Mando Paints (MAPS) Mando Paints (MAPS)) manufactures a paint additive that has

Question

Mando Paints (MAPS)       Mando Paints (MAPS)) manufactures a paint additive that has been very successful in the metallic paint line of automotive paints. The company prides itself in making the paints that car owners buy better. MAPS is in the process of preparing its 2019 fiscal year master budget and has presented you with the following information. The company has a December 31st fiscal year-end.

1. The budgeted December 31, 2018 balance sheet for the company is shown below.

MAPS Limited Budgeted Balance Sheet December 31, 2018

Assets        Liabilities & Stockholders' Equity

Cash      $ 5,080 Accounts payable                $ 2,148 Accounts receivable (net)      26,500 Dividends payable     30,000 Raw materials inventory         800 Notes payable (Due Feb. 28, 2017)   35,000 Finished goods inventory          2,104 Prepaid insurance        1,200    Total liabilities    $ 67,148 Factory Building & Equipment   $300,000    Common stock $100,000 Accumulated       Retained earnings    148,536 248,536       depreciation    (20,000) 280,000           Total Liabilities & Total assets     $315,684    Stockholders' Equity             $315,684

2. The Accounts Receivable balance at 12/31/18 represents the remaining balances of November and December credit sales, net of any allowance for doubtful accounts. Sales were (would be) $70,000 and $65,000, respectively, in those two months.

3. Estimated sales in units for January through May 2019 are shown below.    January 10,000    February 12,000    March 13,000    April 11,000    May 10,000

     Currently, each unit sells for $12. The company expects the selling price to increase to $13 per unit from March 1, 2019.







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MAPS continued     4. The collection pattern for accounts receivable is as follows: 68% in the month of sale; 20% in the first month after the month of sale; 10% in the second month after the month of sale. The remaining 2% of credit sales are never collected. The company expects to achieve a 70-20-8 collection pattern starting with the March 2019 sales.

5. Each unit of additive has the following standard quantities and costs for direct materials and direct labor:   1.2 pounds of direct materials at $.80 per pound      15 minutes of direct labour at $12 per hour  

Direct material costs and direct labor costs are expected to increase by 15% as from March 1, 2019. Variable overhead is applied to the product on a machine hour basis. It takes 12 minutes of machine time to process one unit of finished additive. The variable overhead rate is $1.5 per machine hour. The rate will increase to $2.25 per machine hour from March 1, 2019. Total annual fixed overhead is budgeted at $120,000; it is applied to the production of the month at $1.00 per unit based on an expected annual production of 120,000 units. Budgeted fixed overhead per year is made up of the following costs:   Salaries     $ 72,000   Utilities        20,400   Insurance - factory        2,400   Depreciation- factory building & equipment    25,200    Total     $120,000             Actual fixed overhead is incurred evenly throughout the year and payments for fixed overhead are also made evenly throughout the year, if necessary. For periodic financial statements, any under-applied overhead is added to expenses and any over-applied overhead is deducted from expenses.

6. There is no beginning inventory of Work in Process. All work in process is completed in the period in which it is started. Direct materials inventory at the beginning of 2019 will consist of 1,000 pounds at a standard cost of $.80 per pound. There will be 400 units of additive in finished goods inventory at the beginning of 2019 carried at a standard cost of $5.26 per unit: Direct Materials, $.96; Direct Labor, $3.00; Variable Overhead, $.30; and Fixed Overhead, $1.00.

7. Accounts Payable relates solely to direct materials purchases. All direct material purchases are initially on account. Accounts payable are paid 60% in the month of purchase and 40% in the month after purchase. No discounts are received for prompt payment. Starting with its March 2019 purchases, the company will be making payments on accounts payable at 50% in the month of purchase and 50% in the month after purchase.

8. Any outstanding dividends payable will be paid at the end of January 2019.

9. A new piece of equipment costing $50,000 will be purchased on March 31, 2019. Payment for 80% of the cost will be made in March and 20% in May. The equipment will have a ten-year useful life and no residual value.

10. The note payable has an 8% interest rate; interest is paid at the end of each month.




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11. MAPS's management has set a minimum cash balance at $6,000. Borrowing (repayments) can be made in even $1000 amounts from (to) the Cedi Bank at an interest rate of 6% per year. Borrowing (if necessary in the month) will be at the beginning of the month while repayment (when the company is in a position to do so) will be at the end of the month. Interest on any borrowing must be paid monthly at the end of the month.

12. The ending inventory of finished goods should be 10% of the next month's sales requirements. The ending inventory of raw materials should be 10% of the raw materials required for the next month's production. These requirements may not be met on January 1, 2019, but must be met during the budgeting period.

13. Fixed selling and administrative expenses per month are as follows: salaries, $15,000; rent, $9,000; and utilities and office expenses, $1,500. These costs are paid in cash in the month in which they are incurred.


Required: Prepare an appropriate report to MAPS’s management detailing the company’s budgeted activities for the first quarter of 2019. Budgeted information should be provided for each month, and the quarter as a whole, in columnar form. The following component budgets must be included (and submitted): a. Sales budget b. Production budget c. Direct materials purchases budget d. Direct labor budget e. Manufacturing Overhead budget f. Cost of Goods manufactured budget g. Finished goods budget h. Cost of goods sold budget i. Selling and administrative expenses budget j. Budgeted Income Statement k.   Cash budget

Also to be provided is a Budgeted Balance Sheet. Unlike the other requirements above, the Budgeted Balance Sheet submitted should be ONLY the one at the end of the first quarter of the 2019 fiscal year.

All hand-in materials must be computer generated (spreadsheets for your budgets and word processors for other write-ups).

In a note presenting your work to management, please draw management’s attention to any significant parts of your report (this note to management should not be more than one page).  

Explanation / Answer

Sales Budget Mando Paints Jan Feb Mar Apr Sales (Units) 10000 12000 13000 11000 Unit Price 12 12 13 13 Sale Price 120000 144000 169000 143000 Production Budget Mando Paints Jan Feb Mar Apr Opening Inventory 400 1200 1300 1100 Sales 10000 12000 13000 11000 Closing Inventory 1200 1300 1100 1000 Units to be produced 10800 12100 12800 10900 Direct Materials Budget Mando Paints Jan Feb Mar Apr Production budget (units) 10800 12100 12800 Materials requirements per unit 1.2 1.2 1.2 Materials needed for production 12960 14520 15360 Budgeted ending inventory 1452 1536 1090 1002.8 Total materials requirements (units) 14412 16056 16450 Beginning inventory -1000 -1452 -1536 Materials to be purchased 13412 14604 14914 Material price per unit 0.8 0.8 0.92 Total cost of direct materials purchases            10,729.60                                                  11,683.20        13,720.88 Direct Labour Budget Mando Paints Jan Feb Mar Budgeted production (units) 10800 12100 12800 Labor requirements per unit (hours) 0.25 0.25 0.25 Total Labor hours needed 2700 3025 3200 Labor rate (per hour) 12 12 13.8 Labor dollars 32400 36300 44160 Manufacturing overhead Budget Jan Feb Mar Budgeted production (units) 10800 12100 12800 Machine Time 0.2 0.2 0.2 Machine Time needed 2160 2420 2560 Variable factory overhead rate 1.5 1.5 2.25 Budgeted variable overhead 3240 3630 5760 Budgeted fixed overhead 120000 120000 120000 Budgeted total overhead 123240 123630 125760 Cost of goods manufactured Budget Jan Feb Mar Units produced 10800 12100 12800 Raw Material Expense 10729.6 11683.2 13720.88 Direct Labor 32400 36300 44160 Budgeted total overhead 123240 123630 125760 Total cost 166369.6 171613.2 183640.88 Finished Goods Budget Jan Feb Mar Closing Inventory 1200 1300 1100 Raw Material 0.8 0.8 0.92 3 3 3.45 1.5 1.5 2.25 1 1 1 6.3 6.3 7.62 Closing Inventory Dollars 7560 8190 8382 Cost of Goods Sold Jan Feb Mar Sale 10000 12000 13000 Standard Price 6.3 6.3 7.62 Cost of Goods Sold 63000 75600 99060 Selling and Administrative Expense Jan Feb Mar Salaries 15000 15000 15000 Rent 9000 9000 9000 Utilities and Office Expense 1500 1500 1500 25500 25500 25500 Budgeted Income Statement Jan Feb Mar Sales 120000 144000 169000 Less : Cost of Goods Sold -63000 -75600 -99060 Salaries -15000 -15000 -15000 Rent -9000 -9000 -9000 Utilities and Office Expense -1500 -1500 -1500 Bad Debt -2400 -2880 -3380 Net Income 29100 40020 41060 Cash Receipts Jan Feb Mar 120000 144000 169000 Month of Sale - 68% 81600 97920 118300 20% in second month 13000 24000 28800 10% in third month 7000 6500 12000 2% Bad Debt 2400 2880 3380 Amount Collected 101600 128420 159100 Cash Budget Jan Feb Mar Opening Balance 5080                                                    6,225.91 6095.81 Cash Received from Customer 101600 128420 159100 Total Cash Receipts 106680 134645.9067 165195.81 Less : Disbursements Payment for Raw material purchased -8585.76 -11301.76 -11533.72 Labor Expense -32400 -36300 -44160 Manufacturing overhead Variable -3240 -3630 -5760 Fixed -94800 -94800 -94800 Purchase of Equipment -50000 Interest on note payable                (233.33)                                                     (233.33)           (233.33) Total Payments       (139,259.09)                                             (146,265.09) (206,487.05) Preliminary cash balance          (32,579.09)                                               (11,619.19)     (41,291.24) Loan 39000 18000 48000 Interest on loan @ 6% -195 -285 -525 Closing Balance              6,225.91                                                    6,095.81          6,183.76

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