Question

Royal Company is preparing budgets for the second quarter ending June 30. Last year's sales for the corresponding period were:

March April May June July August 15,000 units 18,000 units 28,000 units 26,000 units 19,000 units 12,000 units

A. The company expects this year's sales to increase by 25%. The selling price is $13 per unit. Prepare a Sales Budget.

B. The company desires to have finished inventory on hand at the end of each month equal to 30 percent of the following month's budgeted unit sales. On March 31, there were 3,000 units on hand. Prepare a Production Budget.

C. Five pounds of material are required per unit of product. Management desires to have materials on hand at the end of each month equal to 10 percent of the following month's production needs. This policy was met on March 31st. The material costs $0.60 per lb. Prepare a Materials Purchases Budget.

D. Each unit produced requires 0.05 hours of direct labor. Each hour of direct labor costs the company $15. No temporary employees or overtime may be scheduled. Prepare a Direct Labor budget.

E. Variable manufacturing overhead is $20 per direct labor hour. Fixed manufacturing overhead is $50,000 per month. This includes $20,000 of depreciation. Prepare a Manufacturing Overhead expense and cash budgets.

F. Variable selling and administrative expenses are $0.50 per unit sold. Fixed selling and administrative expenses are $80,000 per month and include $15,000 in depreciation. Prepare a Selling & Administrative Expense and cash budgets.

G. Royal Company’s cash sales are insignificant. They collect 40% of their sales in the month of sale, 30% in the month after, 10% two months after, and then the remainder is written off. Prepare a cash collection schedule for June, July, and August.

Answer 1

(1) sales budget

	April	May	June	Total for 2nd Quarter	July
sales	22500[18000+25%]	35000[28000+25%]	32500[26000+25%]	90000	23750[19000+25%]
price per unit	$13	$13	$13	$13	$13
Total budgeted sales	$292,500[22500*13]	$455,000[35000*13]	$422,500[32500*13]	$1,170,000[90000*13]	$308,750

(2) production Budget

	April	May	June	Total for 2nd quarter	July	august
sales	22500	35000	32500	90000	23750	15000[12000+25%]
Add: desired ending inventory	10500[35000*30%]	9750[32500*30%]	7125[23750*30%]	7125	4500[15000*30%]
Less: Beginning inventory	3000	10500	9750	3000	7125
budgeted production	30000[22500+10500-3000]	34250[35000+9750-10500]	29875[32500+7125-9750]	94125	21125

(3)purchase budget

	April	May	June	Total 2nd quarter	July
production	30000	34250	29875	94125	21125
material per product	5 pounds	5	5	5	5
Total production needs	150,000 pounds [30000*5]	171,250 pounds[34250*5]	149,375 pounds[29875*5]	470,625 pounds [94125*5]	105625
Add: desired inventory	17125[171,250*10%]	14937.5[149375*10%]	10562.5[105625*10%]	10562.5
Les: Beginning inventory	15000[150000*10%]	17125	14937.5	15000
material purchase in units	152,125 [150000+17125-15000]	169,062.5 [171250+14937.5-17125]	145,000 [149375+10562.5-14937.5]	466,187.5
Cost per pound	$0.60	0.60	0.60	0.60
Budgeted purchase in Dollars	$91,275[152125*0.60]	101,437.5[169062.5*0.60]	$87,000[145000*0.60]	$279,712.5

d. labor

	April	May	June	Total
production	30000	34250	29875	94125
per unit labor	0.05 hours	0.05	0.05	0.05
Total budgeted hours	1500[30000*0.05]	1712.5[34250*0.05]	1493.75[29875*0.05]	4706.25[94125*0.05]
cost per hour	$15	$15	$15	$15
Budgeted labor cost	22,500$[1500*15]	25,687.5$[1712.5*15]	$22,406.25[1493.75*15]	$70,593.75[4706.25*15]

e.Manufacturing Overhead expense and cash budgets.

	April	May	June	Total
Budgeted Direct Labor Hour	1500	1712.5	1493.75	4706.25
variable manufacturing overhead	$20	$20	$20	$20
variable overhead cost	$30,000[1500*20]	$34,250[1712.5*20]	$29,875[1493.75*20]	$94,125[4706.25*20]
fixed manufacturing overhead cost	$50000	$50000	$50000	$150000
Total manufacturing overhead cost	$80,000[30000+50000]	$84,250[34250+50000]	$79,875[29875+50000]	$244,125[94125+50000]
Less: Non cash cost	$20000	$20000	$20000	$60000
cash disbursement for manufacturing overhead	$60,000	$64,250	$59,875	$184,125

f.Prepare a Selling & Administrative Expense and cash budgets.

	April	May	June	Total
sales	30000	34250	29875	94125
Variable Selling and administrative rate	$0.50	$0.50	$0.50	$0.50
variable expenses	$15,000	$17,125	$14,937.5	$47,062.5
fixed S&A expenses	$80,000	$80,000	$80,000	$240,000
Total S & A expenses	$95,000	$97,125	$94,937.5	287,062.5
Less: Non cash expense	$15000	$15000	$15000	$45000
cash Selling and Administrative expenses	$80,000[95000-15000]	$82,125[97125-15000]	$79,937.5[94937.5-15000]	$242,062.5[287062.5-45000]

depreciation is non cash expense

g.Prepare a cash collection schedule for June, July, and August.

	June	July	August	Total
cash receipts for April sales
[$292,500*10%]	$29,250			$29250
cash receipts for May sales
[$455,000*30%]	$136,500			$136500
[$455,000*10%]		$45,500		$45500
cash receipts for June sales
[$422,500*40%]	$169,000			$169000
[$422.500*30%]		$126,750		$126750
[$422,500*10%]			$42,250	$42250
cash receipts for August sales
[12000+25%]*$13*40%			$78,000	$78000
Total cash receipts	$334,750	$172,250	$120,250	$627,250