Royal Company is preparing budgets for the quarter ending June 30.
Budgeted sales for the next 5 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.
Assume all sales are on account (credit sales).
Royal’s collection pattern is:
70% collected in the month of sale,
25% collected in the month following sale,
5% uncollectible
The March 31 accounts receivable balance of $30,000 will be collected in full in April.
The management at Royal Company wants the ending inventory to be equal to 20% of the
following month’s budgeted sales in units.
On March 31, 4,000 units are on hand.
At Royal Company, 5 pounds of material are required for each unit of product.
Management wants materials on hand at the end of each month equal to 10% of the
following month’s production needs.
On March 31, 13,000 pounds of material are on hand.
Material cost is $0.40 per pound.
50% of a month’s purchases is paid for in the month of purchase; the other 50% is paid in
the following month.
The March 31 accounts payable balance is $12,000.
At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labor.
Assume workers are paid at the rate of $10 per hour regardless of the hours worked.
The Company has a “no layoff” policy so all employees will be paid for at least 40 hours of
work each week.
For the next 3 months, the direct labor workforce will be paid a minimum of 1,500 hours per
month.
At Royal, manufacturing overhead is applied to units of product on the basis of direct labor
hours.
The variable manufacturing overhead rate is $20 per direct labor hour.
Fixed manufacturing overhead is $50,000 per month, which includes $20,000 of noncash
costs (primarily depreciation of plant assets).
At Royal, the selling and administrative expense budget is divided into variable and fixed
components.
The variable selling and administrative expenses are $0.50 per unit sold.
Fixed selling and administrative expenses are $70,000 per month.
The fixed selling and administrative expenses include $10,000 in costs – primarily
depreciation – that are not cash outlflows of the current month.
PREPARE
a) SALES BUDGET and b) SCHEDULE OF EXPECTED COLLECTIONS
c) PRODUCTION BUDGET
d) DM BUDGET and e) EXPECTED CASH DISBURSEMENT FOR MATERIALS
f) DL BUDGET
g) MOH BUDGET and h) FINISHED GOODS EI BUDGET
i) S&A EXPENSE BUDGET
j) CASH BUDGET
a) SALES BUDGET
April
Budgeted sales 20,000
in units
Selling price per 10
unit
Total budgeted 200,000
sales
May
50,000
June
30,000
Quarter
100,000
10
10
10
500,000
300,000
1,000,000
June
Quarter
30,000
b) SCHEDULE OF EXPECTED COLLECTIONS
April
May
AR 3/31
30,000
April sales
70% x 200,000
140,000
25% x 200,000
50,000
May sales
70% x 50,000
350,000
25% x 50,000
June sales
70% x 300,000
Total cash
170,000
400,000
collections
140,000
50,000
125,000
350,000
125,000
210,000
335,000
210,000
905,000
c) PRODUCTION BUDGET
April
Budgeted
20,000
Sales in units
Add: Desired
20% x 50,000
EI in units
= 10,000
Total Needs in
units
Less:
Beginning
Inventory in
units
Required
production in
units
May
50,000
June
30,000
Quarter
100,000
20% x 30,000
= 6,000
5,000
30,000
56,000
20% x 25,000
= 5,000
(tricky, look at
July)
35,000
4,000
10,000
6,000
4,000
26,000
46,000
29,000
101,000
d) DM BUDGET
April
Production in
26,000
units
Materials per
5
unit (pounds)
Production
130,000
needs (pounds)
Add: Desired EI 10% x 230,000
(pounds)
= 23,000
Total needed
(pounds)
Less: BI
(pounds)
Materials to be
purchased
(pounds)
105,000
May
46,000
June
29,000
Quarter
101,000
5
5
5
230,000
145,000
505,000
10% x 145,000
= 14,500
11,500
153,000
244,500
11,500 (IS
JULY’S
PRODUCTION
GIVEN??)
156,500
13,000 (EI from
March)
140,000
23,000
14,500
13,000
221,500
142,000
503,500
516,500
e) EXPECTED CASH DISBURSEMENT FOR MATERIALS
April
May
June
AP 3/31
$12,000
April purchases
50% x 140,000 x 28,000
$0.4/lb
50% x 140,000 x
28,000
$0.4/lb
May purchases
50% x 221,500 x
44,300
$0.4/lb
50% x 221,500 x
44,300
$0.4/lb =
$88,600
June purchases
(only once)
50% x 142,000 x
28,400
$0.4/lb =
$56,800
Total cash
$40,000
$72,300
$72,700
disbursements
Quarter
12,000
28,000
28,000
44,300
44,300
28,400
$185,000
f) DL BUDGET
Units of
production
(look at
production
budget)
DLH per unit
DLH required
Guaranteed
DLH
DLH paid
*(whichever is
higher)*
Hourly wage
rate
Total DLH costs
April
26,000
May
46,000
June
29,000
Quarter
101,000
0.05
1,300
1,500
0.05
2,300
1,500
0.05
1,450
1,500
0.05
5,050
1,500
2,300
1,500
5,300
$10
$10
$10
$10
$15,000
$23,000
$15,000
$53,000
g) MOH BUDGET
April
Budgeted DLH
1,300
*(RMBR THAT
ALLOCATION
BASE IS NOT
ALWAYS DLH)*
VMOH rate (per $20
DLH)
VMOH costs
$26,000
FMOH costs
$50,000
Total MOH
$76,000
costs
Less: noncash
$20,000
costs
Cash
$56,000
disbursements
for MOH
May
2,300
June
1,450
Quarter
5,050
$20
$20
$20
$46,000
$50,000
$96,000
$29,000
$50,000
$79,000
$101,000
$150,000
$251,000
$20,000
$20,000
$60,000
$76,000
$59,000
191,000
h) FINISHED GOODS EI BUDGET
*information are from:*
DM budget and information
“5 pounds of material are required for each unit of product.”
“Material cost is $0.40 per pound.”
DL budget and information
“each unit of product requires 0.05 hours of direct labor”
“workers are paid at the rate of $10 per hour regardless of the hours worked.”
Tells you that total DLH required = 5,050 DLH
MOH budget
Tells you that total MOH for quarter = $251,000
Production budget
Tells you the FG ending inventory in units = 5,000 units
DM cost per unit = 5lbs x $0.40 = $2.00
DL cost per unit = 0.05hrs x $10.00 = $0.50
MOH per unit = Total MOH for quarter/Total DLH required = $251,000/5,050 = $49.70
Total Prod Cost Per Unit = $2.00 + $0.50 + $2.49 = $4.99
FG ending inventory
= EI in units x Prod Cost per unit
= 5,000 x $4.99
=$24,950
i) S&A EXPENSE BUDGET
April
Budgeted sales 20,000
in units (from
sales budget)
VS&A rate
$0.50
VS&A expenses $10,000
FS&A expenses $70,000
Total S&A
$80,000
expenses
Less: Noncash
$10,000
expenses
Cash S&A
$70,000
expenses
May
50,000
June
30,000
Quarter
100,000
$0.50
$25,000
$70,000
$95,000
$0.50
$15,000
$70,000
$85,000
$0.50
$50,000
$210,000
$260,000
$10,000
$10,000
$30,000
$85,000
$75,000
$230,000
j) CASH BUDGET
Assume the following information for Royal:
Maintains a 16% open line of credit for $75,000
Maintains a minimum cash balance of $30,000
Borrows on the first day of the month and repays loans on the last day of the month (if has
extra cash)
Pays a cash dividend of $49,000 in April
Purchases $143,700 of equipment in May and $48,300 in June (both purchases paid in cash)
Has an April 1 cash balance of $40,000
CASH BUDGET
April
$40,000
May
30,000
June
30,000
b) Add: Cash
collections
Total cash
available
Less: Cash
disbursements
e) For DM
f) For DL
g) For MOH
i) For S&A
Equipment
purchase
Dividend
Total
disbursements
Excess or
(deficiency)
Financing:
Borrowing *(IN
ORDER TO
MAINTAIN
30,000
BALANCE)*
Repayments
*(IF IT HAS
EXTRA CASH)*
Interest
170,000
400,000
335,000
Quarter
40,000
(BEGINNING OF
QUARTER IS
APRIL)
905,000
210,000
430,000
365,000
945,000
40,000
15,000
56,000
70,000
NONE
72,300
23,000
76,000
85,000
143,700
72,700
15,000
59,000
75,000
48,300
185,000
53,000
191,000
230,000
192,000
49,000
230,000
NONE
400,000
NONE
270,000
49,000
900,000
(20,000)
30,000
95,000
45,000
50,000
NONE
NONE
50,000
NONE
NONE
(50,000)
(50,000)
NONE
NONE
(2,000)
Total financing
Ending cash
balance
50,000
30,000
NONE
30,000
3/12 x 16% x
50,000 =
(2,000)
(52,000)
43,000
Beginning cash
balance
(2,000)
43,000