You have just been hired as a new management trainee by Terre Inc., a manufactur
ID: 2566137 • 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.
38,000
Explanation / Answer
Terre Inc Month May 2017 June 2017 July 2017 August 2017 September 2017 October 2017 November 2017 Actual Actual Budgeted Budgeted Budgeted Budgeted Budgeted 1) Sales Budget 1a)Per Unit Selling Price 5 5 5 5 5 5 5 1b)Budgeted unit sales 30000 33000 38000 42000 50000 40000 38000 1c)Sales (Unit sales * Selling Price) 150000 165000 190000 210000 250000 200000 190000 1d)Gross Cash Sales (30% of 1c) 45000 49500 57000 63000 75000 60000 57000 Discount ( 10% of Gross Cash Sales 4500 4950 5700 6300 7500 6000 5700 Net Cash Sales 40500 44550 51300 56700 67500 54000 51300 1e)Credit Sales (1c-1d) 105000 115500 133000 147000 175000 140000 133000 2) Cash Collection Form Receivables Budget 2a)Credit Sales (from 1e) 105000 115500 133000 147000 175000 140000 133000 2b)75 % Collection in sale month(75 % of 2a) 78750 86625 99750 110250 131250 105000 99750 2c)20% collection in following month (20% of 2a) 21000 23100 26600 29400 35000 28000 26600 2d)5% Uncollectible (5% of 2a) 5250 5775 6650 7350 8750 7000 6650 Total Cash Collection (2b+2c) 99750 109725 126350 139650 166250 133000 126350 3) Production Budget Units 3a)Desired Sales units ( from 1b) 30000 30000 33000 38000 42000 19000 19000 3b)Add : Closing Inv of Finished Goods 9900 11400 12600 5700 5700 39900 44400 50600 47700 24700 3c)Less : Opening Inv of Finished Goods 9900 11400 12600 5700 3d)Chips Packets to be produced 39900 34500 39200 60300 30400 4) Potato Budget Production of Chips Packets( from 3d) 34500 39200 60300 30400 Potato for each packet of chips in kgs 0.5 0.5 0.5 0.5 Potato units required 17250 19600 30150 15200 Add: Ending Potato Inventory 3450 3920 6030 3040 21170 25630 33190 Less : Opening Inv of Potato 3450 3920 6030 3040 Potatoes required in kgs 17720 21710 27160 Cost per kg of potato $ 1.2 1.2 1.2 Raw Material Purchases Cost $ 21264 26052 32592 5) Cash Paid to Payables Budget Closing Accounts Payable 6400 Raw Material Purchases 21264 26052 32592 70% Paid in the same month 14884.8 18236.4 22814.4 30% Paid in subsequent month 6400 6379.2 7815.6 Total Payment for material payables 21284.8 24615.6 30630 6) Direct labour Budget Production of chips packets (From 3d) 34500 39200 60300 Direct Labour Hours per Packet 0.1 0.1 0.1 6c)Total Labour Hours required 3450 3920 6030 Wage rate per hour $ 14 14 14 Total Labout Cost $ 48300 54880 84420 7) Manufacturing Overhead Budget Variable Manufacturing Overhead Budget Total Labour Hours required (From 6c) 3450 3920 6030 Variable Overhead rate per labour hour 5 5 5 Total Variable manufacturing Overhead $ 17250 19600 30150 Fixed Manufacturing Overhead Budget Total Fixed manufacturing Overheads 40000 40000 40000 Less: Depreciation on Factory Equipment 27000 27000 27000 Fixed manufacturing Overheads 13000 13000 13000 8) Selling & Administrative Exps Budget Variable Selling & Administrative Exps Budget Variable S & A Exps per unit sold 0.8 0.8 0.8 Unit Sold ( from 1b) 38000 42000 50000 Total Variable S & A Exps 30400 33600 40000 Fixed Selling & Administrative Exps Budget Fixed Selling & Admin Exps per month 30000 30000 30000 Less: Dep on Office Equipment 10000 10000 10000 Total Fixed S & A Exps 20000 20000 20000
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