LB Enterprises (LB) is preparing its budget for the first quarter of 2019. LB's balance sheet as of December 31, 2018 is as follows: Assets Liabilities Cash $5,000 Accounts Payable $9500 Accounts Recievable 28,000 Inventories Direct Materials 8,100 Finished Goods (500 Units) 16,870 Stockholders Equity Equipment - gross 45,000 Accumulated depreciation 15.000 Common Stock $15,000 Net Equipment 30,000 Retained Earnings 63,470 Total Assets $87,970 Total Liabilities and $87,960 Equity LB sells one product for $45/unit. The Company forecasts that it will sell 2,000; 1,500; 1,600; and 1,700 units in January, February, March and April, respectively. • Sales to customers are all on credit. 40% of the cash for these sales is collected in the month of the sale and the remaining 60% is collected in the following month. LB wants finished goods inventory equal to 25% of the next month's sales on hand at the end of each month. LB wants direct materials equal to 75% of the current month's production requirements on hand at the end of each month. Each unit of finished goods inventory requires 2.5 pound of direct materials at $3 per pound and 2 hours of direct labor at $10.00 per hour. Direct material purchases are paid 15% in the month they are purchased and 85% in the following month. All other costs of the company are paid for as they are incurred. Manufacturing Overhead consists of the following o Indirect Materials (S.15/unit) o Indirect Labor (S.40/unit) Other ($.35/unit) Production supervisors' salaries - $6,000 per month Depreciation - $950 per month Other fixed - $2,000 per month Selling and Adminitstraion costs consist of the following Commissions ($1.10/unit sold) Freight (S.15/unit sold) Salaries - $8,500 per month Rent - $800 per month Depreciation $150 per month LB will purchase new equipment at a cost of $10,000 on March 31, 2019 6. What is the expected balance in Direct Materials at March 31, 2019. A) $ 8,802 B) $ 12,750 C) $ 9,141 D) $ 8,100

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

LB Enterprises (LB) is preparing its budget for the first quarter of 2019. LB's balance sheet as of December 31, 2018
is as follows:
Assets
Liabilities
Cash
$5,000
Accounts Payable
$9500
Accounts Recievable
28,000
Inventories
Direct Materials
8,100
Finished Goods (500
Units)
16,870
Stockholders Equity
Equipment - gross
45,000
Accumulated depreciation
15.000
Common Stock
$15,000
Net Equipment
30,000
Retained Earnings
63,470
Total Assets
$87,970
Total Liabilities and
$87,960
Equity
LB sells one product for $45/unit. The Company forecasts that it will sell 2,000; 1,500; 1,600; and 1,700 units
in January, February, March and April, respectively.
• Sales to customers are all on credit. 40% of the cash for these sales is collected in the month of the sale and
the remaining 60% is collected in the following month.
LB wants finished goods inventory equal to 25% of the next month's sales on hand at the end of each
month.
LB wants direct materials equal to 75% of the current month's production requirements on hand at the end
of each month.
Each unit of finished goods inventory requires 2.5 pound of direct materials at $3 per pound and 2 hours of
direct labor at $10.00 per hour.
Direct material purchases are paid 15% in the month they are purchased and 85% in the following month. All
other costs of the company are paid for as they are incurred.
Manufacturing Overhead consists of the following
o Indirect Materials (S.15/unit)
o Indirect Labor (S.40/unit)
Other ($.35/unit)
Production supervisors' salaries - $6,000 per month
Depreciation - $950 per month
Other fixed - $2,000 per month
Selling and Adminitstraion costs consist of the following
Commissions ($1.10/unit sold)
Freight (S.15/unit sold)
Salaries - $8,500 per month
Rent - $800 per month
Depreciation $150 per month
LB will purchase new equipment at a cost of $10,000 on March 31, 2019

6. What is the expected balance in Direct Materials at March 31, 2019.
A) $ 8,802
B) $ 12,750
C) $ 9,141
D) $ 8,100

Expert Solution

Step 1

Direct material purchase budget determines the measure of direct materials that must be purchased by an organization in order to meet the units to be produced.

Step 2

Formula to calculate budgeted production units=

Budgeted unit sales + Budgeted ending finished goods - Budgeted beginning finished inventory

Notes:

Ending inventory for every month is calculated as 25% of next month sales.
The ending value of finished goods inventory becomes the beginning finished inventory for next quarter.
March= 0.25 of 1,700 (sales of April)

Budgeted production units for March= 1,625

Production needs for direct material= 1,625 × 2.5= 4,063

Ending units of budgeted material for March= 75% of Production need for direct material

= 75% of 4,063

= 3,047

Expected bal. in direct material at the end of 31^st March= 3,047 × 3= $9,141