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Chapter 22: Q9RQ (page 1228)
Why is the sales budget considered the cornerstone of the master budget?
The sales budget estimates the sales revenue in the future.
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Preparing the financial budget鈥攃ash budget
Use the original schedule of cash receipts completed in Exercise E22-26, Requirement 1, and the schedule of cash payments completed in Exercise E22-27 to complete a cash budget for Marcel Company for January, February, and March.
Additional information: Marcel鈥檚 beginning cash balance is \(5,000, and Marcel desires to maintain a minimum ending cash balance of \)5,000. Marcel borrows cash as needed at the beginning of each month in increments of \(1,000 and repays the amounts borrowed in increments of \)1,000 at the beginning of months when excess cash is available. The interest rate on amounts borrowed is 8% per year. Interest is paid at the beginning of the month on the outstanding balance from the previous month.
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 an operating budget鈥攕ales, production, direct materials, direct labor, overhead, COGS, and S&A expense budgets The Irwin Batting Company manufactures wood baseball bats. Irwin鈥檚 two primary products are a youth bat, designed for children and young teens, and an adult bat, designed for high school and college-aged players. Irwin sells the bats to sporting goods stores, and all sales are on account. The youth bat sells for \(35; the adult bat sells for \)50. Irwin鈥檚 highest sales volume is in the first three months of the year as retailers prepare for the spring baseball season. Irwin鈥檚 balance sheet for December 31, 2018, follows:
Other data for Irwin Batting Company for the first quarter of 2019:
a. Budgeted sales are 1,400 youth bats and 3,300 adult bats.
b. Finished Goods Inventory on December 31, 2018, consists of 700 youth bats at \(15 each and 550 adult bats at \)10 each.
c. Desired ending Finished Goods Inventory is 220 youth bats and 300 adult bats; FIFO inventory costing method is used.
d. Direct materials requirements are 40 ounces of wood for youth bats and 70 ounces of wood for adult bats. The cost of wood is \(0.10 per ounce.
e. Raw Materials Inventory on December 31, 2018, consists of 90,000 ounces of wood at \)0.10 per ounce.
f. Desired ending Raw Materials Inventory is 90,000 ounces (indirect materials are insignificant and not considered for budgeting purposes).
g. Each bat requires 0.4 hours of direct labor; direct labor costs average \(26 per hour.
h. Variable manufacturing overhead is \)0.30 per bat.
i. Fixed manufacturing overhead includes \(1,300 per quarter in depreciation and \)14,977 per quarter for other costs, such as insurance and property taxes.
j. Fixed selling and administrative expenses include \(13,000 per quarter for salaries; \)3,500 per quarter for rent; \(1,400 per quarter for insurance; and \)450 per quarter for depreciation. k. Variable selling and administrative expenses include supplies at 1% of sales.
Requirements
1. Prepare Irwin鈥檚 sales budget for the first quarter of 2019.
2. Prepare Irwin鈥檚 production budget for the first quarter of 2019.
3. Prepare Irwin鈥檚 direct materials, direct labor budget, and manufacturing overhead budget for the first quarter of 2019. Round the predetermined overhead allocation rate to two decimal places. The overhead allocation base is direct labor hours.
4. Prepare Irwin鈥檚 cost of goods sold budget for the first quarter of 2019.
5. Prepare Irwin鈥檚 selling and administrative expense budget for the first quarter of 2019.
Preparing the financial budget鈥攂udgeted balance sheet
Barker, Inc. has the following balance sheet at December 31, 2018:
Barker projects the following transactions for 2019:
Sales on account, \(20,000
Cash receipts from customers from sales on account, \)17,600
Purchase of raw materials on account, \(7,000
Payments on account, \)3,500
Total cost of completed products, \(16,600, which includes the following:
Raw materials used, \)7,100
Direct labor costs incurred and paid, \(3,900
Manufacturing overhead costs incurred and paid, \)4,800
Depreciation on manufacturing equipment, \(800
Cost of goods sold, \)14,800
Selling and administrative costs incurred and paid, \(500
Purchase of equipment, paid in 2019, \)2,000
Prepare a budgeted balance sheet for Barker, Inc. for December 31, 2019. (Hint: It may be helpful to trace the effects of each transaction on the accounting equation to determine the ending balance of each account.)
Preparing an operating budget鈥攕ales and production budgets
Lugo Company manufactures drinking glasses. One unit is a package of eight glasses, which sells for $30. Lugo projects sales for April will be 2,000 packages, with sales increasing by 250 packages per month for May, June, and July. On April 1, Lugo has 325 packages on hand but desires to maintain an ending inventory of 20% of the next month鈥檚 sales. Prepare a sales budget and a production budget for Lugo for April, May, and June.
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