Question

Problem 20-4A Manufacturing: Preparation of a complete master budget LO P1, P2, P3

The management of Zigby Manufacturing prepared the following estimated balance sheet for March 2019.

ZIGBY MANUFACTURING Estimated Balance Sheet March 31, 2019
Assets
Cash	$	44,000
Accounts receivable		500,000
Raw materials inventory		90,200
Finished goods inventory		444,000
Total current assets		1,078,200
Equipment		608,000
Accumulated depreciation		(154,000	)
Equipment, net		454,000
Total assets	$	1,532,200
Liabilities and Equity
Accounts payable	$	211,300
Short-term notes payable		16,000
Total current liabilities		227,300
Long-term note payable		505,000
Total liabilities		732,300
Common stock		339,000
Retained earnings		460,900
Total stockholders’ equity		799,900
Total liabilities and equity	$	1,532,200

To prepare a master budget for April, May, and June of 2019, management gathers the following information.

1. Sales for March total 25,000 units. Forecasted sales in units are as follows: April, 25,000; May, 16,300; June, 21,100; and July, 25,000. Sales of 244,000 units are forecasted for the entire year. The product’s selling price is $25.00 per unit and its total product cost is $22.20 per unit.
2. Company policy calls for a given month’s ending raw materials inventory to equal 50% of the next month’s materials requirements. The March 31 raw materials inventory is 4,510 units, which complies with the policy. The expected June 30 ending raw materials inventory is 4,400 units. Raw materials cost $20 per unit. Each finished unit requires 0.50 units of raw materials.
3. Company policy calls for a given month’s ending finished goods inventory to equal 80% of the next month’s expected unit sales. The March 31 finished goods inventory is 20,000 units, which complies with the policy.
4. Each finished unit requires 0.50 hours of direct labor at a rate of $19 per hour.
5. Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is $3.10 per direct labor hour. Depreciation of $23,920 per month is treated as fixed factory overhead.
6. Sales representatives’ commissions are 6% of sales and are paid in the month of the sales. The sales manager’s monthly salary is $3,400.
7. Monthly general and administrative expenses include $16,000 administrative salaries and 0.8% monthly interest on the long-term note payable.
8. The company expects 20% of sales to be for cash and the remaining 80% on credit. Receivables are collected in full in the month following the sale (none are collected in the month of the sale).
9. All raw materials purchases are on credit, and no payables arise from any other transactions. One month’s raw materials purchases are fully paid in the next month.
10. The minimum ending cash balance for all months is $44,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.
11. Dividends of $14,000 are to be declared and paid in May.
12. No cash payments for income taxes are to be made during the second calendar quarter. Income tax will be assessed at 40% in the quarter and paid in the third calendar quarter.
13. Equipment purchases of $134,000 are budgeted for the last day of June.

Required:
Prepare the following budgets and other financial information as required. All budgets and other financial information should be prepared for the second calendar quarter, except as otherwise noted below. (Round calculations up to the nearest whole dollar, except for the amount of cash sales, which should be rounded down to the nearest whole dollar.):

1. Sales budget.
2. Production budget.
3. Raw materials budget.
4. Direct labor budget.
5. Factory overhead budget.
6. Selling expense budget.
7. General and administrative expense budget.
8. Cash budget.
9. Budgeted income statement for the entire second quarter (not for each month separately).
10. Budgeted balance sheet.

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6,7,8,9,10

Answer 1

1) Sales Budget
	April	May	June
Budgeted sales in units (a)	25,000	16,300	21,100
Budgeted selling price per unit (b)	$25	$25	$25
Budgeted sales in dollars (a*b)	$625,000	$407,500	$527,500
2) Production Budget
	April	May	June
Budgeted sales in units	25,000	16,300	21,100
Add: Desired ending finished goods inventory (16,300*80/100); (21,100*80/100); (25,000*80/100)	13,040	16,880	20,000
Less: Beginning finished goods inventory (last month's ending inventory will be the beginning inventory in current month)	20,000	13,040	16,880
Finished Goods required to produce	18,040	20,140	24,220
3) Raw materials budget
	April	May	June
Finished goods required to produce (a)	18,040	20,140	24,220
Per unit of raw materials for per unit of finished goods (b)	0.5	0.5	0.5
Units of raw materials required (a*b)	9,020	10,070	12,110
Add: Desired ending raw materials inventory (10,070*50/100); (12,110*50/100)	5,035	6,055	4,400
Less: Beginning raw materials inventory (last month's ending inventory will be the current month's beginning inventory)	4,510	5,035	6,055
Total raw materials required to purchase (c )	9,545	11,090	10,455
Cost per unit of raw materials inventory (d)	$20	$20	$20
Total cost of raw materials required to purchase (c*d)	$190,900	$221,800	$209,100
4) Direct labor budget
	April	May	June
Finished goods required to produce (a)	18,040	20,140	24,220
Per hour of direct labor for each unit (b)	0.5	0.5	0.5
Total hours of direct labor required (c = a*b)	9,020	10,070	12,110
Dollar rate per hour of direct labor (d)	$19	$19	$19
Total cost of direct labor (c * d)	$171,380	$191,330	$230,090

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