Understanding Relationships, Master Budget, Comprehensive Review Optima Company

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Understanding Relationships, Master Budget, Comprehensive Review

Optima Company is a high-technology organization that produces a mass-storage system. The design of Optima's system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (20X1). The budget will detail each quarter's activity and the activity for the year in total. The master budget will be based on the following information:

Fourth-quarter sales for 20X0 are 55,000 units.

Unit sales by quarter (for 20X1) are projected as follows:

The selling price is $400 per unit. All sales are credit sales. Optima collects 85% of all sales within the quarter in which they are realized; the other 15% is collected in the following quarter. There are no bad debts.There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter:

Each mass-storage unit uses 5 hours of direct labor and three units of direct materials. Laborers are paid $10 per hour, and one unit of direct materials costs $80.

There are 65,700 units of direct materials in beginning inventory as of January 1, 20X1. At the end of each quarter, Optima plans to have 30% of the direct materials needed for next quarter's unit sales. Optima will end the year with the same amount of direct materials found in this year's beginning inventory.

Optima buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition, and the remaining half are paid for in the following quarter. Wages and salaries are paid on the 15th and 30th of each month.

Fixed overhead totals $1 million each quarter. Of this total, $350,000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year's total fixed overhead by the year's budgeted production in units.

Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred.

Fixed selling and administrative expenses total $250,000 per quarter, including $50,000 depreciation.

Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.

The balance sheet as of December 31, 20X0, is as follows:

Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2 million of equipment will be purchased.

REQUIRED

1) Direct Materials Purchases Budget (in thousands, except for per unit/hour data) If required, round answers to one decimal place.

2) Cost of goods sold budget (Note: Assume that there is no change in work-in-process inventories.) Enter amounts in full, not in thousands. If an amount is zero, enter "0".

3)Cash Budget (in thousands)

4) Pro forma income statement (using absorption costing). Enter amounts in full, not in thousands.(Note: Ignore income taxes.)

5). Pro forma balance sheet. Enter amounts in full, not in thousands. List all assets and liabilities in order of liquidity. (Note: Ignore income taxes.)

Liabilities and stockholders' equity

Accounts payble

First quarter 65,000 Second quarter 70,000 Third quarter 75,000 Fourth quarter 90,000

Explanation / Answer

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1 Direct Material Budget Q1 Q2 Q3 Q4 Total Production 78 72 80 80 310 Material Per Unit 3 3 3 3 3 Production Needs Direct Material 234 216 240 240 930 Desired Ending Inventory (30% of next quarter Unit sale) For Last Q, Same as Opening of Q1 64.8 72 72 65.7 274.5 Total Needs 298.8 288 312 305.7 1204.5 Less Beginning Inventory (Ending of Last Q) 65.7 64.8 72 72 274.5 Purchases 233.1 223.2 240 233.7 930 Cost Per Unit 80 80 80 80 80 Purchase Cost 18648 17856 19200 18696 74400 2 Cot of Goods Sold Budget Direct Material Used (930*80) 74400000 Direct Labor Used (310*5*10) 15500000 Overhead (310*5*6)+1000000*4 13300000 Budgeted Manufacturing Costs 103200000 Add: Beginning Finished Goods Inventory 0 Cost of Goods Available for sales 103200000 Less: Ending Finished Goods Inventory 3329000 Budgeted Cost of Goods Sold 99871000 3 Cash Budget Q1 Q2 Q3 Q4 Total Beginning Cash Balance 250 1038 2876 5748 250 Credit Sale -Current Quarter 22100 23800 25500 30600 102000 -Prior Quarter 3300 3900 4200 4500 15900 Cash Available 25650 28738 32576 40848 118150 Less Disbursment Direct Material -Current Quarter 9324 8928 9600 9348 37200 -Prior Quarter 7248 9324 8928 9600 35100 Direct Labor (Prod Units*5*10) 3900 3600 4000 4000 15500 Overhead (Prod Units*5*6)+1000 each quarter-350 of Dep 2990 2810 3050 3050 11900 Selling and Admin (Unit Sold*10)+250-50 Dep 850 900 950 1100 3800 Dividends 300 300 300 300 1200 Equipment 2000 Total Cash Needs 24612 25862 26828 29398 106700 Ending Cash 1038 2876 5748 11450 11450 4 Income Statement Sales 120000000 Less: Cost of Goods Sold 99871000 Gross Margin 20129000 Less: Selling and Admin (300000*10)+250000*4 4000000 Income Before Taxes 16129000 5 Proforma Balance Sheet Cash 11450000 Accounts Receivable (36000000 Last Q sale*15%) 5400000 Direct Material Inventory (65700*80) 5256000 Finished Goods Inventory (99871000*300000 sale/10000 closing) 3329000 Plant Equipment 33900000 Total Asset 59335000 Capital Stock 27000000 Accounts Payable (18696000*50%) 9348000 Retained Earning (8058000+16129000-1200000 Dividend) 22987000 Total Liabilitys and equity 59335000 0

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