You have just been hired as a new management trainee by Terre Inc., a manufactur
ID: 2565250 • 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
May (Actual)
30,000
June (Actual)
33,000
July (Budgeted)
38,000
August (Budgeted)
42,000
September (Budgeted)
50,000
October (Budgeted)
40,000
November (Budgeted)
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 $30,000.
Required:
1. Prepare the master budget that includes sales, production, direct materials, direct labor, manufacturing overhead, and selling and administrative (SG&A) expenses, by each month and in total for the 3rd quarter of 2017. Also, prepare ending finished goods inventory budget (in dollars) for the 3rd quarter of 2017.
2. Prepare the schedule of expected cash collections from sales, the schedule of expected cash disbursements for materials, manufacturing overhead, and SG&A expenses by each month and in total for the 3rd quarter of 2017.
3. Prepare a cash budget, by each month and in total for the 3rd quarter of 2017. Use the simple interest rate (no compounding interest rate needed).
4. Assume the bad debt expenses can be ignored. Prepare a budgeted income statement, which shows sales, cost of goods sold, gross margin, SG&A expenses, operating income, interest expense, and net income, for the 3rd quarter of 2017.
5. Assume finished goods and direct materials inventories are insignificant and can be ignored. At the end of the 3rd quarter, the actual data is reported as follows:
Actual inputs for the 3rd quarter
Unit produced and sold
138,000 units
Direct materials purchased and used (kg)
70,380 kg
Direct materials purchased and used ($)
$87,975
Direct labor hours incurred (hours)
12,420 hours
Direct labor cost incurred($)
$186,300
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
2017
May (Actual)
30,000
June (Actual)
33,000
July (Budgeted)
38,000
August (Budgeted)
42,000
September (Budgeted)
50,000
October (Budgeted)
40,000
November (Budgeted)
38,000
Terre Inc Budgeted Selling price Unit sales May (Actual) June (Actual) July (Budgeted) August (Budgeted) 30,000 33,000 38,000 42,000 50,000 40,000 38,000 October (Budgeted) November (Budgeted) Collection on sales: Cash sales Cash sales discount Sales on account Credit sales collected in the current month of sale Credit sales collected in the month following sales Credit sales uncollectible 30% 10% 70% 75% 596 Production and direct materials: Desired ending inventories (% of next month's sales in units) 30% 0.50 Material needed per unit of product (kg) Cost of direct materials (per kg Desired ending inventories of direct materials (% of next month's production needs) $120 Purchases paid as follows: In month of purchase In following month Accounts Payable, 30 June 2017 70% $6,400 Direct labor: Direct labor hours needed per unit of product Direct labor rate (per hour) 0.1 $14 Manufacturing overhead (MOH) Variable MOH rate per direct labor hour Fixed MOH per month Depreciation included in MOH $40,000 527,000 Selling and Administrative expense: Variable selling & administrative expense per unit Fixed selling & administrative expense Depreciation included in selling & administrative expense 50.8 $30,000 510,000 Purchase of a new equipment, August Dividend per share, July Number of shares ourstanding, July Loan from bank, 1 July 2017 Interest rate per month Cash on hand as of 1 July, 2017 $30,000 50.5 100,000 $40,000 1% $30,000 Actual inputs for the 3rd quarter Unit produced and sold (units) Direct materials purchased and used (kg) Direct materials purchased and used Direct labor hours incurred (hours) Direct labor cost incurred 138,000 70,380 587,975 12,420 5186,300 Assume finished goods and direct materials inventories are insignificant and can be ignoreExplanation / Answer
Sales Budget July August September Total Sales Units 38000 42000 50000 130000 Unit selling price 5 5 5 5 Total sales 190000 210000 250000 650000 Cash sales(30%) 57000 63000 75000 195000 Credit Sales (70%) 133000 147000 175000 455000 Schedule of collections July August September Total Fom cash sales A 57000 63000 75000 195000 Less: Discount (10%) B 5700 6300 7500 19500 Collection from cash sales (A - B) C 51300 56700 67500 175500 From credit sales June Sales C 23100 23100 July Sales D 99750 26600 126350 August Sales E 110250 29400 139650 September sales F 131250 131250 Collection from credit sales G 122850 136850 160650 420350 Total Collections (C + G) 174150 193550 228150 595850 Production budget July August September Total Sales 38000 42000 50000 130000 Add: Desired ending inventory 12600 15000 12000 12000 (30% of next month's sales) Required units 50600 57000 62000 142000 Less: Beginning inventory 11400 12600 15000 11400 Production required 39200 44400 47000 130600 Direct material requirement budget July August September Total Budgeted Production units 39200 44400 47000 130600 Direct material per unit (Kg) 0.50 0.50 0.50 0.50 Raw material required for production 19600 22200 23500 65300 Add: Desired ending inventory 4440 4700 3940 3940 (20% of next month's requirement) Direct material requirement 24040 26900 27440 69240 Less; Beginning inventory 3920 4440 4700 3920 Raw material purchases (Kg) 20120 22460 22740 65320 Cost per kg of raw material 1.20 1.20 1.20 1.20 Total raw material purchases 24144 26952 27288 78384 78360 Cash disbursement for direct material July August September Total Beginning Accounts payable 6400 6400 July Purchases 16901 7243 24144 August Purchases 18866 8086 26952 September Purchases 19102 19102 Total cash disbursements for direct material 23301 26110 27187 76598 Direct labor budget July August September Total Budgeted Production units 39200 44400 47000 130600 Direct labor hour per unit 0.10 0.10 0.10 0.10 Total direct labor hours for production 3920 4440 4700 13060 Direct labor hour rate ($) 14.00 14.00 14.00 14.00 Direct labor cost 54880 62160 65800 182840 Manufacturing overhead budget July August September Total Budgeted Direct labor hours 3920 4440 4700 13060 Variable manufacturing cost per direct labor hour ($) 5 5 5 5 Variable manufacturing cost 19600 22200 23500 65300 Fixed manufacturing overhead cost ($) 40000 40000 40000 120000 Total manufacturing overhead 59600 62200 63500 185300 Depreciation expense 27000 27000 27000 81000 Cash disbursement for manufacturing overhead 32600 35200 36500 104300 Selling, general and administrative expesnes budget July August September Total Budgeted sales 38000 42000 50000 130000 Variable SG&A expenses per unit of sale ($) 0.80 0.80 0.80 0.80 Total variable SG & A expenses 30400 33600 40000 104000 Fixed SG & A expenses 30000 30000 30000 90000 Total SG & A expenses 60400 63600 70000 194000 Depreciation expense on office equipment 10000 10000 10000 30000 Cash disbursement for SG & A expenses 50400 53600 60000 164000 Terre Inc. Cash budget for the quarter ending September 30, 2017 July August September Total Beginning cash balance 30000 32969 19450 30000 Cash collection from sales 174150 193550 228150 595850 Cash available for disbursement 204150 226519 247599.6 625850 Cash disbursement For Direct material 23301 26110 27187 76598 For doirect labor 54880 62160 65800 182840 For manufacturing overhead 32600 35200 36500 104300 For SG & A expenses 50400 53600 60000 164000 For dividends 50000 50000 For purchase of equipment 30000 30000 Total Cash disbursement 211181 207070 189487 607738 Cash surplus -7031 19450 58112 18112 Finance Borrowing 40000 40000 Repayment -40000 -40000 Interest -1200 -1200 Total Finance 40000 0 -41200 -1200 Ending cash balance 32969 19450 16912 16912 Actual Production for Quarter 138000 Budgeted direct material @0.5 kg per unit 69000 Actual quantity of direct material used (Kg) 70380 Budgeted Direct material cost per unit 1.20 Actual direct material cost per Kg 1.25 Budgeted direct material cost for actual production 82800 Actual direct material cost incured ($) 87975 Direct Material price variance = (Budgeted price - Actual price) x Actual quantity =(1.20-1.25) x 70380 = 3,519 U Direct Material quantity variance = (Budgeted quantity - Actual quantity) x Budgeted price =(69000 -70380) x1.20 = 1,656 U Total direct material variance = 3519+1656 = 5,175 U 5175 (Checking 82800-87975 = 5,175 U) Actual Production for Quarter 138000 Budgeted direct labor hours @0.1 hours per unit 13800 Actual direct labor hours worked 12420 Budgeted Direct labor cost per hour 14.00 Actual direct material cost per Kg 15.00 Budgeted directlabor cost for actual production 193200 Actual direct material cost incured ($) 186300 Direct Labor rate variance = (Budgeted rate - Actual rate) x Actual labor hours =(14.00-15.00) x 12,420 =12,420 U Direct labor efficiency variance = (Budgeted labor hours - Actual labor hours) x Budgeted rate per hour =(13,800 - 12,420) x14.00 = 19,320 F Total direct material variance = 12,420 U + 19,320 F = 6,900 F (Checking 193200 - 186300 = 6,900 F)
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