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 2017:

ZIGBY MANUFACTURING Estimated Balance Sheet March 31, 2017
Assets
Cash	$	48,000
Accounts receivable		438,750
Raw materials inventory		87,900
Finished goods inventory		383,760
Total current assets		958,410
Equipment, gross		616,000
Accumulated depreciation		(158,000	)
Equipment, net		458,000
Total assets	$	1,416,410
Liabilities and Equity
Accounts payable	$	187,200
Short-term notes payable		20,000
Total current liabilities		207,200
Long-term note payable		508,000
Total liabilities		715,200
Common stock		343,000
Retained earnings		358,210
Total stockholders’ equity		701,210
Total liabilities and equity	$	1,416,410

To prepare a master budget for April, May, and June of 2017, management gathers the following information:

1. Sales for March total 19,500 units. Forecasted sales in units are as follows: April, 19,500; May, 17,100; June, 21,300; and July, 19,500. Sales of 248,000 units are forecasted for the entire year. The product’s selling price is $30.00 per unit and its total product cost is $24.60 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 4,395 units, which complies with the policy. The expected June 30 ending raw materials inventory is 4,800 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 15,600 units, which complies with the policy.
4. Each finished unit requires 0.50 hours of direct labor at a rate of $23 per hour.
5. Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is $3.40 per direct labor hour. Depreciation of $27,020 per month is treated as fixed factory overhead.
6. Sales representatives’ commissions are 7% of sales and are paid in the month of the sales. The sales manager’s monthly salary is $3,800.
7. Monthly general and administrative expenses include $20,000 administrative salaries and 0.5% monthly interest on the long-term note payable.
8. The company expects 25% of sales to be for cash and the remaining 75% 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 $48,000. 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 $18,000 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 $138,000 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.):

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.

Answer 1

June Zigby Manufacturing Sales Budget Req 1 Sales (Units) Selling price per unit Total budgeted sales April 19,500 30.00 585,000 May 17,100 30.00 513,000 June 21,300 30.00 639,000 Calculation Quarter April May 57,900 30.00 1,737,000 Sales (units)* Selling price per unit Quarter April May June Production budget Req2 Budgeted Next Months Sales (Units) Ratio of inventory to future sales Budgeted Ending Inventory (Units) Budgeted Sales (Units) Inventory Needed Less Beginning Inventory Required Production (Units) April 17,100 80% 13,680 19,500 33,180 15,600 17,580 May 21,300 80% 17,040 17,100 34,140 13,680 20,460 June 19,500 80% 15,600 21,300 36,900 17,040 19,860 15,600 Budgeted Next Months Sales (Units) * 80% 57,900 73,500 15,600 End Inv of Apr End Inv of May 57,900 Raw Materials budget Req3 Required Production (Units) Materials required per unit Raw Material Required Add Ending Inventory Raw Materials Needed Less Beginning Inventory Raw Material Purchased Raw Material Cost per unit Budgeted Raw Material Cost April 17,580 0.50 8,790 5,115 13,905 4,395 9,510 20.00 190,200 May 20,460 0.50 10,230 4,965 15,195 5,115 10,080 20.00 201,600 June 19,860 0.50 9,930 4,800 14,730 4,965 9,765 20.00 195,300 Quarter April May June 57,900 0.50 28,950 Required Production (Units) * 0.50 4,800 Next Months Raw Material Required * 50% 33,750 4,395 End Inv of Apr End Inv of May 29,355 20.00 587,100 Raw Material Purchased * Raw Material Cost per unit April May June Direct labor budget Req4 Required Production (Units) Labor requirements per unit Total Labor hours needed Direct labor rate per hour Budgeted Direct Labor Cost April 17,580 0.50 8,790 23.00 202,170 May 20,460 0.50 10,230 23.00 235,290 June 19,860 0.50 9,930 23.00 228,390 Quarter 57,900 0.50 28,950 23.00 665,850 Required Production (Units) * 0.50 Total Labor hours needed * Direct labor rate per hour April May June Factory Overhead budget Req5 Labor hours needed Variable factory overhead rate Budgeted Variable factory overhead Budgeted Fixed factory overhead Budgeted total factory overhead April 8,790 3.40 29,886 27,020 56,906 May June 10,230 9,930 3.40 3.40 34,782' 33,762 27,020 27,020 61,802 60,782 Quarter 28,950 3.40 98,430 81,060 179,490 Labor hours needed * Variable factory overhead rate

April May June Selling Expenses Budget Req6 Budgeted sales Sales commission percent Sales commission Sales salaries Total budgeted selling expenses April 585,000 7% 40,950 3,800 44,750 May 513,000 7% 35,910 3,800 39,710 June 639,000 7% 44,730 3,800 48,530 Quarter 1,737,000 7% 121,590 11,400 132,990 Budgeted sales *7% April May June General & Admin Expenses Budget Req 7 Salaries Interest on long term note Total budgeted General & Admin expenses April 20,000 2,540 22,540 May 20,000 2,540 22,540 June 20,000 2,540 22,540 Quarter 60,000 7,620 67,620 =508,000*0.5% =508,000*0.5% =508,000*0.5% May June Schedule of cash receipts Req 8A Cash sales Credit sales Total cash collections April 146,250 438,750 585,000 May 128,250 384,750 513,000 June 159,750 479,250 639,000 Quarter April 434,250 Budgeted sales * 25% 1,302,750 Budgeted sales * 75% 1,737,000 April May June Schedule of cash receipts Reg 8B Current Months Cash sales Collections of receivables Total cash collections April 146,250 438,750 585,000 May 128,250 438,750 567,000 June 159,750 384,750 544,500 Quarter 434,250 1,262,250 1,696,500 April May June April 48,000 585,000 633,000 May 126,254 567,000 693,254 June 152,732 544,500 697,232 Quarter 48,000 1,696,500 1,744,500 Cash budget Req8 Cash balance, beginning Cash receipts from customers Total cash available Less Cash payments for Raw materials Direct labor Variable overhead Sales commissions Sales salaries General & admin salaries Dividends Loan interest Long term note interest Purchase of equipment Taxes paid Total cash payments Preliminary cash balance Additional loan (loan repayments) Ending Cash balance 187,200 202,170 29,886 40,950 3,800 20,000 190,200 235,290 34,782 35,910 3,800 20,000 18,000 201,600 228,390 33,762 44,730 3,800 20,000 579,000 665,850 98,430 121,590 11,400 60,000 18,000 200 =20,000 200 2,540 2,540 7,620 2,540 138,000 138,000 540,522 152,732 486,746 146,254 (20,000) 126,254 672,822 24,410 23,590 48,000 1,700,090 44,410 3,590 48,000 -48,000-24,410 152,732 June Loan Balance Loan Balance - Beginning of Month Additional loan (loan repayments) Loan Balance - End of Month April May 20,000 (20,000) Quarter 20,000 3,590 23,590 23,590 23,590

1,737,000 1,424,340 312,660 Calculation =57,900*30 =57,900*24.60 Income Statement Req9 Sales Cost of goods sold Gross Profit Operating expenses Sales Commissions Sales Salaries General Administrative Salaries Interest on short term note payable Interest on long term note payable Total Operating expenses Income before taxes Income tax expense Net Income 121,590 11,400 60,000 200 7,620 =20,000*1% =508,000*0.5%*3 200,810 111,850 44,740 67,110 =111,850*40% Balance Sheet Req 10 Assets Cash Accounts Receivable Raw Material Inventory Finished goods Inventory Total Current Assets Equipment, gross Accumulated Depreciation Equipment, net Total Assets 48,000 479,250 96,000 383,760 =639,000*75% --4,800*20 =15,600*24.60 1,007,010 754,000 (239,060) =616,000+138,000 =158,000+27,020 *3 514,940 1,521,950 195,300 23,590 44,740 From Cash budget From Income Statement Liabilities & Stockholders Equity Current Liabilties Accounts Payable Short term notes payable Income taxes Payable Total Current Liabilties Long term notes payable Stockholders Equity Common Stock Retained Earnings Total Stockholders Equity Total Liabilities & Stockholders Equity 263,630 508,000 343,000 407,320 =358,210+67, 110-18,000 750,320 1,521,950