Chapter 22, Problem P22.51BPGB

Completing a comprehensive budgeting problem-manufacturing company

The Grilton Tire Company manufacture racing tires for bicycles. Grilton sells tires for $50 each. Grilton is planning for the next day by developing a master budget by quarters. Grilton’s balance sheet for December 31, 2016, follows

Other data for Gailton Tire Company:

1. Budgeted sales are 1,500 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 30% of total sales, with the remaining 70% of sales on accounts.
2. Finished Goods Inventory on December 31 consists of 300 tires at $29 each.
3. Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2018 are expected to be 2,300 tires. FIFO inventory costing, method, is used.
4. Direct materials cost is $8 per tire.
5. Desired ending Raw Materials Inventory is 30% of the next quarter’s direct materials needed for production, desired ending Inventory for December 31 is $900, indirect materials are insignificant and not considered for budgeting purpose.
6. Each tire requires 0.40 hours of direct labor costs average $16 per hour.
7. Variable manufacturing overhead is $2 per tire.
8. Fixed manufacturing overhead includes $4,500 per quarter in depreciation and $26,780 per quarter for other costs, such as utilities, insurance, and property taxes.
9. Fixed selling and administrative expense include $8,000 per quarter for salaries: $1,800 per quarter for rent; $1,200 per quarter for insurance, and $500 per quarter for depreciation.
10. Variable selling and administrative expense include supplies at 2% of sales.
11. Capital expenditures include $45,000 for new manufacturing equipment, to be purchased and paid in the first quarter.
12. Cash receipts for sales on account are 60% in the quarter of the sale and 40% in the quarter following the sale; December 31, 2016. Accounts Receivable is received in the first quarter of 2017; uncollectible accounts are considered insignificant and not considered for budgeting purposes.
13. Direct materials purchases are paid 70% in the quarter purchased and 30% in the following quarter: December 31, 2016, Accounts Payable is paid in the first quarter of 2017.
14. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.
15. Income tax expense is projected at $3,500 per quarter and is paid is the quarter incurred.
16. Grady desires to maintain a minimum cash balance of $35,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter, principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000, interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

Requirements

1. Prepare Grady’s operating budget and cash budget for 2017 by quarters. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours. Round all calculations to the nearest dollar.
2. Prepare Grady’s annual financial budget for 2017, including budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows.