You have just been hired as a new management trainee by Terre Inc., a manufactur
ID: 2562618 • Letter: Y
Question
You have just been hired as a new management trainee by Terre Inc., a manufacturer of potato chips. In the past, the company did very little in the way of budgeting and at certain times of the year experienced a shortage of cash.
Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming quarter to show management the benefits that can be gained from an integrated budgeting program. To this end, you worked with accounting and other areas to gather the information assembled below.
The company sells a single type of potato chip with a budgeted selling price of $5 per packet. Actual and budgeted sales of potato chip are provided as below (in units):
2017
38,000
From their experience, 30% of the sales are on cash with 10% discount. The remainder are on account. Collections for sales on account follow a stable pattern: 75% of a month's credit sales are collected in the month of sale, and 20% are collected in the month following sale, and the remaining 5% are uncollectible.
Due to the unstable sales, the company has been experienced the shortage of inventory. Hence, you plan to suggest a new inventory policy; the ending inventory for each month should be equal to 30% of the next month's sales in units. This requirement had been met at the end of June.
Each packet of potato chip requires 500g of potato. The company has a policy of maintaining the raw material at the end of each month equal to 20% of the next month's production needs. This requirement had been met at the end of June. Potatoes cost $1.2 per kg. 70% of a month’s purchases is paid for in the month of purchase; the remaining is paid in the following month. At the end of June, the accounts payable balance is $6,400.
Each packet of potato chip requires 0.1 direct labor-hours. Due to the recent increase in minimum wage, factory workers are paid $14 per direct labor-hour.
Terre bases its manufacturing overhead budget on budgeted direct labor-hours. The variable overhead rate is $5 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $40,000 per month. Fixed manufacturing overhead includes depreciation on factory equipment, which is $27,000 per month.
At Terre, the selling and administrative (SG&A) expense budget is divided into variable and fixed components. The variable SG&A expense is $0.8 per unit sold. The budgeted fixed selling and administrative expense is $30,000 per month. This expense includes depreciation on office equipment, which is $10,000 per month.
Due to the recent customer claims on the packaging defects, Terre Inc. has decided to purchase a new packing equipment in August 2017. The new equipment costs $30,000 and will be paid in cash. Terre has declared a cash dividend of $0.50 per share, which will be paid on July 31, 2017. The company has 100,000 common shares outstanding. To finance potential cash deficit, Terre Inc. plans to borrow a $40,000 loan from a local bank in the beginning of July 2017 and repay the loan plus accumulated interest at the end of September 2017. The annual interest rate on the loan is 12% (i.e., 1% per month). At the end of June, the cash balance is $30,000.
Required:
1. Prepare the master budget that includes sales, production, direct materials, direct labor, manufacturing overhead, and selling and administrative (SG&A) expenses, by each month and in total for the 3rd quarter of 2017. Also, prepare ending finished goods inventory budget (in dollars) for the 3rd quarter of 2017.
2. Prepare the schedule of expected cash collections from sales, the schedule of expected cash disbursements for materials, manufacturing overhead, and SG&A expenses by each month and in total for the 3rd quarter of 2017.
3. Prepare a cash budget, by each month and in total for the 3rd quarter of 2017. Use the simple interest rate (no compounding interest rate needed).
4. Assume the bad debt expenses can be ignored. Prepare a budgeted income statement, which shows sales, cost of goods sold, gross margin, SG&A expenses, operating income, interest expense, and net income, for the 3rd quarter of 2017.
5. Assume finished goods and direct materials inventories are insignificant and can be ignored. At the end of the 3rd quarter, the actual data is reported as follows:
Actual inputs for the 3rd quarter
Unit produced and sold
Assuming no guaranteed labor hours, compute the following variances for the 3rd quarter of 2017 and specify whether it is a favorable or unfavorable variances:
i. Material price and quantity variances
ii. Labor rate and efficiency variances
38,000
Explanation / Answer
Terre Inc. Sales (Units) May (Actual) 30000 June (Actual) 33000 July 38000 Aug 42000 Sept 50000 Oct 40000 Nov 38000 Sales Budget Months July Aug Sep Quarter Budgeted unit sales 38000 42000 50000 130000 Selling Price Per unit $ 5.00 $ 5.00 $ 5.00 $ 5.00 Total sales $ 190,000.00 $ 210,000.00 $ 250,000.00 $ 650,000.00 Schedule of expected cash collections Months Sales July Aug Sep Quarter June sales=($165000*70%*20%) in July $ 165,000.00 $ 23,100.00 $ 23,100.00 July Sales($190000*30%*90%) in July and ($190000*70%*75%) in Aug $ 190,000.00 $ 51,300.00 $ 99,750.00 $ 151,050.00 Aug Sales=($210000*30%*90%) in Aug and ($210000*70%*75%) in Sep $ 210,000.00 $ 56,700.00 $ 110,250.00 $ 166,950.00 Sept Sales=($250000*30%*90%) in Sept $ 250,000.00 $ 67,500.00 $ 67,500.00 $ - $ - Total Cash collections $ 815,000.00 $ 74,400.00 $ 156,450.00 $ 177,750.00 $ 408,600.00 Production Budget July Aug Sep Quarter Budgeted Unit Sales 38000 42000 50000 130000 Add:Ending Inventory=($42000*30%) in July,($50000*30%)in Aug,($40000*30%) in Sept 12600 15000 12000 12000 Total Needs 50600 57000 62000 142000 Less: Opening Inventory=($38000*30%) in July 11400 12600 15000 11400 Required Production Units 39200 44400 47000 130600 October (Sales+Ending Inventory-Opening Inventory) 40000+(38000*30%)-12000 October Required Production Units 39400 Direct Material needed=(39200*500) 19600000 500 gms =0.5Kg Purchase Budget July Aug Sep Quarter Production Units 39200 44400 47000 130600 Direct Material needed=(39200*(500/1000) KG in July),(44000*(500/1000) in Aug,(47000*(500/1000) in Sep 19600 22000 23500 23500 Add: Ending Inventory=(22000000*20%) in July,(23500000*20%) in Aug,(39400*500*20%) 4400 4700 3940 13040 Total Material required 24000 26700 27440 36540 Less: Opening Inventory=($38000*30%) in July 3920 4400 4700 3920 Direct Material Purchase 20080 22300 22740 32620 Cost Per KG $ 1.20 $ 1.20 $ 1.20 $ 1.20 Total Cost of Purchase $ 24,096.00 $ 26,760.00 $ 27,288.00 $ 39,144.00 Budgeted Cash disbursement of Mercendise Purchase Months July Aug Sep Quarter Accounts Payable $ 6,400.00 $ 6,400.00 July=($24096*70%) in July and ($24096*30%) in Aug $ 16,867.20 $ 7,228.80 $ 24,096.00 Aug=($26760*70%) in Aug and ($26070*30%) in Sep $ 18,732.00 $ 8,028.00 $ 26,760.00 Sep=(427288*70%) in Sep $ 19,101.60 $ 19,101.60 Total Cash Payments $ 23,267.20 $ 25,960.80 $ 27,129.60 $ 76,357.60 Direct Labor Budget July Aug Sep Quarter Production Units 39200 44400 47000 130600 Direct Labor Hours Required per packet 0.1 0.1 0.1 0.1 Total Required Labor Hours 3920 4440 4700 13060 Direct Labor cost per hours $ 14.00 $ 14.00 $ 14.00 $ 14.00 Total Direct Labor Cost $ 54,880.00 $ 62,160.00 $ 65,800.00 $ 182,840.00 Overhead Budget July Aug Sep Quarter Production Units 39200 44400 47000 130600 Direct Labor Hours Required per packet 0.1 0.1 0.1 0.1 Total Required Labor Hours 3920 4440 4700 13060 Variable Overhead cost per labor hours $ 5.00 $ 5.00 $ 5.00 $ 5.00 Variable Overhead $ 19,600.00 $ 22,200.00 $ 23,500.00 $ 65,300.00 Depreciation $ 27,000.00 $ 27,000.00 $ 27,000.00 $ 81,000.00 Other Fixed Overhead $ 13,000.00 $ 13,000.00 $ 13,000.00 $ 39,000.00 Total Overhead $ 59,600.00 $ 62,200.00 $ 63,500.00 $ 185,300.00 Selling & Administerative Expenses Budget July Aug Sep Quarter Sales 38000 42000 50000 130000 Variable S& A overhead per unit 0.8 0.8 0.8 0.8 Total Variable Overhead 30400 33600 40000 104000 Depreciation $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 30,000.00 Other Fixed Overhead $ 20,000.00 $ 20,000.00 $ 20,000.00 $ 60,000.00 Total Selling & Administerative Exp $ 60,400.00 $ 63,600.00 $ 70,000.00 $ 194,000.00
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