Chapter 7, Problem 4PSA

The management of Zigby Manufacturing prepared the following estimated balance sheet for March, 2015:

NABAR MANUFACTURING Estimated Balance Sheet December 30,2015
Assets		Liabilities and Equity
Cash	$ 40,000	Accounts payable	$ 200,500
Accounts receivable	342,248
Raw material Inventory	98,500	Short-term notes payable	12,500
Finished goods inventory	325,540	Total current liabilities	212,500
Total current assets	806,288	Long-term note payable	500,000
Equipment, gross	600,000	Total Liabilities	712,500
Accumulated depreciation	(150,000)	Common stock	335,000
Equipment, net	45,000	Retained earnings	208,788
Total assets	$1,256,288	Total stockholders’ equity	543,788
		Total Liabilities and equity	$1,045,980

To prepare a master budget for July, August, and September of 2015 management gathers the following information:

1. Salve were 20,000 units in June. Fore casted sales in units are as follows: July 21,000; August, 19,000; September, 20,000; October, 24,000. The product’s selling price is $17 per unit and its total product cost is $14.35 per unit.
2. Company policy calls for a given month’s ending raw materials inventory to equal 50% of the next month’s materials requirements. The March 31 raw materials inventory is 4,925 units, which com-plies with the policy. The expected June 30 ending raw materials inventory is 4,000 units. Raw mate-rials cost $20 per unit. Each finished unit requires 0.50 units of raw materials.
3. Company policy calls for a given month’s ending finished goods inventory to equal 80% of the next month’s expected unit sales. The March 31 finished goods inventory is 16,400 units, which complies with the policy.
4. Each finished unit requires 0.50 hours of direct labor at a rate of $15 per hour.
5. Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is $2.70 per direct labor hour. Depreciation of $20,000 per month is treated as fixed factory overhead.
6. Sales representatives' commissions are 8% of sales and are paid in the month of the sales. The sales manager’s monthly salary is $3,000.
7. Sales representatives' commissions are 10% of sales and are paid in the month of the sales. The sales manager’s monthly salary is $3,500 per month.
8. The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none is collected in the month of the sale).

1. All raw materials purchases are on credit, and no payables arise from any other transactions. One month’s raw materials purchases are fully paid in the next month.
2. The minimum ending cash balance for all months is $40,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.
3. Dividends of $10,000 are to be declared and paid in May.
4. No cash payments for income taxes are to be made during the second calendar quarter. Income tax will be assessed at 35% in the quarter and paid in the third calendar quarter. m. Equipment purchases of $130,000 are budgeted for the last day of June.

Required

Prepare the following budgets and other financial information as required. All budgets and other financial information should be prepared for the second calendar quarter, except as otherwise noted below. Round calculations up to the nearest whole dollar, except for the amount of cash sales, which should be rounded down to the nearest whole dollar.

1. Sales budget.
2. Production budget.
3. Raw materials budget.
4. Direct labor budget.
5. Factory overhead budget.
6. Selling expense budget.
7. General and administrative expense budget.
8. Cash budget.
9. Budgeted income statement for the entire second quarter (not for each month separately).
10. Budgeted balance sheet as of the end of the second calendar quarter.

To determine

Concept introduction:

Master forecast

Master budget is a detailed plan for upcoming, it start with sales forecast and ends with money (cash) forecast and with statement of finance. It is also known as joint forecast manufactured by company at a very small level. It also includes budget for money(cash), forecasted statement of finance and monetary plan.

Sales forecast:

It relates to the monetary plan that shows the way capital can be assigned in best way for achieving sales target. The aim of this budget is to curb and plan for the expenditure incurred for objective achievement with respect to sales.

Requirement 1:

Sales forecast for the second quarter of the calendar.

Answer to Problem 4PSA

Therefore, it is determined that sales budget for second quarter for 60000 units is $1431000.

Explanation of Solution

Sales forecast::

It relates to the monetary plan that shows the way capital can be assigned in best way for achieving target for sales. The aim of this budget is to curb and plan for the expenditure incurred for objective achievement with respect to sales.

So computation of sales forecast is given below.

Z manufacturing forecast for sales
Particulars	Forecasted units	Unit value	Dollar(total)
April	20500	$23.85	488925
May	19500	23.85	465075
June	20000	23.85	477000
Second quarter total	60000		1431000

Therefore it is determined that sales forecast for quarter second for 60000 units is $1431000

To determine

Concept introduction:

Manufacturing(production) forecast assesses the number of units to be produced. It is determined by scheduled amount relating to stock of completed goods and sales budget.

Requirement 2:

To explain:

Production budget for the second quarter of the calendar.

Answer to Problem 4PSA

Therefore, it is determined that the production budget for April is 19700 for May it is 19900 and for June it is 20400.

Explanation of Solution

Z manufacturing forecast for production
Particulars	April	May	June
Forecast sales for succeeding month	19500	20000	20500
Ratio of stock to upcoming sales	*.80	*.80	*.80
Forecasted closing stock	15600	16000	16400
Add- forecasted sales	20500	19500	20000
Required manufacturing of units	36100	35500	36400
Less-opening stock	(16400)	(15600)	(16000)
Units to be manufactured	19700	19900	20400

Therefore, it is determined that the manufacturing forecast for April is 19700 for May it is 19900 and for June it is 20400.

To determine

Concept introduction:

Raw material forecast points out the material required for production of units and services.

Requirement 3:

Raw material budget for the second quarter of the calendar.

Answer to Problem 4PSA

Therefore, it is determined that the raw material forecast for the month of April is-$198000, for May-201500 and for June it is $182000.

Explanation of Solution

Z manufacturing raw material forecast
Particulars	April	May	June
Manufactured forecasted units	19700	19900	20400
Per unit material required	*.50	*.50	*.50
Material required for manufacturing	9850	9950	10200
Add-forecasted closing stock	4975	5100	4000
Total material required	14825	15050	14200
Less-opening stock	(4925)	(4975)	(5100)
Material required to be purchased	9900	10075	9100
Price per unit of material	$20	$20	$20
Cost in total of direct material(DM) purchase	198000	201500	182000

Therefore, it is determined that the raw material forecast for the month of April is-$198000, for May-201500 and for June it is $182000.

To determine

Concept introduction:

Direct labour forecast usually tells the numberof hours required for producing units.

Requirement 4:

Direct labour forecast for the second quarter of the calendar.

Answer to Problem 4PSA

Therefore, it is determined that direct labour budget for April is$147750, for May $149250 and for June is $153000.

Explanation of Solution

Direct labour forecast usually determines the number ofhours required for producing units specified underlying the production forecast.

So, computation of direct labour forecast is given below.

Z manufacturing labour(direct) forecast
Particulars	April	May	June
Forecasted manufacturing units	19700	19900	20400
Requirement of labour unit per hours	*.50	*.50	*.50
Total hours needed	9850	9950	10200
Labour rate	15	15	15
Labour $	147750	149250	153000

Therefore, it is determined that direct labour forecast for April is$147750, for May $149250 and for June $153000.

To determine

Concept introduction:

Factory overhead forecast is that forecast which consists of cost of production apart from cost relating to direct material (DM) and direct labour.

Requirement 5:

Factory overhead budget for the second quarter of the calendar.

Answer to Problem 4PSA

Hence, it is determined that factory overhead budget for April is $46595, for May it is $46865 and for June it is $47540.

Explanation of Solution

Factory overhead forecast is that forecast which consists of cost of production apart from cost relating to direct material (DM) and direct labour.

So computation of factory overhead forecast is given below.

Z manufacturing factory overhead forecast
Particulars	April	May	June
Hours of labour needed	9850	9950	10200
Factory overhead (variable) rate	*2.70	*2.70	*2.70
Forecasted overhead(variable)	26595	26865	27540
Overhead(fixed)	20000	20000	20000
Total overhead forecasted	$46595	$46865	$47540

Hence, it is determined that factory overhead forecast for April is $46595, for May it is $46865 and for June; it is $47540.

To determine

Concept introduction:

Forecast for selling expenses is that budget which involves forecast related tosales, marketing, engineering and accounting.

Requirement 6:

Selling expenses budget for the second quarter of the calendar.

Answer to Problem 4PSA

Hence, it is determined that selling expenses budget for April is $42114, for May it is $40206 and for June it is $41160.

Explanation of Solution

Forecast for selling expenses is that forecast which involves forecast relating to sales, marketing, engineering and accounting.

So computation of selling expenses forecast is given below.

Z manufacturing selling expenses forecast
Particulars	April	May	June
Forecasted sales	488925	465075	477000
Commission percentage sales	*.08	*.08	*.08
Expenses related to sales commission	39114	37206	38160
Salaries of sales	3000	3000	3000
Selling expenses in total	$42114	$40206	$41160

Hence, it is determined that selling expenses forecast for April is $42114, for May it is $40206 and for June it is $41160.

To determine

Concept introduction:

Administrative and general expenditure forecast relates to the expenditure that is made for administering the company i.e. rent, utilities and insurance. It does not include expenditure in relation to manufacturing of commodities and services.

Requirement 7:

Administrative and general expenses budget for the second quarter of the calendar.

Answer to Problem 4PSA

Hence it is determined that administrative and general expenses budget for April is $42114, for May it is $40206 and for June it is $41160.

Explanation of Solution

Administrative and general expenditure forecast relates to that expenditure which is made for administering the company i.e. rent, utilities and insurance. It does not include expenditure that is in relation to manufacturingof commodities and services. So, computation of administrative and general expenditure forecast is given below.

Z manufacturing administrative and general expenses forecast
Particulars	April	May	June
Salaries	12000	12000	12000
Long term interest (500000*.9%)	4500	4500	4500
Expenses total	$16500	$16500	$16500

Hence it is determined that administrative and general expenses forecast for April is $16500, for May it is $16500 and for June it is $16500.

To determine

Concept introduction:

Cash received forecast shows the outflow and inflow of money(cash) in forecasted period to assess the money(cash) balance.

Cash budget for the second quarter of the calendar.

Answer to Problem 4PSA

Therefore the cash budget for April $83346, for May $124295 and for June is $40000.

Explanation of Solution

Cash received forecast shows the outflow and inflow of money(cash)in forecasted period to assess the money(cash) balance.

So, computation of cash received forecast is given below.

Z manufacturing cash received forecast
Particulars	April	May	June
Total sales	488925	465075	477000
Cash sales (30%)	146677	139522	143100
Amount due from last month(70%of credit sales)	342248	342248	325553
Total cash received	$488925	$481770	$468653

Z manufacturing cash budget
Particulars	April	May	June
Opening balance	40000	83346	124295
Cash received	488925	481770	468653
Total available cash	528925	565116	592948
Cash disposal
Payment for material	200500	198000	201500
Payment for direct labour	147750	149250	153000
Payment for overhead(variable)	26595	26865	27540
Sales commission	39114	37206	38160
Salaries	3000	3000	3000
Administrative & general	12000	12000	12000
Dividends	10000
Loan interest	120
Interest long term	4500	4500	4500
Purchase of equipment	130000
Total cash disposal	433579	440821	569700
Preliminary balance money(cash)	95346	124295	23248
Additional loan	16752
Payment of loan	(12000)
Closing cash balance	$83346	$124295	$40000
Loan balance			$16752

Therefore, the closing budget for April $83346, for May $124295 and for June is$40000.

To determine

Concept introduction:

Forecasted statement of income assesses the financial standing of the company. It depicts the income, expenses and net income of a firm in a period of time.

Requirement 9:

Budgeted income statement for the second quarter.

Answer to Problem 4PSA

Hence the budgeted income statement for second quarter is $43485.

Explanation of Solution

Forecasted statement of income assesses the financial standing of the company. It depicts the income, expenses, net income of a firm over a period.

So computation of income statement forecast is given below.

Z manufacturing forecasted income statement
sales		$1431000
Cost of goods sold(COGS)(60000*$19.85)		191000
Gross profit		240000
Running expenses
Commission on sales	114480
Salaries	9000
Administrative & general salaries	36000
Long term interest	13500
Expenses on interest	120	173100
Before tax income		66900
Tax (66900*35%)		23415
Net revenue		$43485

Hence, the budgeted income statement for second quarter is $43485.

To determine

Concept introduction:

Financial statement also known as balance sheet helps in summarizing assets, liabilities and equity of the company held by shareholders at a point of time.

Requirement 10:

Financial statement for the entire second quarter.

Answer to Problem 4PSA

Budgeted balance sheet for the second quarter totals $1299440.

Explanation of Solution

Financial statement also known as balance sheet that help in summarizing assets, liabilities and equity of the company held by shareholders at thatpoint of time.

So, computation of financial statement forecast is given below.

Z manufacturing forecasted income statement
Asset
Cash		40000
Amount due		333900
Raw material stock		80000
Finished goods stock		325540
Total current asset		779440
Equipment	730000
Less-depreciation	210000	520000
Total of asset		$1299440
Liabilities and equities
Account to be paid		182000
Bank loan		16752
Taxes		23415
Total of current liabilities		222167
Long term loan		500000
Common inventory	335000
Retained income	242273
Total equity shareholder		577273
Total equity and liabilities		$1299440

Budgeted balance sheet for the second quarter totals $1299440.