Week 4 Chapter 6 Problem 3 Comprehensive budgeting

Chapter 6 Problem 3: Comprehensive budgeting

The balance sheet of Watson Company as of December 31, 20X1, follows.

WATSON COMPANY 

Balance Sheet 

December 31, 20X1 

Assets 

Cash       $4,595

Accounts receivable       10,000

Finished goods (575 units x $7.00)       4,025

Direct materials (2,760 units x $0.50)  1,380

Plant & equipment         $50,000

Less: Accumulated depreciation            10,000             40,000

Liabilities & Stockholders’ Equity 

Accounts payable to suppliers  $14,000

Common stock  $25,000

Retained earnings           21,000             46,000

Total liabilities &. stockholders’ equity             $60,000

The following information has been extracted from the firm’s accounting records:

1. 1.      All sales are made on account at $20 per unit. Sixty percent of the sales are collected in the month of sale; the remaining 40% are collected in the following month. Forecasted sales for the first five months of 20X2 are: January, 1,500 units,- February, 1,600 units; March, 1,800 units; April, 2,000 units; May, 2,100 units.
2. 2.      Management wants to maintain the finished goods inventory at 30% of the following month’s sales.
3. 3.      Watson uses four units of direct material in each finished unit. The direct material price has been stable and is expected to remain so over the next six months. Management wants to maintain the ending direct materials inventory at 60% of the following month’s production needs.
4. 4.      Seventy percent of all purchases are paid in the month of purchase; the remaining 30% are paid in the subsequent month.
5. 5.      Watson’s product requires 30 minutes of direct labor time. Each hour of direct labor costs $7.

Instructions:

1. a.       Rounding computations to the nearest dollar, prepare the following for January through March:

1)  Sales budget

2)  Schedule of cash collections

3)  Production budget

4)  Direct material purchases budget

5)  Schedule of cash disbursements for material purchases

6)  Direct labor budget

1. b.      Determine the balances in the following accounts as of March 31:

1)  Accounts Receivable

2)  Direct Materials

3)  Accounts Payable