Chapter 8 the Master Budget

CHAPTER 8 THE MASTER BUDGET 19. A

B

C

1st Quarter 2nd Quarter 600,000 300,000  $17  $16 $10,200,000 $ 4,800,000

3rd Quarter 640,000  $14 $ 8,960,000

4th Quarter 460,000  $12 $5,520,000

Total $29,480,000

400,000 700,000  $17  $16 $ 6,800,000 $11,200,000

250,000  $14 $ 3,500,000

650,000  $12 $7,800,000

$29,300,000

530,000 480,000  $17  $16 $ 9,010,000 $ 7,680,000

800,000  $14 $11,200,000

190,000  $12 $2,280,000

$30,170,000

The most financially beneficial scenario would be C; however, given the large discrepancies in sales quantities per quarter, Pataky Company may not be able to smooth production activities over the year. There would need to be a large inventory build-up for the third quarter, which would increase the costs of nonvalue-added costs of moving and storing units. The extreme decline in fourth quarter sales might result in layoffs, if other value-added activities could not be developed for direct labor employees. Scenario A might actually be a better situation because of the less dramatic adjustments between quarters. 20. Budgeted sales Ending inventory (5%) Total required Beginning inventory Budgeted production 21.

st

Sales EI (10%) Total BI Production

1 1,080,000 136,000 1,216,000 (94,500) 1,121,500

22. a. Sales EI Total units needed BI Units produced

January 102,400 4,800 107,200 (7,000) 100,200

February 96,000 6,400 102,400 (4,800) 97,600

QUARTER 2 3rd 1,360,000 980,000 98,000 110,000 1,458,000 1,090,000 (136,000) (98,000) 1,322,000 992,000 nd

January 300 1,700 2,000 (1,000) 1,000

February 700 1,900 2,600 (1,700) 900

March 128,000 7,680 135,680 (6,400) 129,280 th

4 1,100,000 120,000 1,220,000 (110,000) 1,110,000 March 1,000 1,300 2,300 (1,900) 400

Total 4,520,000 120,000 4,640,000 (94,500) 4,545,500 April 900 700 1,600 (1,300) 300

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b.

February 900 3 2,700 1,350 4,050 (1,500) 2,550  $2.00 $ 5,100

Units produced Pounds of RM per unit RM needed for production EI Pounds of RM needed Pounds of RM in BI Pounds of RM to purchase Cost per pound Cost of RM purchases c. Units produced DLHs per unit Total hours Cost per DLH Cost of DL 23. Sales of gowns EI of gowns Total BI of gowns Production

February 900  10 9,000  $12 $108,000

March 400 3 1,200 600 1,800 (1,350) 450  $2.30 $ 1,035

April 300 3 900 450 1,350 (600) 750  $2.40 $ 1,800

March 400  10 4,000  $12 $48,000

April 300  10 3,000  $12 $36,000

325,000 15,800 340,800 (21,000) 319,800

319,800  2.5 yards = 799,500 yards Yards needed for production Ending inventory Total Beginning inventory Yards to purchase Divided by yards in bolt Necessary bolts 24. a. and b. Sales (feet) EI Total BI Production Production in feet Pounds per foot Pounds for production EI Total pounds needed

799,500 4,550 804,050 (5,000) 799,050 ÷ 15 53,270 190,000 10,000 200,000 (12,250) 187,750 Concrete 187,750 4 751,000 34,300 785,300

Gravel 187,750  7.5 1,408,125 46,250 1,454,375

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BI Purchase (pounds) Cost per pound Total cost 25. a. Production budget Units of sales Units desired in ending inv. Units needed Units in beginning inv. Budgeted production

(41,000) 744,300  $0.10 $ 74,430

(32,650) 1,421,725  $0.04 $ 56,869

Boxes

Trays

42,000 1,800 43,800 (1,200) 42,600

30,000 650 30,650 (800) 29,850

b. Purchases budget—Material A Pounds needed for production: (42,600  2) + (29,850  1) = (85,200 + 29,850) Desired ending inventory Total requirements Less beginning inventory Pounds to be purchased Cost per pound Total cost of Material A purchases

115,050 1,500 116,550 (1,780) 114,770  $0.05 $5,738.50

Purchases budget—Material B Pounds needed for production: (42,600  1.5) + (29,850  0.8) = (63,900 + 23,880) Desired ending inventory Total requirements Less beginning inventory Pounds to be purchased Cost per pound Total cost of Material B purchases Material purchases: Material A 114,770 lbs. Material B 84,180 lbs. Total

$ 5,738.50 5,892.60 $11,631.10

c. Direct labor budget Required hours: Boxes (42,600  0.3) Trays (29,850  0.2) Total DLHs Average DL wage rate Total DL cost d. Activity base (DLHs) Multiplied by OH rate Overhead applied

87,780 1,400 89,180 (5,000) 84,180  $0.07 $5,892.60

Boxes 12,780  $1.60 $20,448

12,780 5,970 18,750  $9.50 $178,125 Trays 5,970  $1.60 $9,552

Total $30,000

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26. Cost of goods sold Ending inventory Beginning inventory Budgeted purchases

$600,000 84,000 (60,000) $624,000

Monthly purchases: $624,000 ÷ 12 = $52,000 Payment for current year purchases ($52,000  11) Beginning A/P balance Total cash payments for purchases in 2014 27.

Sept. $37,440 32,000 9,600

Aug. credit sales (60%  $78,000  80%) Sept. cash sales (40%  $80,000) Sept. credit sales (60%  $80,000  20%) Sept. credit sales (60%  $80,000  80%) Oct. cash sales (40%  $95,000) Oct. credit sales (60%  $95,000  20%) Oct. credit sales (60%  $95,000  80%) Nov. cash sales (40%  $91,000) Nov. credit sales (60%  $91,000  20%) Total collections

28. a. Nov. sales (30%  $83,000) Dec. sales (30%  $76,000) Dec. sales (30%  $76,000) Jan. sales (40%  $79,000  99%) Jan. sales (30%  $79,000) Jan. sales (30%  $79,000) Feb. sales (40%  $88,000  99%) Feb. sales (30%  $88,000) Mar. sales (40%  $59,000  99%) Total collections

$572,000 40,000 $612,000 Oct.

Nov.

$38,400 38,000 11,400

$79,040 January $24,900 22,800

$87,800

February

$45,600 36,400 10,920 $92,920 March

$22,800 31,284 23,700 $23,700 34,848

$78,984

$81,348

b. Feb. sales to be collected in April (30%  $88,000) March sales to be collected in April (30%  $59,000) March sales to be collected in May (30%  $59,000) Total A/R balance at March 31 29. a. October collections: From A/R balance From October billings ($100,000  0.15) Total October collections November collections: From October billings ($100,000  0.55) From November billings ($65,000  0.15) Total November collections

26,400 23,364 $73,464 $26,400 17,700 17,700 $61,800

$11,000 15,000 $26,000 $55,000 9,750 $64,750

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December collections: From October billings ($100,000  0.30) From November billings ($65,000  0.55) From December billings ($15,000  0.15) Total December collections

$30,000 35,750 2,250 $68,000

b. October collections Less October business costs Remainder 10/31 November collections Total Less November business costs Remainder 11/30

$ 26,000 (22,500) $ 3,500 64,750 $ 68,250 (22,500) $ 45,750

Yes, Irby could pay the $45,000 for the trip at the end of November. c. If Irby pays for the trip and if everything works out exactly as planned, she would have $750 of cash on hand in the business. This is an exceptionally small “cushion” and she should probably not make such a large cash expenditure at the end of November. Remainder 11/30 December collections Total Less December business costs Remainder 12/31

$ 45,750 68,000 $113,750 (22,500) $ 91,250

However, if Irby has good credit, she could borrow the $45,000 to pay for the trip at the end of November and pay the money back at the end of December when she has a substantial cash balance. If she can borrow at 12%, she would incur 1% per month for interest—or $450 ($45,000  0.01) until the end of December. By paying for the trip in November, she’d be saving $5,000 and spending $450—saving a total of $4,550. 35. Beginning cash balance Cash receipts Total cash available Cash disbursements: Payments on account Wage expenses Overhead costs Total disbursements Cash excess (inadequacy) Minimum cash balance Cash available (needed) Financing: Borrowings (repayments) Sell (acquire) investments Receive (pay) interest

July $ 7,400 16,400 $23,800

August $ 7,200 20,200 $27,400

Sept. $ 7,200 33,800 $41,000

Total $ 7,400 70,400 $ 77,800

$ 2,600 10,000 8,000 $20,600 $ 3,200 (7,000) $ (3,800)

$ 7,800 12,200 9,200 $29,200 $ (1,800) (7,000) $ (8,800)

$11,400 12,400 8,800 $32,600 $ 8,400 (7,000) $ 1,400

$ 21,800 34,600 26,000 $ 82,400 $ (4,600) (7,000) $(11,600)

$ 4,000 0 0

$ 9,000 0 0

$ (1,000) 0 (20)

$ 12,000 0 (20)

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Ending cash balance

$ 7,200

$ 7,200

$ 7,380

$ 7,380

36. a. CGS = $2,000,000 + (0.65  $8,000,000) = $7,200,000 b. CGS ($800,000  0.75) Increase in Inventory Decrease in Accounts Payable Total cash payment for inventories

$600,000 20,000 45,000 $665,000

c. y = $250,000 + $17.50X y = $250,000 + ($17.50  7,500) y = $250,000 + $131,250 = $381,250 total overhead Cash overhead cost = $381,250 – $95,000 = $286,250 d. Beginning cash balance Cash collections Total cash available Disbursements: Payoff of note payable Interest on note payable Purchase of computer system Operating costs and inventory purchases Direct labor wages Overhead costs Selling and administrative costs Cash deficiency Borrowings needed Ending cash balance (December 11, 2003), p. A14.

$ 15,000 470,500 $ 485,500 $ 52,500 4,700 17,900 193,500 110,000 106,400 94,800

(579,800) $ (94,300) 100,000 $ 5,700

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