PROFIT PLANNING
VietTien Corp
To illustrate the master budgeting process, we will use an
example based on the activities of VietTien Corp, one of the
biggest exporters of Vietnam that sells t-shirts with VTec Logo.
VietTien Corp purchases white t-shirts from external suppliers but
do take care of the printing process. The example focuses on the
VietTien cloth-printing factory.
For simplicity, we assume that VietTien has only one product: a
standard short-sleeved t-shirt with the VTec logo printed on the
back. All budgeting exercises refer to year N.
1. Sales Budget
Information
Budgeted units to be sold for each quarter: 1,000; 1,200; 1,500
and 2,000. Selling price is $ 10 per t-shirt.
Required
Prepare a sales budget for each quarter and for the year.
2. Production Budget
Information
Assume that company policy requires 20 percent of the next
quarter’s sales in closing inventory and that beginning inventory of
t-shirts for the first quarter of the year was 200. Assume also that
for the first quarter of next year sales are estimated at 1,200 units.
Required
Prepare a production budget for each quarter and for the year.
3. Direct Materials Purchases Budget
Information
Plain t-shirts cost $ 3 each and ink (for the printing) costs $ 0.20
per ounce. On a per unit basis, the factory needs one plain tshirt and five ounces of ink for each logo t-shirt that it produces.
VTEC’s policy is to have 10 percent of the following quarter’s
production needs in ending inventory. The factory has 60 plain tshirts and 390 ounces of ink on hand on January 1st. At the end
of the year, the desired ending inventory is 110 plain t-shirts and
530 ounces of ink.
Required
Prepare a direct materials purchases budget for plain t-shirts and
for ink (separately).
4. Direct Labour Budget
Information
It takes 0.12 hour to produce one t-shirt. The average wage cost
per hour is $ 12. Total direct labor workforce will be paid for a
minimum of 160 hours per quarter. Any hours worked in excess
160 hours in a quarter are paid at the rate of 1.5 times the normal
hourly rate for direct labour hour. Labor cost incurred as overtime
will be considered as fixed overhead manufacturing cost.
Required
Prepare a direct labour budget.
5. Manufacturing Overhead Budget
Information
The variable overhead rate is $ 5 per direct labour hour; fixed
overhead is budgeted at $ 1,550 per quarter.
Required
Prepare an overhead budget.
6. Closing Finished Goods Inventory Budget
Information
Please refer to direct materials, direct labour and overhead
budgets.
Required
Prepare a closing finished goods inventory budget.
7. Selling and Administrative Expenses Budget
Information
Variable expenses are $ 0.10 per unit sold. Salaries average
$ 1,460 per quarter; utilities, $ 50 per quarter; and depreciation,
$ 200 per quarter. Advertising for quarters 1 through 4 is $ 120,
$ 200, $ 300 and $ 500, respectively. Insurance is $ 500 and is
paid in the second quarter.
Required
Prepare a selling and administrative expenses budget.
8. Budgeted Income Statement
Information
Please refer to the sales budget, the cost of goods sold budget,
the selling and administrative expenses budget, and the cash
budget.
Assume the tax rate is 40 percent.
Required
Prepare a budgeted income statement.
Prepare a budgeted P&L following Variable costing method.
Explain why Income before interest and tax in absorption costing
and variable costing is different. Show your calculation.
9. Cash Budget
Information
1
2
3
4
5
6
7
A $ 2,000 minimum cash balance is required for the end of
each quarter. Money can be borrowed and repaid in
multiples of $ 1,000. Interest is 15 percent per year. By
special arrangement, interest payments are made only for
the amount of the principal being repaid. All borrowings take
place at the beginning of a quarter. All repayments take
place at the end of a quarter.
One-quarter of all sales are for cash, 90 percent of credit
sales are collected in the quarter of sale, and the remaining
10 percent are collected in the following quarter. The sales
for the 4th quarter of the previous year were $ 20,000.
80 percent of purchases of raw materials are paid for in the
quarter of purchase. The remaining 20 percent are paid for
in the following quarter. The purchases for the 4th quarter of
the previous year were $ 6,000.
Budgeted depreciation is $ 550 per quarter for overhead and
$ 200 per quarter for selling and administrative expenses.
The capital budget revealed plans to purchase printing
equipment to replace former machines. The cash outlay for
the equipment, $ 7000, will take place at some point during
the first quarter and it will have no impact on the depreciation
amount per quarter. The company plans to finance the
acquisition of the equipment with operating cash,
supplementing it with short-term loans as necessary.
Corporate income taxes will be paid at the end of the 4th
quarter.
Beginning cash balance equals $ 5,000.
8
All amounts in the budget are rounded to the nearest dollar.
Required
Prepare a cash budget.
10. Budgeted Balance Sheet
Information: Last year’s balance sheet:
12.31.N-1
Current Assets
Cash
5,000
Accounts receivable
1,500
Raw Materials Inventory
258
Finished Goods
Inventory
1,462
Total Current assets
8,220
Land
1,200
Building and equipment
32,000
Property, plant and
equipment
Accumulated
depreciation
Total PP&E
TOTAL ASSETS
-
5,000
28,200
36,420
Current Liabilities
Accounts Payable
1,200
Retained Earnings
35,220
Owner's Equity
TOTAL LIABILITIES &
OWNER'S EQUITY
Required
Prepare a budgeted balance sheet.
36,420