Understanding Relationships, Master Budget, Comprehensive Review

Understanding Relationships, Master Budget, Comprehensive Review

Optima Company is a high-technology organization that produces a mass-storage system. The design of Optima’s system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (20X1). The budget will detail each quarter’s activity and the activity for the year in total. The master budget will be based on the following information:

Fourth-quarter sales for 20X0 are 55,000 units.

Unit sales by quarter (for 20X1) are projected as follows:

First quarter 65,000
Second quarter 70,000
Third quarter 75,000
Fourth quarter 90,000

The selling price is $400 per unit. All sales are credit sales. Optima collects 85% of all sales within the quarter in which they are realized; the other 15% is collected in the following quarter. There are no bad debts.There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter:

First quarter 13,000 units
Second quarter 15,000 units
Third quarter 20,000 units
Fourth quarter 10,000 units

Each mass-storage unit uses five hours of direct labor and three units of direct materials. Laborers are paid $10 per hour, and one unit of direct materials costs $80.

There are 65,700 units of direct materials in beginning inventory as of January 1, 20X1. At the end of each quarter, Optima plans to have 30% of the direct materials needed for next quarter’s unit sales. Optima will end the year with the same amount of direct materials found in this year’s beginning inventory.

Optima buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition, and the remaining half are paid for in the following quarter. Wages and salaries are paid on the 15th and 30th of each month.

Fixed overhead totals $1 million each quarter. Of this total, $350,000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year’s total fixed overhead by the year’s budgeted production in units.

Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred.

Fixed selling and administrative expenses total $250,000 per quarter, including $50,000 depreciation.

Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.

The balance sheet as of December 31, 20X0, is as follows:

Assets
Cash $ 250,000
Direct materials inventory 5,256,000
Accounts receivable 3,300,000
Plant and equipment, net 33,500,000
     Total assets $42,306,000
Liabilities and Stockholders’ Equity
Accounts payable $ 7,248,000*
Capital stock 27,000,000
Retained earnings 8,058,000
     Total liabilities and stockholders’ equity $42,306,000
* For purchase of direct materials only.

Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2 million of equipment will be purchased.

Required:

Prepare a budget for Optima Company for each quarter of 20X1 and for the year in total. The following component budgets must be included:

1. Selling and Administrative costs

2. Ending finished goods inventory budget

3. Cost of goods sold budget ( Assume that there is no change in work in progress inventories)

4. Cash budget

5. Pro forma Income Statement (using absorption costing)

6. Pro forma Balance Sheet

Expert Answer

 

Answer 1. a
Sales Budget
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
Budgeted Units Sales                  65,000                  70,000                  75,000                  90,000                300,000
SP Per Unit                        400                        400                        400                        400                        400
Total Budgeted Sales in $          26,000,000          28,000,000          30,000,000          36,000,000        120,000,000
Answer 1. b
Schedule of Expected Cash Collections from Sales
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
Collection from Accounts Receivables
AR – 20X0 – Qtr 4            3,300,000            3,300,000
Qtr 1 – Sales collections          22,100,000            3,900,000          26,000,000
Qtr 2 – Sales collections          23,800,000            4,200,000          28,000,000
Qtr 3 – Sales collections                            –                            –          25,500,000            4,500,000          30,000,000
Qtr 4 – Sales collections          30,600,000          30,600,000
Total cash Collections          25,400,000          27,700,000          29,700,000          35,100,000        117,900,000
Answer 1.c
Merchandise Production Budget
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
Budgeted Units Sales                  65,000                  70,000                  75,000                  90,000                300,000
Add: Closing Inventory in units                  13,000                  15,000                  20,000                  10,000                  10,000
Total Needs                  78,000                  85,000                  95,000                100,000                310,000
Less: opening Inventory in uints                            –                (13,000)                (15,000)                (20,000)                            –
Required Production in Units                  78,000                  72,000                  80,000                  80,000                310,000
Answer 1. d
Direct Material Purchase Budget
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
Required Production in Units                  78,000                  72,000                  80,000                  80,000                310,000
No. of Units Required – Direct Material                             3                             3                             3                             3                             3
Total Units Required – Direct Material                234,000                216,000                240,000                240,000                930,000
Add: Closing Inventory in units                  21,600                  24,000                  24,000                  65,700                  65,700
Total Needs                255,600                240,000                264,000                305,700                995,700
Less: opening Inventory in uints                (65,700)                (21,600)                (24,000)                (24,000)                (65,700)
Required Units Purchased – Direct Material                189,900                218,400                240,000                281,700                930,000
Cost per Unit                           80                           80                           80                           80                           80
Required Purchases          15,192,000          17,472,000          19,200,000          22,536,000          74,400,000
Direct Labor Budget
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
Required Production in Units 78000 72000 80000 80000 310000
Direct Labor hours Required per unit                             5                             5                             5                             5                             5
Total Labor Hours Required                390,000                360,000                400,000                400,000            1,550,000
Cost per Labor hour                           10                           10                           10                           10                           10
Total Labor Cost            3,900,000            3,600,000            4,000,000            4,000,000          15,500,000
Schedule of Cash payments to Suppliers (Direct Material)
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
Cash Payment
Accounts Payable -Qtr 4 – 20X0      7,248,000.00      7,248,000.00
Qtr 1 Purchases      7,596,000.00      7,596,000.00    15,192,000.00
Qtr 2 Purchases      8,736,000.00      8,736,000.00    17,472,000.00
Qtr 3 Purchases      9,600,000.00      9,600,000.00    19,200,000.00
Qtr 4 Purchases    11,268,000.00    11,268,000.00
Total Cash Payment to Suppliers    14,844,000.00    16,332,000.00    18,336,000.00    20,868,000.00    70,380,000.00
Factory Overhead Budget
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
Fixed Overhead                650,000                650,000                650,000                650,000            2,600,000
Depreciation                350,000                350,000                350,000                350,000            1,400,000
Variable Overhead            2,340,000            2,160,000            2,400,000            2,400,000            9,300,000
Total Overhead            3,340,000            3,160,000            3,400,000            3,400,000          13,300,000
Selling & Administrative Expenses
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
Fixed Selling & Admn. Exp.                200,000                200,000                200,000                200,000                800,000
Depreciation                  50,000                  50,000                  50,000                  50,000                200,000
Variable Selling & Admn. Exp.                650,000                700,000                750,000                900,000            3,000,000
Total Selling & Admn. Exp.                900,000                950,000            1,000,000            1,150,000            4,000,000
Calculation of Cost per Unit:
Direct Material – 3 Units X $80                  240.00
Direct Labor – 5 hrs X $10                     50.00
Variable Factory Overhead – 5 Hrs X $6                     30.00
Fixed Factory Overhead – $4,000,000 / 310,000 Unit                     12.90
Total Cost per Unit                  332.90
Cost of Goods Sold Budget
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
No. of Units Sold                  65,000                  70,000                  75,000                  90,000                300,000
Cost per Unit                  332.90                  332.90                  332.90                  332.90                  332.90
Cost of Good Sold          21,638,710          23,303,226          24,967,742          29,961,290          99,870,968
Cash budget
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total
Opening cash Balance                250,000            2,766,000            6,524,000            9,588,000                250,000
Add: receipts
Collection from Customers          25,400,000          27,700,000          29,700,000          35,100,000        117,900,000
Total Cash available from operations          25,650,000          30,466,000          36,224,000          44,688,000        118,150,000
Less: Cash Disbursements
Direct Material        (14,844,000)        (16,332,000)        (18,336,000)        (20,868,000)        (70,380,000)
Direct Labor          (3,900,000)          (3,600,000)          (4,000,000)          (4,000,000)        (15,500,000)
Factory Overhead Expenes          (2,990,000)          (2,810,000)          (3,050,000)          (3,050,000)        (11,900,000)
Selling & Admn. Exp.              (850,000)              (900,000)              (950,000)          (1,100,000)          (3,800,000)
Dividends Paid              (300,000)              (300,000)              (300,000)              (300,000)          (1,200,000)
Total Disbursement        (22,884,000)        (23,942,000)        (26,636,000)        (29,318,000)     (102,780,000)
Investments (Assets Using Cash)
Short term – interest bearing                            –                            –                            –                            –
Land Purchased                            –                            –          (2,000,000)          (2,000,000)
Net Cash Balance Closing            2,766,000            6,524,000            9,588,000          13,370,000          13,370,000
Income Statement
Sales        120,000,000
Cost of Goods Sold        (99,870,968)
Gross Margin          20,129,032
Less: Selling & Admn. Exp.          (4,000,000)
Net Income          16,129,032
Balance Sheet
Assets
Current Assets
Cash          13,370,000
Accounts receivables            5,400,000
Direct Material Inventory            5,256,000
Finished Goods Inventory – 10,000 Units X $332.90            3,329,032          27,355,032
Plant & Equipment          33,500,000
Add: Additions            2,000,000
Less: Depreciation          (1,600,000)          33,900,000
Total Assets          61,255,032
Liabilities
Accounts Payable          11,268,000
Other Liabilities                            –
Total liabilities          11,268,000
Shareholders’s Equity
Common Stock          27,000,000
Retained Earnings          22,987,032
Total Stockholders equity          49,987,032
Total liabilities & Stockholders’ Equity          61,255,032                            –
Schedule of Retained Earnings
Opening Balance            8,058,000
Add: net income          16,129,032
Less: Dividend Paid          (1,200,000)
Closing Balance          22,987,032
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