Manny Fold owns a factory that specializes in making titanium valves for high pe
ID: 2473439 • Letter: M
Question
Manny Fold owns a factory that specializes in making titanium valves for high performance engines on a just in time basis. Thus, Manny produces what he sells in a particular month. There are no inventories of finished goods or work in process. However, Manny does require that an inventory of direct raw materials equal to 20% of next month’s production requirement be available at the end of each month. To build his business and gain new customers Manny has extended generous credit terms to his customers. While Manny is confident about the fundamentals of his business, he is concerned about the possible income and cash flow implications.
The variable costs of producing a valve are budgeted at $7.20 per valve for direct materials (3/4 pound of titanium alloy costing $9.60 per pound), $2.80 per valve for direct labor, and $5.50 per valve for variable manufacturing overhead. Fixed manufacturing overhead is budgeted at $74,700 per month during the 2nd quarter. The detailed components of variable and fixed overhead are as listed below.
For variable overhead, electric power is budgeted at $2.30 per unit, indirect labor is budgeted at $2.50 per unit, and supplies are budgeted at $.70 per unit. For fixed overhead depreciation is budgeted at
$10,000 per month, Supervision and other factory salaries are budgeted at $40,000 per month, property tax and insurance combined are budgeted at $8,000 per month (which have been paid in advance through June 15 – see below), maintenance is budgeted at $7,000 per month, licensing fees and permits to use proprietary technology are budgeted at $3,400 per month, and other miscellaneous fixed overhead expenses are budgeted at $6,300 per month.
Manny’s customers drive a hard bargain because they can easily switch suppliers. They all do pay eventually, but many of them take their time about doing so and Manny is reluctant to get tough with them for fear they will take their business elsewhere. He tells you that all his sales are on credit (no cash sales). He typically collects only 10% of sales in the month of the sale, 30% of sales in the month after the sale and 60% of sales two months later (for example 10% of June sales would be collected in June, 30% in July and 60% in August). On the other hand he must pay for 70% of his materials purchases in the same month of the purchase and 30% in the month after. Cash costs of labor and overhead other than depreciation, property taxes and insurance are paid in the same month they are incurred. Property taxes and insurance are paid in advance through June 15. The amount due for the next 6 months (starting June 16) must be paid in early June.
All of the selling and administrative expenses are fixed. Monthly fixed selling and administrative costs, other than interest, amount to $43,600, of which $6,000 is depreciation. These operating costs, excepting depreciation, are paid in cash in the month incurred. Manny has large tax loss carry forwards from a previous unsuccessful business venture. Therefore he does not expect to pay any income taxes this year. (In other words you may ignore income taxes).
Manny plans to buy new equipment costing $80,000 during the month of June. This equipment will be ready for use starting in July.
The budgeted selling price of valves for April, May, and June is $23 per valve. Because of market competition there is not much flexibility to adjust the price and the price is expected to be stable during the 2nd quarter of 2014. Manny budgeted sales in units for April at 17,000 units. For May he expects to sell only 18,000 units. He has projected sales of 19,000 units for June and 18,000 units for July.
Manny requires a minimum cash balance of $10,000 at the end of each month. If the budgeted month end cash balance will fall below this level Manny plans to borrow enough cash at the beginning of that same month to keep his ending balance up to the minimum level. Manny’s bank charges him interest at the rate of ½ % per month on the balance outstanding during that month. Manny’s bank charges him interest at the rate of ½ % per month on the balance outstanding during that month. Manny pays the interest at the beginning of the following month and plans to repay as much as he can at the beginning of that month without letting his budgeted cash balance go below $10,000 at month end. (On the budgeted income statement round interest expense to the nearest dollar)
The company’s managerial accountant has resigned unexpectedly before the 2nd quarter budget could be completed. You have been contracted to complete the master budget for June and for the 2nd quarter (including some missing numbers from May). Balances as of March 31 for all relevant accounts have already been calculated by this accountant together with some of the amounts for April and May. You may assume that these balances and amounts shown in the tables below are correct.
REQUIREMENTS: (To Equal 36 project points)
1)Construct Manny’s budgeted for June and the total for the 2nd quarter. April and May have already been provided below. (Show any calculations.
2)Using the forecast as in 1construct budget for raw purchases in June and total for 2nd quarter(You will also to the budget for May) the template provided which already has for April and May. (4 points)
3)Using the forecast as you used in 1 Manny’s cash budgets for June and the for the 2nd quarter(You will also have to provide for May for purchases). the templates provided below which already have for April
4)Using the forecast as you used in 1 Manny’s budgeted balance sheet at the end of June.Complete the provided which already has the March 31 balances.(5 points)
5)During March Manny actually produced and sold 16,500 valves. Actual sales revenues were $381,950. Actual costs and the March budget based on 16,000 valves were as in the below. table by a budget based on 16,500
REQUIREMENT 1
Budgeted Income Statement
April
May
June
2nd Quarter
SALES REVENUES
$391,000
$414,000
DIRECT MATERIALS USED
($122,400)
($129,600)
DIRECT LABOR
($47,600)
($50,400)
VARIABLE OVERHEAD
($93,500)
($99,000)
CONTRIBUTION MARGIN
$127,500
FIXED OVERHEAD
($74,700)
($74,700)
FIXED OPERATING EXPENSES
($43,600)
($43,600)
OPERATING INCOME
$ 9,200
INTEREST EXPENSE
$0
NET INCOME
$9,200
REQUIREMENT #2 BUDGETED PURCHASES OF TITANIUM ALLOY (direct material)
April
May
June
2nd Quarter
Valves to be produced
17,000
18,000
X Pounds per unit
0.75
0.75
Titanium to be used
12,750
13,500
Desired ending inventory (20%)
2,700
Pounds of Titanium Needed
15,450
Less Beginning Inventory
2,550
2,700
Pounds to be purchased
12,900
Cost per pound
$9.60
Cost of Purchases
$123,840
REQUIREMENT #3
COMPUTATION OF CASH COLLECTIONS (Use this to calculate March & Feb sales)
April
May
June
2nd Quarter
Sales Made 2 Months Ago
$213,900
$220,800
Sales Made 1 Month Ago
$110,400
$117,300
Sales Made this Month
$39,100
$41,400
Total Cash Collections
$363,400
$379,500
COMPUTATION OF CASH PAYMENTS
April
May
June
2nd Quarter
Payments for purchases of materials
$121,680 (used to calculate March purchases)
Payments for direct Labor
$47,600
$50,400
Payments for Variable Overhead
$93,500
$99,000
Payments for Fixed Overhead
$56,700
$56,700
Payments for Property Taxes and Insurance
$0
$0
Payments for other operating expenses
$37,600
$37,600
Capital Expenditures
$0
$0
Total Cash Payments
$357,080
April
May
June
2nd Quarter
Beginning Balance of Cash
$10,324
$16,644
Cash Collections
$363,400
$379,500
Total cash available
$373,724
$396,144
Less: Cash Payments
$357,080
Ending Cash Balance Before Financing:
$16,644
Borrowings
$0
Repayments
$0
Interest Payments
$0
End Cash Balance
$16,644
REQUIREMENT #4: BUDGETED BALANCE SHEET FOR JUNE 30
March 31
June 30
ASSETS:
Current Assets
Cash
$10,324
Accounts Receivable
$545,100
Inventory (raw materials)
$24,480
Prepaid Insurance and Property Taxes
$20,000
Total Current Assets
$599,904
Equipment and Furniture
$880,000
Accumulated Depreciation
($540,000)
Equipment & Furniture (net)
$340,000
Total Assets
$939,904
LIABILITIES AND EQUITY
Liabilities (all current)
Accounts Payable
$34,992
Interest Payable
0
Bank Loans Payable
0
Total Liabilities
$34,992
Owner’s Equity
(Net income increases this)
$904,912
Total Liabilities and Equity
$939,904
Actual Costs and Template for Requirement #5 Use this page to answer this requirement.
Performance Report for March
Cost Item
Actual results
Flexible Budget Variance
Flexible Budget for 16,500 units
Sales Volume Variance
Static Master Budget for 16,000 units
Sales Revenues
$381,950
$368,000
Direct Materials used
$118,720
$115,200
Direct Labor
$45,600
$44,800
Electric Power
$38,454
$36,800
Indirect Labor
$49,360
$40,000
Supplies
$16,686
$11,200
Supervision and other salaries
$37,858
$40,000
Maintenance
$8,925
$7,000
Insurance and property tax
$8,000
$8,000
Permits and license fees
$3,400
$3,400
Factory depreciation
$10,000
$10,000
Other Overhead expenses
$8,650
$6,300
Total Production Expenses
?
$322,700
Total Selling & Administrative Expenses
$39,867
$43,600
Total Expenses
?
$366,300
Operating Income
?
$ 1,700
April
May
June
2nd Quarter
SALES REVENUES
$391,000
$414,000
DIRECT MATERIALS USED
($122,400)
($129,600)
DIRECT LABOR
($47,600)
($50,400)
VARIABLE OVERHEAD
($93,500)
($99,000)
CONTRIBUTION MARGIN
$127,500
FIXED OVERHEAD
($74,700)
($74,700)
FIXED OPERATING EXPENSES
($43,600)
($43,600)
OPERATING INCOME
$ 9,200
INTEREST EXPENSE
$0
NET INCOME
$9,200
Explanation / Answer
April May June 2nd Quarter No.of units 19000 Sales Rev $391,000 $414,000 437000 $1,242,000 Direct Materials Used -122,400 -129,600 -136800 ($388,800) Direct Labor -47,600 -50,400 -53200 ($151,200) Variable OH -93,500 -99,000 -104500 ($297,000) Contribution Margin 127,500 135000 142500 $405,000 Fixed OH -74,700 -74,700 -74,700 ($224,100) Fixed operating expenses -43,600 -43,600 -43,600 ($130,800) Operating Income 9,200 16,700 24,200 $50,100 Interest Expense 0 520 $520 Net Income 9,200 16,700 23,680 $49,580 budgeted purchases of titanium alloy April May june 2nd quarter July Valves to produced 17,000 18,000 19000 $54,000 18000 X punds per unit 0.75 0.75 0.75 titanium to be used 12,750 13,500 14250 $40,500 desired ending inventory (20%) 2,700 2,850 3600 3600 lbs of titanium needed 15,450 16,350 17,850 $44,100 less: beginning inventory 2,550 2,700 2,850 2,550 lbs to be purchased 12,900 13,650 15,000 $41,550 cost per lbs 9.6 9.6 9.6 9.6 cost of purchases 123,840 131040 144000 398880 computation of cash collections P April May june 2nd quarter sales made 2 months ago 60% June= April*60% $213,900 $220,800 $234,600.0 $669,300 sales made 1 month ago 30% June=May*.3 110,400 117,300 $124,200.0 $351,900 sales made this month 10% June 39,100 41,400 43700 $124,200 total cash collections 363,400 379,500 402,500 $1,145,400 Computation of cash payments April may june 2nd quarter payments for purchases of materials Same month 70% of P 91728 100800 Next month 30% P 37152 39312 payments for purchases of materials $121,680 128880 140112 $390,672 payments for direct labor 47,600 50,400 53200 $151,200 payments of variable OH 93,500 99,000 104500 $297,000 payments of fixed OH 56,700 56,700 56,700 $170,100 8000*6 payments of property taxes & insurance 0 0 48000 $48,000 payments for other op expenses 37,600 37,600 37,600 $112,800 capital expenditures 0 0 80000 $80,000 total cash payments 357,080 372580 520112 $1,249,772 combinded cash budget april may june 2nd quarter beginning balance $10,324 $16,644 23,564 $10,324 cash collections $363,400 379,500 402,500 $1,145,400 total cash available 373,724 396,144 426,064 $1,195,932 less: cash payments 357,080 372580 520112 $1,249,772 ending cash balance before financing 16,644 23,564 -94,048 -94,048 borrowings 0 104048 104048 repayments 0 interest payments 0 end cash nalance 16,644 23,564 10,000 10,000 budgeted balance sheet for june 30 31-Mar 31-Mar 30-Jun 30-Jun Assets: Cash 10,324 10000 accts receivable 545,100 $641,700.0 (437000*90%)+(414000*60%) inventory 24,480 34560 2850*9.6 prepaid insurance 20,000 44000 48000-4000(16 June to 30 June) total current assets 599,904 730260 equipment & furniture 880,000 960,000 accumulated depreciation -540,000 -588,000 net equipment & furn 340,000 372,000 Total Assets 939,904 1,102,260 Liabilites & equity Current Liabilities accts pay 34,992 43200 interest pay 0 520 bank loans pay 0 104048 total liabilities 34,992 147768 owners equity 904,912 $954,492 total liab & equity 939,904 $1,102,260 Dear student there are various sub parts I have answered first 4. performance report for march cost item actual results flex budget variance flex budget for 16,500 Variance sales volume variance static master budget for 16,000 units sales rev $381,950 $2,450 379500 F 11500 368000 F direcr materials used 118,720 ($80) 118800 F 115,200 direct labor 45,600 ($600) 46200 F 44,800 electric power 38,454 $504 37950 U 36,800 indirect labor 49,360 $8,110 41250 U 40,000 supplies 16,686 $5,136 11550 U 11,200 supervision & other salaries 37,858 ($2,142) 40,000 F 40,000 maintenance 8,925 $1,925 7,000 U 7,000 insurance & prop tax 8,000 $0 8,000 8,000 permits & license fees 3,400 $0 3,400 3,400 factory depreciation 10,000 $0 10,000 10,000 other OH expenses 8,650 $2,350 6,300 U 6,300 total production expenses 345,653 $15,203 330,450 U 322,700 total selling & admin expsnes 39,867 ($3,733) 43,600 F 43,600 total expenses 385,520 $11,470 374,050 U 366,300 operating income ($3,570) ($9,020) $5,450 F 1,700
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