ACCT

CHAPTER 22

COMPREHENSIVE BUDGETING EXAMPLE

Royal Company is preparing budgets for the second quarter ending June 30.

SALES BUDGET

• Budgeted sales of the company’s only product for the next five months are:

April	20,000 units
May	50,000 units
June	30,000 units
July	25,000 units
August	15,000 units

• The selling price is $10 per unit.

SCHEDULE OF EXPECTED CASH COLLECTIONS

Additional data:

• All sales are on account.

• The company collects 70% of these credit sales in the month of the sale; 25% are collected in the month following sale; and the remaining 5% are uncollectible.

• The accounts receivable balance on March 31 was $30,000. All of this balance was collectible.

PRODUCTION BUDGET

Additional data:

• The company desires to have inventory on hand at the end of each month equal to 20% of the following month’s budgeted unit sales.

• On March 31, 4,000 units were on hand.

DIRECT MATERIALS BUDGET

Additional data:

• 5 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% of the following month’s production needs.

• The beginning materials inventory was 13,000 pounds.

• The material costs $0.40 per pound.

SCHEDULE OF EXPECTED CASH DISBURSEMENTS FOR MATERIAL

Additional data:

• Half of a month’s purchases are paid for in the month of purchase; the other half is paid for in the following month.

• No discounts are given for early payment.

• The accounts payable balance on March 31 was $12,000.

DIRECT LABOR BUDGET

Additional data:

• Each unit produced requires 0.05 hour of direct labor.

• Each hour of direct labor costs the company $10.

• Management fully adjusts the workforce to the workload each month.

MANUFACTURING OVERHEAD BUDGET

Additional data:

• Variable manufacturing overhead is $20 per direct labor-hour.

• Fixed manufacturing overhead is $50,500 per month. This includes $20,500 in depreciation, which is not a cash outflow.

ENDING FINISHED GOODS INVENTORY BUDGET

Additional data:

• Royal Company uses absorption costing in its budgeted income statement and balance sheet.

• Manufacturing overhead is applied to units of product on the basis of direct labor-hours.

• The company has no work in process inventories.

SELLING AND ADMINISTRATIVE EXPENSE BUDGET

Additional data:

• Variable selling and administrative expenses are $0.50 per unit sold.

• Fixed selling and administrative expenses are $70,000 per month and include $10,000 in depreciation.

CASH BUDGET

Additional data:

1. A line of credit is available at a local bank that allows the company to borrow up to $75,000.

a. All borrowing occurs at the beginning of the month, and all repayments occur at the end of the month.

b. The interest rate is 16% annually.

c. The company does not have to make any payments until the end of the quarter.

2. Royal Company desires a cash balance of at least $30,000 at the end of each month. The cash balance at the beginning of April was $40,000.

3. Cash dividends of $51,000 are to be paid to stockholders in April.

4. Equipment purchases of $143,700 are scheduled for May and $48,800 for June. This equipment will be installed and tested during the second quarter and will not become operational until July, when depreciation charges will commence.