received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes.
n. Direct materials purchases are paid 60% in the quarter purchased and 40% in the following quarter; December 31, 2018, Accounts Payable is paid in the first quarter of 2019. o. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.
p. Income tax expense is projected at \(1,500 per quarter and is paid in the quarter incurred.
q. Gerard desires to maintain a minimum cash balance of \)55,000 and borrows from the local bank as needed in increments of \(1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of \)1,000; interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.
Requirements
1. Prepare Gerard鈥檚 operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours. Round all calculations to the nearest dollar.
2. Prepare Gerard鈥檚 annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.
Preparing a financial budget鈥攕chedule of cash payments
Marcel Company has the following projected costs for manufacturing and selling and administrative expenses:
January February March Direct materials purchases \( 3,100 \) 3,500 $ 4,800 Direct labor costs 3,300 3,500 3,600 Depreciation on plant 550 550 550 Utilities for plant 650 650 650 Property taxes on plant 200 200 200 Depreciation on office 550 550 550 Utilities for office 250 250 250 Property taxes on office 170 170 170 Office salaries 3,500 3,500 3,500
All costs are paid in month incurred except: direct materials, which are paid in the month following the purchase; utilities, which are paid in the month after incurred; and property taxes, which are prepaid for the year on January 2. The Accounts Payable and Utilities Payable accounts have a zero balance on January 1. Prepare a schedule of cash payments for Marcel for January, February, and March. Determine the balances in Prepaid Property Taxes, Accounts Payable, and Utilities Payable as of March 31.
Preparing an operating budget鈥攑roduction budget Bailey Company expects to sell 1,500 units of finished product in January and 1,750 units in February. The company has 180 units on hand on January 1 and desires to have an ending inventory equal to 80% of the next month鈥檚 sales. March sales are expected to be 1,820 units. Prepare Bailey鈥檚 production budget for January and February.
Patrick works for McGill鈥檚 Computer Repair, owned and operated by Frank McGill. As a computer technician, Patrick has grown accustomed to friends and family members asking for assistance with their personal computers. In an effort to increase his income, Patrick started a personal computer repair business that he operates out of his home on a part-time basis, working evenings and weekends. Because Patrick is doing this 鈥渙n the side鈥� for friends and family, he does not want to charge as much as McGill鈥檚 charges its customers. When Frank McGill assigned Patrick the task of developing the budget for his department, Patrick increased the amount budgeted for computer parts. When the budget was approved, Patrick purchased as many parts as the budget allowed, even when they were not needed. He then took the extra parts home to use in his personal business in an effort to keep his costs down and profits up. So far, no one at McGill鈥檚 has asked about the parts expense because Patrick has not allowed the actual amount spent to exceed the budgeted amount.
Requirements
1. Why would Patrick鈥檚 actions be considered fraudulent?
2. What can a company do to protect against this kind of business risk?
: Completing a comprehensive budgeting problem鈥攎erchandising company
Belton Printing Company of Baltimore has applied for a loan. Its bank has requested a budgeted income statement for the month of April 2018 and a balance sheet at April 30, 2018. The March 31, 2018, balance sheet follows:
As Belton Printing鈥檚 controller, you have assembled the following additional information:
a. April dividends of \(7,000 were declared and paid.
b. April capital expenditures of \)17,000 budgeted for cash purchase of equipment.
c. April depreciation expense, \(800.
d. Cost of goods sold, 55% of sales.
e. Desired ending inventory for April is \)24,800.
f. April selling and administrative expenses includes salaries of \(29,000, 20% of which will be paid in cash and the remainder paid next month.
g. Additional April selling and administrative expenses also include miscellaneous expenses of 10% of sales, all paid in April.
h. April budgeted sales, \)86,000, 80% collected in April and 20% in May.
i. April cash payments of March 31 liabilities incurred for March purchases of inventory, \(8,300.
j. April purchases of inventory, \)22,900 for cash and $37,200 on account. Half the credit purchases will be paid in April and half in May
Requirements
1. Prepare the sales budget for April.
2. Prepare the inventory, purchases, and cost of goods sold budget for April.
3. Prepare the selling and administrative expense budget for April.
4. Prepare the schedule of cash receipts from customers for April.
5. Prepare the schedule of cash payments for selling and administrative expenses for April.
6. Prepare the cash budget for April. Assume the company does not use short-term financing to maintain a minimum cash balance.
7. Prepare the budgeted income statement for April.
8. Prepare the budgeted balance sheet at April 30, 2018.
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