Optima Company is a high-technology organization that produces a mass-storage system. Thedesign of Optima’s system is unique and represents a breakthrough in the industry. The unitsOptima produces combine positive features of both compact and hard disks. The company iscompleting its fifth year of operations and is preparing to build its master budget for the comingyear (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:a. Fourth-quarter sales for 20X0 are 55,000 units.b. Unit sales by quarter (for 20X1) are projected as follows:First quarter 65,000Second quarter 70,000Third quarter 75,000Fourth quarter 90,000The selling price is $400 per unit. All sales are credit sales. Optima collects 85% of all saleswithin the quarter in which they are realized; the other 15% is collected in the followingquarter. There are no bad debts.c. There is no beginning inventory of finished goods. Optima is planning the followingending finished goods inventories for each quarter:First quarter 13,000 unitsSecond quarter 15,000 unitsThird quarter 20,000 unitsFourth quarter 10,000 units d. Each mass-storage unit uses 5 hours of direct labor and three units of direct materials.Laborers are paid $10 per hour, and one unit of direct materials costs $80.e. There are 65,700 units of direct materials in beginning inventory as of January 1, 20X1. Atthe end of each quarter, Optima plans to have 30% of the direct materials needed for nextquarter’s unit sales. Optima will end the year with the same amount of direct materialsfound in this year’s beginning inventory.f. Optima buys direct materials on account. Half of the purchases are paid for in the quarterof acquisition, and the remaining half are paid for in the following quarter. Wages andsalaries are paid on the 15th and 30th of each month.g. Fixed overhead totals $1 million each quarter. Of this total, $350,000 representsdepreciation. All other fixed expenses are paid for in cash in the quarter incurred. Thefixed overhead rate is computed by dividing the year’s total fixed overhead by the year’sbudgeted production in units.h. Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expensesare paid for in the quarter incurred.i. Fixed selling and administrative expenses total $250,000 per quarter, including $50,000depreciation.j. Variable selling and administrative expenses are budgeted at $10 per unit sold. All sellingand administrative expenses are paid for in the quarter incurred.k. The balance sheet as of December 31, 20X0, is as follows:AssetsCash $ 250,000Direct materials inventory 5,256,000Accounts receivable 3,300,000Plant and equipment, net 33,500,000Total assets $42,306,000 Liabilities and Stockholders’ EquityAccounts payable $ 7,248,000*Capital stock 27,000,000Retained earnings 8,058,000Total liabilities and stockholders’ equity $42,306,000 *For purchase of direct materials only. l. Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2million of equipment will be purchased. Required:Prepare a master budget for Optima Company for each quarter of 20X1 and for the year intotal. The following component budgets must be included:1. Sales budget2. Production budget3. Direct materials purchases budget4. Direct labor budget5. Overhead budget6. Selling and administrative expenses budget7. Ending finished goods inventory budget8. Cost of goods sold budget (Note: Assume that there is no change in work-in-processinventories.)9. Cash budget10. Pro forma income statement (using absorption costing) (Note: Ignore income taxes.)11. Pro forma balance sheet (Note: Ignore income taxes.)
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
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
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:
a. Fourth-quarter sales for 20X0 are 55,000 units.
b. 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.
c. 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
d. Each mass-storage unit uses 5 hours of direct labor and three units of direct materials.
Laborers are paid $10 per hour, and one unit of direct materials costs $80.
e. 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.
f. 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.
g. Fixed
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.
h. Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses
are paid for in the quarter incurred.
i. Fixed selling and administrative expenses total $250,000 per quarter, including $50,000
depreciation.
j. Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling
and administrative expenses are paid for in the quarter incurred.
k. The
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
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.
l. 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 master budget for Optima Company for each quarter of 20X1 and for the year in
total. The following component budgets must be included:
1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
5. Overhead budget
6. Selling and administrative expenses budget
7. Ending finished goods inventory budget
8. Cost of goods sold budget (Note: Assume that there is no change in work-in-process
inventories.)
9. Cash budget
10. Pro forma income statement (using absorption costing) (Note: Ignore income taxes.)
11. Pro forma balance sheet (Note: Ignore income taxes.)
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