You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm
ID: 2489745 • Letter: Y
Question
You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. One of the partners in your practice would like to give back to the community through helping a non-for-profit company, Guardian Angel, prepare a master budget without charging them service fees. She asks you to take the lead on this engagement with the hope that a successful outcome may lead to your promotion to Senior Consultant. You take the background files from the partner and get started.
Guardian Angel is a non-for-profit organization that helps give street youth a second chance by providing them with business clothing and teaching them work related skills. The company is getting ready for a fundraiser by selling crystal angle wing key chains. The information below about Guardian Angel’s operations has been assembled to assist budget preparation. The company is preparing its master budget for the first quarter of 2014. The budget will detail each month’s activity and the activity for the quarter in total. The master budget will be based on the following information:
Additional Information
· Selling price is $60 per unit in 2013 and will not change for the first two quarters of 2014.
Actual and estimated sales are as follows:
Actual 2013
Estimated 2014
November: 10,000 units
January: 11,000 units
December: 12,000 units
February: 10,000 units
March: 13,000 units
April: 11,000 units
May: 10,000 units
· The company produces enough units each month to meet that month’s sales plus a desired inventory level equal to 20% of next month’s estimated sales. Finished Goods inventory at the end of 2011 consisted of 2,200 units at a variable cost of $33 each.
· The company purchases enough raw materials each month for the current month’s production requirement and 25% of next month’s production requirements. Each unit of product requires 5 kilograms of raw material at $0.60 per kilogram. There were 13,500 kilograms of raw materials in inventory at the end of 2013. Guardian Angel pays 40% of raw material purchases in the month of purchase and pays the remaining 60% in the following month.
· Each unit of finished product requires 1.25 labor-hours. The average wage rate is $16 per hour.
· Variable manufacturing overhead is 50% of the direct labor cost.
· Credit sales are 60% of total sales. The company collects 50% of the credit sales during the first month following the month of sale and 50% during the second month.
· Fixed overhead cost (per month):
Factory supervisor’s salary
$75,000
Factory insurance
$1,400
Factory Rent
$8,000
Depreciation of factory equipment
$1,200
· Total fixed selling and administrative expenses are as follows
Advertising
$300
Depreciation
$9,000
Insurance
$250
Salaries
$4,000
Other
$14,550
· Variable selling and administrative expenses consist of $4 for shipping and sales commissions of 10% of sales.
· The company is going to acquire assets for use in the sales office at a cost of $300,000, which will be paid at the end of January 2014. The monthly depreciation expense on the additional capital assets will be $6,000.
The balance sheet as of December 31, 2013, is as follows:
Assets
Cash
$80,000
Accounts receivable
$612,000
Inventory: raw materials
$8,100
Finished goods
$72,600
$80,700
Plant and equipment
$1,000,000
Less: accumulated depreciation
$(100,000)
$900,000
Total Assets
$1,672,700
Liabilities and Equity
Accounts payable
$24,000
6% long term notes payable
$900,000
Common shares
$735,000
Retained earnings
$13,700
Total liabilities and equity
$1,672,700
· All cash payments except purchases of raw materials are made monthly as incurred.
· All loan repayments and borrowings, when appropriate, occur at the end of each month.
· All interest on borrowed funds is paid at the end of each month at the rate of 6% per year.
· Loan repayments and borrowings, when appropriate, may be made in any amount.
· A minimum cash balance of $30,000 is required at the end of each month.
Having a better grasp of the client and information required in order to prepare a master budget, you get to work on solving the client’s needs.
Required:
Prepare the following budgets for the first three months of 2014:
1. Sales budget
Guardian Angel
Sales Budget
First Quarter of 2014
Particulars
January
February
March
Sales Units
11,000
10,000
13,000
Selling Price
$60
$60
$60
Total Sales
$660,000
$600,000
$780,000
2. Production budget
Guardian Angel
Production Budget
First Quarter of 2014
Particulars
January
February
March
April
Sales Units
11,000
10,000
13,000
11,000
Add: Ending Finished Goods
2,000
2,600
2,200
2,000
Total Required Units
13,000
12,600
15,200
13,000
Less: Beginning Finished Goods
2,200
2,000
2,600
2,200
Required Production Units
10,800
10,600
12,600
10,800
3. Raw materials purchases budget
Guardian Angel
Raw Materials Purchases Budget
First Quarter of 2014
Particulars
January
February
March
Units to be produced
10,800
10,600
12,600
Direct Material per Unit
5
5
5
Total Material needed for Production
54,000
53,000
63,000
Add: Ending Direct Material
13,250
15,750
13,500
Total material required
67,250
68,750
76,500
Less: Beginning Direct Material
13,500
13,250
15,750
Direct Material Purchases
53,750
55,500
60,750
Cost per Kg
0.6
0.6
0.6
Total Cost of Direct Material Purchased
$32,250
$33,300
$36,450
4. Direct labor and manufacturing overhead budget
Guardian Angel
Direct Labour Budget
First Quarter of 2014
Particulars
January
February
March
Units to be produced
10,800
10,600
12,600
Direct Labor Time per Unit
1.25
1.25
1.25
Total Required Labour Hours
13,500
13,250
15,750
Direct Labour cost per hour
16
16
16
Total Direct Labour Cost
216,000
212,000
252,000
Guardian Angel
Manufacturing Overhead Budget
First Quarter of 2014
Particulars
January
February
March
Total
Variable manufacturing overhead
$108,000
$106,000
$126,000
$340,000
Fixed Expenses
Factory supervisor’s salary
$75,000
$75,000
$75,000
Factory insurance
$1,400
$1,400
$1,400
Factory Rent
$8,000
$8,000
$8,000
Depreciation of factory equipment
$1,200
$1,200
$1,200
Total Fixed Expenses
$85,600
$85,600
$85,600
$256,800
Total Manufacturing overhead
$193,600
$191,600
$211,600
$596,800
Direct Labour Hours
$13,500
$13,250
$15,750
$42,500
Manufacturing overhead rate per direct labor hour
14.04
5. Selling and administrative budget
Guardian Angel
Selling and Administrative Budget
First Quarter of 2014
Particulars
January
February
March
Total
Variable Selling and Administrative Expenses
44,000
40,000
52,000
Commission
66,000
60,000
78,000
Total Variable
110,000
100,000
130,000
340,000
Fixed Expenses:
Advertising
300
300
300
Depreciation
9,000
9,000
9,000
Insurance
250
250
250
Salaries
4,000
4,000
4,000
Others
14,550
14,550
14,550
Total
28,100
28,100
28,100
84,300
Total Selling and Administrative Expenses
138,100
138,100
138,100
534,300
6. Budgeted income statement (using variable costing). Ignore income taxes.
Guardian Angel
Budgeted Income Statement
First Quarter of 2014
Particulars
Amount
Sales
$2,040,000
Less: Cost of Goods Sold (34,000*33)
$1,122,000
Less: Selling and Administrative
$340,000
Contribution Margin
$578,000
Less: Fixed Manufacturing
$256,800
Fixed Selling Expenses
$84,300
Net Profit
$236,900
*******Complete a Cash budget
Actual 2013
Estimated 2014
November: 10,000 units
January: 11,000 units
December: 12,000 units
February: 10,000 units
March: 13,000 units
April: 11,000 units
May: 10,000 units
Explanation / Answer
Cash budget for the 1st quarter of the year 2014 is as under: January February March Total Opening balance $ 80,000 $ 30,010 $30,000 Cash collected $ 660,000 $ 654,000 $ 690,000 $ 2,004,000 Borrowings $ 182,800 $ - Cash payment for purchases $ (50,790) $ (48,750) $ (51,660) $ (151,200) selling and administrative exp $ (44,000) $ (40,000) $ (52,000) $ (136,000) Sales commission(10%) $ (66,000) $ (60,000) $ (78,000) $ (204,000) Wages($16 per labor hour) $ (216,000) $ (212,000) $ (252,000) $ (680,000) Variable manufacturing oh(50%) $ (108,000) $ (106,000) $ (126,000) $ (340,000) Fixed overhead cost(monthly) $ (84,400) $ (84,400) $ (84,400) $ (253,200) Fixed selling and admin exp $ (19,100) $ (19,100) $ (19,100) $ (57,300) Acquisition of asset $ (300,000) $ (300,000) Interest on borrowed funds(6%p.a) $ (4,500) $ (5,414) $ (5,022) $ (14,936) RePayment of borrowings $ (78,346) $ (21,818) Balance $ 30,010 $ 30,000 $ 30,000 $ (132,636) Balance after minimum balance of $30,000 -182790 Borrowals required to take 182800 Jan. Feb Mar Interest on borrowings: Opening borrowings $ 900,000 $ 1,082,800 $ 1,004,454 Borrowals $ 182,800 0 Total borrowings $ 1,082,800 $ 1,082,800 $ 1,004,454 Repayment $ - $ (78,346) $ (21,818) Balance borrowings $ 1,082,800 $ 1,004,454 $ 982,636 Interst @ 6%p.a $ 5,414 $ 5,414 $ 5,022 Repayment of loans Cash balance before repayment $ 30,010 $ 108,346 $ 51,818 Required min cash balance $ 30,000 $ 30,000 $ 30,000 Repayment of loans 0 $ 78,346 $ 21,818
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