Question

Morganton Company makes one product and it provided the following information to help prepare the master budget for its first four months of operations:

a.  
The budgeted selling price per unit is $70. Budgeted unit sales for June, July, August, and September are 8,500, 16,000, 18,000, and 19,000 units, respectively. All sales are on credit.

b.  
Forty percent of credit sales are collected in the month of the sale and 60% in the following month.

c.   The ending finished goods inventory equals 20% of the following month’s unit sales.
d.  
The ending raw materials inventory equals 10% of the following month’s raw materials production needs. Each unit of finished goods requires 5 pounds of raw materials. The raw materials cost $2.00 per pound.

e.  
Thirty percent of raw materials purchases are paid for in the month of purchase and 70% in the following month.

f.  
The direct labor wage rate is $13 per hour. Each unit of finished goods requires two direct labor-hours.

g.  
The variable selling and administrative expense per unit sold is $1.70. The fixed selling and administrative expense per month is $66,000.

1. What is the estimated raw materials inventory balance at the end of July? 2. If the company always uses an estimated predetermined plantwide overhead rate of $8 per direct labor-hour, what is the estimated unit product cost? 3. What is the estimated finished goods inventory balance at the end of July, if the company always uses an estimated predetermined plantwide overhead rate of $8 per direct labor-hour? 4. What is the estimated cost of goods sold and gross margin for July, if the company always uses an estimated predetermined plantwide overhead rate of $8 per direct labor-hour? 5.What is the estimated total selling and administrative expense for July? 6. What is the estimated net operating income for July, if the company always uses an estimated predetermined plantwide overhead rate of $8 per direct labor-hour?

Answer 1

1)	Ending R.M inventory balance			9100	units
2)	Direct Material			$     165,800.00
	Direct Labor (16400 x 2 x $ 13)			$     426,400.00
	OH (16400 x 2 x $ 8)			$     262,400.00
				$     854,600.00
	No. of units to be produced			16400
		Units product cost		$               52.11
3)	Ending F.G Invenotry balance			16400	units
4)	Sales (16000 x $ 70)			$ 1,120,000.00
	Less: COGS (16000 x $ 52.11)			$     833,756.10
		Gross Margin		$     286,243.90
5)	Selling and Adm. Expense
	Variable (16000 x $ 1.70)			$       27,200.00
	Fixed			$       66,000.00
			Total	$       93,200.00
6)	Net Operating Income
	Gross Margin			$     286,243.90
	Less: Selling and Adm. Expense			$       93,200.00
		Net Income		$     193,043.90

Workings:

Sales Budget
Particulars		June	July	August	September
Budgeted sales (units)		8500	16000	18000	19000
Selling price		$           70.00	$              70.00	$              70.00	$              70.00
Sales		$ 595,000.00	$ 1,120,000.00	$ 1,260,000.00	$ 1,330,000.00

	Production Budget
	Particulars		June	July	August	September
	Budgeted sales (units)		8500	16000	18000	19000
Add:	Ending F.G		3200	3600	3800
Less:	Beginning F.G		0	3200	3600
	Production Req		11700	16400	18200

	R.M Budget
	Particulars		June	July	August
	Production Req		11700	16400	18200
	R.M req. per unit		5	5	5
	Total R.M prod. needs		58500	82000	91000
Add:	Ending R.M inventory		8200	9100	0
Less:	Beginning R.M invent.		0	8200	0
	Net R.M required			82900
	R.M cost per pound			$             2.00
	Total R.M cost			$ 165,800.00