Comprehensive budgeting problem
Ravenna Manufacturing is preparing its master budget for the first quarter of the upcom¬ing year. The following data pertain to Ravenna manufacturing's operations:
Current assets as of December 31 (prior year):
Cash $4,500
Accounts receivable, net ....... $46,000
Invento ............ $15,000
Property, plant, and equipment, net........ $122,000
Accounts Payable.... $42,400
Capital stock............................... $125,000
Retained earnings....................... $22,920
a. Actual sales in December were $70,000. Selling price per unit is projected to remain stable at $10 per unit throughout the budget period. Sales for the first five months of the upcoming year are budgeted to be as follows:
| January |
$83,000 |
| February |
$99,000 |
| March |
$96,000 |
| April |
$90,000 |
| May |
$86,000 |
b. Sales are 30% cash and 70% credit. All credit sales are collected in the month following the sale.
c. Ravenna Manufacturing has a policy that states that each month's ending inventory of finished goods should be 25% of the following month's sales in units).
d. Of each month's direct material purchase 20% are paid for in the month of purchase, while the remainder is paid for M the month following purchase. Two pounds of direct material is needed per unit at $2.00 per pound. Ending inventory of direct materials should be 10% of next month's production needs.
e. Most of the labor at the manufacturing facility is indirect, but there is some direct labor incurred. The direct labor hours per unit is 0.03. The direct labor rate per hour is $8 per hour. All direct labor is paid for in the month in which the work is performed. The direct labor total cost for each of the upcoming three months is as follows:
January........... $2,088
February.......... $2,358
March.............. $2,268
f. Monthly manufacturing overhead costs are $5,000 for factory rent, $3,000 for other fixed manufacturing expenses, and $1.20 per unit for variable manufacturing over¬head. No depreciation is included in these figures. All expenses are paid in the month in which they are incurred.
g. Computer equipment for the administrative offices will be purchased in the upcoming quarter. In January, the company will purchase equipment for $5,000 (cash), while February's cash expenditure will be $12,000 and March's cash expenditure will be $16,000.
h. Operating expenses are budgeted to be $1.00 per unit sold plus fixed operating expenses of $1,000 per month. All operating expenses are paid in the month In which they are incurred.
i. Depreciation on the building and equipment for the general and administrative offices is budgeted to be $4,400 for the entire quarter, which includes depreciation on new acquisitions.
j. Ravenna Manufacturing has a policy that the ending cash balance in each month must be at least $4,000. The company has a line of credit with a local bank. It cto borrow in incrernents of $1,000 at the beginning of each month, up to a total outstanding loan balance 41 9125,000. The interest rate on these loans is 1% per month simple interest (not compounded). Ravenna Manufacturing would pay down on the line of credit balance 3 it has excess funds at the end of the quarter. The company would also Pry the accumulated interest at the end of the quarter on the funds borrowed during the quarter.
k. The company's income tax rate is projected to be 30% of operating income less hterest expense. The company pays $10,000 cash at the end of February in estimated taxes.
Requirement.
1. Prepare a schedule of cash collections for January, February, and March, and for the quarter In total.
2. Prepare a production budget. (Hint: Unit sales = sales in dollars/Selling price per unit)
3. Prepare a direct materials budget.
4. Prepare a cash payments budget for the direct material purchase from requirement 3.
5. Prepare a cash payments budget for direct labor, using the following format:
6. Prepare a cash payments budget for manufacturing overhead costs.
7. Prepare a cash payments budget for operating expenses.
8. Prepare a combined cash budget.
9. Calculate the budgeted manufacturing cost per unit (assume that fixed manufacturing overhead is budgeted to be $0.70 per unit for the year).
10. Prepare a budgeted income statement for the quarter ending March 31. (Hint: Cost of goods sold = Budgeted cost of manufacturing each unit x Number of units sold)
Requirement:
Hughes does not want to give Harland this budget without making constructive suggestions for steps Harland could take to improve expected performance. Write a memo to Harland outlining your suggestions.
Prepare cash budgets under two alternatives (Learning Objectives 2 & 3)
Each autumn, as a hobby, Pauline Spahr weaves cotton place mats to sell at a local craft shop. The mats sell for $20 per set of four mats. The shop charges a 10% commission and remits the net proceeds to Spahr at the end of December. Spahr has woven and sold 25 sets in each of the last two years. She has enough cotton in inventory to make another 25 sets. She paid $7 per set for the cotton. Spahr uses a four-harness loom that she pur¬chased for cash exactly two years ago. It is depreciated at the rate of $10 per month. The accounts payable relate to the cotton inventory and are payable by September 30.
Spahr is considering buying an eight-harness loom so that she can weave more intricate patterns in linen. The new loom costs $1,000; it would be depreciated at $20 per month. Her bank has agreed to lend her $1,000 at 18% interest, with $200 principal plus accrued interest payable December 31. Spahr believes she can weave 15 linen place mat sets in time rush if she does not weave any cotton mats. She predicts that each line set will sell for $50. Linen costs $18 per set. Spahr's supplier will sell her linen on credit, payable December 31.
spahr plans to keep her old loom whether or not she buys the new loom. The balance for sheet for her weaving business at Augest 31 is as follows:
PAULINE SPAHR, WEAVER
Balance Sheet
August 31
| Current assets: |
|
Current liabilities: |
|
| Cash |
$25 |
Accounts payable |
$74 |
| Inventory of cotton |
175 |
|
|
| |
$200 |
|
|
| Fixed assets: |
|
|
|
| Loom |
500 |
Stockholders' equity |
386 |
| Accumulated depreciation |
-240 |
|
|
|
$260 |
|
|
| Total assets |
$460 |
Total liabilities and stockholders' equity |
$460 |
Requirements
1. Prepare a combined cash budget for the four months ending December 31, for two alternatives: weaving the place mats in cotton using the existing loom and weaving the place mats in linen using the new loom.
For each alternative, prepare a budgeted income statement for the four months ending December 31 and a budgeted balance sheet at December 31.
2. On the basis of financial consideration only, what should Spahr do? Give your reason.
3. What nonfinancial factors consider in her decision?