Question: Comprehensive budget plan (adapted from CPA exam). Regis Corporation,

Question

Question:

Comprehensive budget plan (adapted from CPA exam). Regis Corporation, a manufacturer of vases to hold flowers, decided in October Year 1 that it needed cash to continue operations. It began negotiating for a one-month bank loan of $100,000 starting in November of Year 1. The bank would charge interest at the rate of 1 percent per month and require the company to repay interest and principal on November 30 Year 1. In considering the loan, the bank requested a projected income statement and cash budget for November

The following information is available:

* The company budgeted sales at 100,000 units per month in October Year 1. December Year 1. And January Year 2. and at 90,000 units in November Year 1. The selling price is $2 per unit.

* The inventory of finished goods on October 1 was 24,000 units. The number of units of finished goods inventory at the end of each month equals 20 percent of unit sales anticipated for the following month. There is no work in process.

* The inventory of raw materials on October 1 was 22,800 pounds. At the end of each month, the raw materials inventory equals no less than 40 percent of production requirements for the following month. The company purchases materials as needed in minimum quantities of 25,000 pounds per shipment.

* Selling expenses are 10 percent of gross sales. Administrative expenses, which include depreciation of $500 per month on office furniture and fixtures, total $33,000 per month.

* The manufacturing budget for vases, based on normal production of 100,000 units per month, follows:

Materials (1/2 pound pet vase. 50,000 pounds. $2.00 per pound)... ____________ $50,000

Labor.........................._____________________ 40,000

Variable Overhead_________________________________ 20,000

Fixed Overhead (includes depreciation $4000).______________ 10,000

Total............__................................_____________________ $120,000

a. Prepare schedules computing inventory budgets by months for

(1) Production in units for October. November, and December

(2) Raw material purchases in pounds for October and November
b. Prepare a projected income statement for November

Explanation / Answer

Answer Production Budget (a) -1 October November December Total Unit Required for sale 100000 90000 100000 290000 Inventory required 18000 20000 20000 58000 Total need 118000 110000 120000 348000 Less Opening Inventory 24000 18000 20000 62000 Required Inventory Mfg 94000 92000 100000 286000 (a) -2 Raw Material Budget October November December Total Unit Mfg 94000 92000 100000 286000 Raw material req 0.5 0.5 0.5 Total Raw material required 47000 46000 50000 143000 Raw material inventory 18400 20000 20000 58400 Total need raw material 65400 66000 70000 201400 Less Opening raw material Inventory 22800 18400 20000 61200 Total Raw material required 42600 47600 50000 140200 Minimum Raw Material Purchase 50000 50000 50000 Excess Purchased 7400 2400 0 9800 Raw Material Purchased in Oct & Nov = 50000+50000 = 100000 Working Notes October November December Total Sales (units) 100000 90000 100000 290000 Rate 2 2 2 Sale (amount) 200000 180000 200000 580000 Answer b Income Statement for November Sales 180000 Direct Material 90000 Labor 36000 Variable overhead 18000 Fixed Overhead 10000 Selling Expenses 18000 Administrative Expenses 33000 Total Expenses 205000 205000 Net Loss before Interest -25000 * Cash collection & payment details not provide, so calculation of bank loan & interest on bank Loan can not be calculate.

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