SUBDOMAIN 308.1 - COST/MANAGERIAL ACCOUNTING

Competency 308.1.7: Developing Budgets - The student can develop various

forms of operating budgets, including a flexible budget system.

Objectives:

308.1.7-01: Develop a sales budget.

308.1.7-03: Develop a direct materials budget.

308.1.7-04: Develop a purchases budget.

308.1.7-05: Develop a manufacturing overhead budget.

308.1.7-06: Develop a direct labor budget.

308.1.7-07: Develop a production budget.

Given:

Note: This is the first of two budgeting tasks that must be completed in order. You

must complete this task before you begin task 308.1.7-02, 08, 09.

Company A is a high-end ceiling fan manufacturer established six years ago. It has

one luxury fan model that is unique and has wide market acceptance.

Sales Data

Actual Sales Data Year 10 (last 2 months) Projected Sales Data Year 11 (first 5 months)

Month Units Sold

November, X6 3,000

December, X6 2,400

January, X7 3,500

February, X7 4,000

March, X7 3,500

April, X7 3,400

May, X7 4,000

Selling price is $100 per unit.

All sales are on credit.

Ending Inventory

Raw materials: Outlined in direct materials below

Work in process: No work in process inventory; all work completed on last day of

quarter

Finished goods: 20% of next months sales projection Average unit cost in Year 10: $64 Inventory method used: FIFO

Direct Cost Data

Direct Materials:

Motors are purchased ready to use from an outside supplier at a cost of $14

each. Company As management desires to maintain a motor inventory based on 20% of the next months projected production.

Blades are produced in the plant. Each fan requires 10 blades. The material is

purchased in 4 ft. x 8 ft. sheets at $24 per sheet. Fifteen blades can be cut out of

each sheet. Experience has shown that, on average, the number of defective

blades produced by the cutting process is equal to 6% of the number of good

blades. Defective blades must be discarded. In case of machine breakdowns,

management desires an ending inventory of finished blades each month equal to

10% of the next months total projected blade production.

Direct Labor:

Total payroll expense including benefits is $63 per hour for the production

workers required to operate the blade-cutting machine, and $63 per hour for the

workers required to staff the assembly/packing workstation. The standard labor

allowance is 0.2 hours per fan on the blade-cutting machine and 0.2 hours per

fan at the assembly/packing workstation.

Overhead:

Variable manufacturing overhead and fixed overhead items are presented below.

Accounts Receivable

All sales are made on credit. Historically, 26% of receivables have been collected

during the month of sale, 50% collected in the month following the sale, and 20%

collected two months after the sale. The company has experienced 4% bad debt on

its credit sales.

Accounts Payable

All materials are purchased on credit. Normally, one half of the purchases are paid

during the month in which they were purchased and one half paid the following

month. The accounts payable balance shown on the Year 10 balance sheet

represents one half of the December purchases. The company does not receive any

purchase discounts from its suppliers.

Indirect Labor Costs

Company Sales

Representatives

3% commission on sales each month

Sales Manager $5,000/mo. plus 50% override on sales commissions

Production Supervisor $4,000/mo.

Administrative Expenses

(salaries)

$8,000/mo.

Other Expenses

Yearly Insurance

Premiums

$36,000 on October 1; 80% related to factory operations

Factory Utilities January $15,000; February $17,000; March $15,200

Usage estimated at 90% factory and 10% administrative

Advertising Expenses 7% of monthly sales

Factory Building

Mortgage

(20 years at 8%)

Building purchased four years ago for $430,000 (total

cost)

Down payment of $190,000

Mortgage paid at the end of each quarter

Travel Expenses 4% of monthly sales

Factory Maintenance 10% of monthly blade material costs

Factory Janitor Services $3,000/mo.

Cash Control

The cash on hand at the beginning of each month must be maintained at $60,000 for

any contingencies that might arise. If the operations do not provide this balance, the

company will use its preapproved line of credit at 8% and borrow sufficient funds to

meet the minimum required cash balance. When there is a credit line balance due, it

will be paid in the next month that generates a projected cash balance over the

$60,000 minimum.

Depreciable Assets

The factory building was purchased on January 1, Year 3. It is being depreciated

using straight line depreciation for 20 years. Salvage value of the building is

estimated at $70,000.

The blade-cutting machine was purchased on December 31, Year 10, for $240,000

cash. It is being depreciated over eight years using the double declining balance

method. Depreciation is recognized on long-term assets at the end of each quarter.

Dividend Policy

The company declares $58,000 annual dividend to its shareholders in the first month

of the quarter. Dividends are paid in the second month of the quarter.

Task:

A. Using the attached Budgeting Template and the information provided in the given, create the budgets listed below for the first three months of Year 11.

1. Sales budget

2. Production budget

3. Direct materials budget

4. Direct labor budget

5. Manufacturing overhead budget

Note: Please save word-processing documents as *.rtf (Rich Text Format) or *.pdf

(Portable Document Format) files.

Note: For definitions of terms commonly used in the rubric, see the attached Rubric

Terms.

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