Waterways Corporation is preparing its budget for the coming year 2016. The firs

Question

Waterways Corporation is preparing its budget for the coming year 2016. The first step is to plan for the first quarter of that coming year. Waterways gathered the following information from the managers.

Sales:

Unit sates for November 2015 112,500

Unit sales for December 2015      102,200

Expected unit sales for January 2016      113,400

Expected unit sales for February 2016      112,500

Expected unit sales for March 2016      116,700

Expected unit sales for April 2016      125,000

Expected unit sales for May 2016      137,500

Unit selling price      $13

Waterways wants to keep 10% of the next month’s unit sales in ending inventory. All sales are on account. 85% of the Accounts Receivable is collected in the month of sale and 15% of the Accounts Receivable is collected in the month after sale. Accounts receivable on December 31, 2015, totaled 183,750 and the total is expected to be collected in January.

Direct Materials:

The product uses metal, plastic, and rubber. In total, each unit requires 2 pounds of material at an average cost of 0.75 per pound.

Waterways likes to keep 5% of the materials needed for the next month in its ending inventory. Payment for materials is made within 15 days. 50% is paid in the month of purchase and 50% is paid in the month after purchase. Accounts Payable on December 31, 2015, totaled $120,595 and the total will be paid in January. Raw materials in inventory on December 31, 2015, totaled 10,355 pounds.

Direct Labor:

Labor requires 12 minutes per unit for completion and is paid at a rate of $18 per hour.

Manufacturing Overhead:

Indirect materials      30 cents per labor hour

Indirect labor 50 cents per labor hour

Utilities      45 cents per labor hour

Maintenance      30 cents per labor hour

Salaries      $42,000 per month

Depreciation      $16,800 per month

Property taxes      $2,700 per month

Insurance      $1,300 per month

Janitorial      $1,400 per month

Selling and Administrative Expenses:

Variable selling and administrative cost per unit is $2.20.

Advertising      $15,000 per month

Insurance      $1,500 per month

Salaries      $71,000 per month

Depreciation      $2,500 per month

Other fixed costs      $3,000 per month

Other Information:

The cash balance on December 31, 2015, totaled $220,000, but management has decided that it wants to maintain a cash balance of at least $800,000 beginning January 31, 2016. Dividends are paid each month at the rate of $2.70 per share for 5,000 shares outstanding. The company has an open line of credit with the First National Bank. The terms of the agreement requires borrowing to be in $1,000 increments at 6% interest. Waterways borrows on the first day of the month and repays on the last day of the month. Reserve repayment, if required, until Waterways can pay the entire amount. A $245,000 equipment purchase is planned for February 2016.

Instructions (Do all parts):

Note: All budgets and schedules should be prepared by month for the first quarter of 2016 (January, February, and March). Round all figures to the nearest dollar. For labor hours round to whole hours.

a. Prepare a sales budget.

b. Prepare a production budget.

c. Prepare a direct materials budget.

d. Prepare a direct labor budget.

e. Prepare a manufacturing overhead budget.

f. Prepare a selling and administrative budget.

g. Prepare a schedule for expected cash collections from customers.

h. Prepare a schedule for expected payments for materials purchases.

i. Prepare a cash budget.

Explanation / Answer

a. Sales budget

b. Production budget

Note

1. Ending inventory of Jan = 112500 x 10% = 11250

Beginning inventory of Jan = Closing inventory of December = 113400 x 10% = 11340

Same will follow for February and march

c. Direct Material Budget

Direct Material consumption budget

Direct material purchase budget

April production = 125000 + 137500 x 10% - 125000 x 10%

= 126250

Raw material to be consumed for April = 126250 x 2 = 252500

Closing inventory of March = 5% x 252500 = 12625

d. Direct labour budget

January February March Quantity sold 113400 112500 116700 Sales price $13 $13 $13 Total Sales 1474200 1462500 1517100

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