Chapter 13, Problem 61P

Comprehensive Budget Plan

Brighton, Inc., manufactures kitchen tiles. The company recently expanded, and the controller believes that it will need to borrow cash to continue operations. It began negotiating for a one-month bank loan of $500,000 starting May 1. The bank would charge interest at the rate of 1 percent per month and require the company to repay interest and principal on May 31. In considering the loan, the bank requested a projected income statement and cash budget for May.

The following information is available:

• The company budgeted sales at 600,000 units per month in April, June, and July and at 450,000 units in May. The selling price is $4 per unit.
• The inventory of finished goods on April 1 was 120,000 units. The finished goods inventory at the end of each month equals 20 percent of sales anticipated for the following month. There is no work in process.
• The inventory of raw materials on April 1 was 57,000 pounds. At the end of each month, the raw materials inventory equals no less than 40 percent of production requirements for the following month. The company purchases materials in quantities of 62,500 pounds per shipment.
• Selling expenses are 10 percent of gross sales. Administrative expenses, which include depreciation of $2,500 per month on office furniture and fixtures, total $165,000 per month.
• The manufacturing budget for tiles, based on normal production of 500,000 units per month, follows:

Required

1. a.      Prepare schedules computing inventory budgets by months for:
   1. 1. Production in units for April, May, and June.
   2. 2. Raw materials purchases in pounds for April and May.
2. b.      Prepare a projected income statement for May. Cost of goods sold should equal the variable manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period. Assume cash discounts of 1 percent and bad debt expense of 0.5 percent.

To determine

Prepare schedules computing inventory budgets by months for:

1. Production in units for April, May and June.

2. Raw materials purchases in pounds for April and May.

Answer to Problem 61P

The estimated level of production is 570,000, 480,000 and 600,000 for April, May and June. The estimated level of purchase is $133,500 and $78,000 for April and May.

Explanation of Solution

1.

Budgeted production:

Budgeted production is the total number of goods that need to be produced to attain the targeted sales for the budgeted period. It is calculated by adjusting the beginning and closing inventory.

Calculate the production in units for April, May and June:

Company B Budgeted Production statement For the month end 31 June (in units)
Particulars	April	May	June
Estimated sales	600,000	450,000	600,000
Add: closing stock required (1)	90,000	120,000	120,000
Total requirement of units	690,000	570,000	720,000
Less: opening stock	120,000	90,000	120,000
Estimated level of production	570,000	480,000	600,000

Table: (1)

Thus, the estimated level of production is 570,000, 480,000 and 600,000 for April, May and June.

Working note 1:

Calculate the closing stock required:

Particulars	Sales (a)	% of sales (b)	Closing stock     $\text{c =}\left(\text{a×b}\right)$
April	450,000	20%	90,000
May	600,000	20%	120,000
June	600,000	20%	120,000

Table: (2)

2.

Budgeted purchase:

Budgeted purchase is the total amount of goods that is needed to purchase in order to attain the targeted sales. It is calculated by adjusting the inventory.

Calculate the budgeted purchase of raw material for April and May:

Company B Budgeted Purchase Statement For the month end 30 May
Particulars	April	May
Estimated level of production (2)	$142,500	$120,000
Add: closing stock required (3)	$48,000	$60,000
Total requirement of units	$190,500	$180,000
Less: opening stock	$57,000	$102,000 (4)
Estimated level of purchase	$133,500	$78,000

Table: (3)

Thus, the estimated level of purchase is $133,500 and $78,000 for April and May.

Working note 2:

Calculate the estimated level of production ($):

Particulars	Total units (a)	Rate per unit (b)	Amount     $\text{c =}\left(\text{a×b}\right)$
April	570,000	$0.25	$142,500
May	480,000	$0.25	$120,000
June	600,000	0.25	$150,000

Table: (4)

Working note 3:

Calculate the closing stock required:

Month	Production for next month ($) (a)	% requirement (b)	Amount $\text{c =}\left(\text{a×b}\right)$
April	$120,000 (2)	40%	$48,000
May	$150,000 (2)	40%	$60,000

Table: (5)

Working note 4:

Calculate the opening stock for May:

Closing stock of April will be the opening stock of May so the value can be found out with the calculation of closing stock of April.

$\begin{array}{c}\text{Closing stock = Opening stock + Purchase - Prodcution}\\ \text{= \$57,000 + \$187,500 - \$142,500}\\ \text{= \$102,000}\end{array}$

To determine

Prepare a projected income statement for May. Cost of goods sold should equal the variable manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period.

Answer to Problem 61P

The net profit for the month of May is $33,000.

Explanation of Solution

Projected income statement:

Projected income statement is a statement that shows the total income and expenses of the budgeted period. The last year’s income statement is used and some estimates are made for the items that may change in the budgeted period.

Projected income statement for Company B:

Company B Projected Income Statement For the month of May
Particulars	Amount	Total amount
Net Sales revenue (a) (5)		$1,773,000
Less: cost of goods sold:
Variable cost of sales (7)	$990,000
Fixed cost of sales	$400,000
Total cost of goods sold (b)		$1,390,000
Gross profit $\text{c = }\left(\text{a-b}\right)$		$383,000
Less: expenses:
Selling expenses (8)	$180,000
Administrative expenses	$165,000
Interest expenses (9)	$5,000
Total expenses (f)		$350,000
Net profit $\text{g}=\left(c-e\right)$		$33,000

Table: (6)

Thus, the net profit for the month of May is $33,000.

Working note 5:

Calculate the sales revenue:

Particulars	Amount	Total amount
Sales revenue		$1,800,000
Less: cash discount	$18,000
Less: estimated bad debts (6)	$9,000	$27,000
Net sales		$1,773,000

Table: (7)

Working note 6:

Calculate the estimated bed debts:

$\begin{array}{c}\text{Bad debts = Gross sales }\times \text{ (\% of bad debts)}\\ \text{= \$1,800,000 }\times \text{ 0}\text{.5\%}\\ \text{= \$9,000}\end{array}$

Working note 7:

Calculate variable cost:

$\begin{array}{c}\text{Variable cost = }\frac{\text{Total direct variable cost}}{\text{Units sold in April}}\times \text{ Units sold in May}\\ \text{= }\frac{\$1,100,000}{500,000}\times \text{ 450,000}\\ \text{= \$990,000}\end{array}$

Working note 8:

Calculate the selling expenses:

$\begin{array}{c}\text{Selling expenses = Gross sales }\times \text{ (\% of expense)}\\ \text{= \$1,800,000 }\times \text{ 10\%}\\ \text{= \$180,000}\end{array}$

Working note 9:

Calculate the interest expense:

$\begin{array}{c}\text{Interest expense = Bank loand }\times \text{ Rate of interest}\\ \text{= \$500,000 }\times \text{ 1\%}\\ =\text{ \$5,000}\end{array}$