Question

Operating Budget, Comprehensive Analysis

Ponderosa, Inc., produces wiring harness assemblies used in the production of semi-trailer trucks. The wiring harness assemblies are sold to various truck manufacturers around the world. Projected sales in units for the coming five months are given below.

January	10,000
February	10,600
March	13,300
April	16,000
May	18,500

The following data pertain to production policies and manufacturing specifications followed by Ponderosa:

1. Finished goods inventory on January 1 is 900 units. The desired ending inventory for each month is 20 percent of the next month’s sales.
2. The data on materials used are as follows:

   Direct Material	Per-Unit Usage	Unit Cost
   Part #K298	2	$4
   Part #C30	3	7

   Inventory policy dictates that sufficient materials be on hand at the beginning of the month to satisfy 30 percent of the next month’s production needs. This is exactly the amount of material on hand on January 1.

3. The direct labor used per unit of output is one and one-half hours. The average direct labor cost per hour is $20.
4. Overhead each month is estimated using a flexible budget formula. (Activity is measured in direct labor hours.)

   	Fixed Cost Component	Variable Cost Component
   Supplies	$ —	$1.00
   Power	—	0.20
   Maintenance	12,500	1.10
   Supervision	14,000	—
   Depreciation	45,000	—
   Taxes	4,300	—
   Other	86,000	1.60

5. Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. (Activity is measured in units sold.)

   	Fixed Costs	Variable Costs
   Salaries	$ 88,600	—
   Commissions	—	$1.40
   Depreciation	25,000	—
   Shipping	—	3.60
   Other	137,000	1.60

6. The unit selling price of the wiring harness assembly is $110.
7. In February, the company plans to purchase land for future expansion. The land costs $68,000.
8. All sales and purchases are for cash. The cash balance on January 1 equals $62,900. The firm wants to have an ending cash balance of at least $25,000. If a cash shortage develops, sufficient cash is borrowed to cover the shortage and provide the desired ending balance. Any cash borrowed must be borrowed in $1,000 increments and is repaid the following month, as is the interest due. The interest rate is 12 percent per annum.

Required:

Prepare a monthly operating budget for the first quarter with the following schedules:

1. Sales budget

	January	February	March	Total
Units
Unit selling price	$	$	$	$
Sales	$	$	$	$

Feedback

See Cornerstone 8.1.

2. Production budget

	January	February	March	Total
Unit sales
Desired ending inventory
Total needed
Less: Beginning inventory
Units produced

Feedback

See Cornerstone 8.2.

3. Direct materials purchases budget

	January		February		March		Total
	Part K298	Part C30	Part K298	Part C30	Part K298	Part C30	Part K298	Part C30
Units produced
Dir. mat. per unit
Production needs
Desired EI
Total needed
Less: BI
Dir. mat. to purchase
Cost per unit	$	$	$	$	$	$	$	$
Total purchase cost	$	$	$	$	$	$	$	$

Feedback

See Cornerstone 8.3.

4. Direct labor budget. Round your answers to two decimal places, if required.

	January	February	March	Total
Units to be produced
Direct labor time per unit (hrs.)
Total hours needed
Wages per hour	$	$	$	$
Total direct labor cost	$	$	$	$

Feedback

See Cornerstone 8.4.

5. Overhead budget. Round your answers to two decimal places, if required.

	January	February	March	Total
Budgeted direct labor hours
Variable overhead rate
Budgeted var. overhead	$	$	$	$
Budgeted fixed overhead
Total overhead cost	$	$	$	$

Feedback

See Cornerstone 8.5.

6. Selling and administrative expense budget. Round your answers to the nearest cent, if required.

	January	February	March	Total
Planned sales
Variable selling & administrative expense per unit	$	$	$	$
Total variable expense	$	$	$	$
Fixed selling & administrative expense:
Salaries	$	$	$	$
Depreciation
Other
Total fixed expenses	$	$	$	$
Total selling & administrative expenses	$	$	$	$

Feedback

See Cornerstone 8.9.

7. Ending finished goods inventory budget. Round intermediate calculations to the nearest cent. Round your answers to the nearest cent, if required.

Unit cost computation:
Direct materials:
Part K298	$
Part C30
Direct labor
Overhead:
Variable
Fixed
Total unit cost	$
Number of units
Finished goods	$

Feedback

See Cornerstone 8.6.

8. Cost of goods sold budget

Direct materials used
Part K298	$
Part C30		$
Direct labor used
Overhead
Budgeted manufacturing costs		$
Add: Beginning finished goods
Goods available for sale		$
Less: Ending finished goods
Budgeted cost of goods sold		$

Feedback

See Cornerstone 8.7.

9. Budgeted income statement (ignore income taxes)

Sales	$
Less: Cost of goods sold
Gross margin	$
Less: Selling and administrative expense
Income before income taxes	$

Feedback

See Cornerstone 8.10.

10. Cash budget
Enter a negative balance as a negative amount, and if an amount is zero enter "0".

	January	February	March	Total
Beginning balance	$	$	$	$
Cash receipts
Total cash available	$	$	$	$
Disbursements:
Purchases	$	$	$	$
DL payroll
Overhead
Marketing & admin
Land
Total disbursements	$	$	$	$
Ending balance	$	$	$	$
Financing:
Borrowed/repaid
Interest paid
Ending cash balance	$	$	$	$

Answer 1

Requirement 1: Prepare the sales budget as follows

Particulars	January	February	March	Total
Number of units	10,000	10,600	13,300	33,900
× Selling price per unit	$110	$110	$110	$110
Sales revenue	$1,100,000	$1,166,000	$1,463,000	$3,729,000

Requirement 2. Prepare the production budget as follows

Particulars	January	February	March	Total
Sales in units	10,000	10,600	13,300	33,900
Add: Desired ending finished inventory	2,120	2,660	3,200	3,200
Total units needed	12,120	13,260	16,500	37,100
Deduct: Beginning finished inventory	900	2,120	2,660	900
Units to be produced	11,220	11,140	13,840	36,200

Note: Desired ending inventory is computed as follows : January :10,600 × 20% = 2,120 ; February: 13,300 × 20% = 2,660; March : 16,000 × 20% = 3,200  

Requirement 3. Prepare the direct materials purchases budget as follows

Particulars	January		February		March		Total
	Part #K298	Part #C30	Part #K298	Part #C30	Part #K298	Part #C30	Part #K298	Part #C30
Units to be produced	11,220	11,220	11,140	11,140	13,840	13,840	36,200	36,200
× Direct material per unit	2	3	2	3	2	3	2	3
Total production needs	22,440	33,660	22,280	33,420	27,680	41,520	72,400	108,600
Add: Desired ending inventory	6,684	10,026	8,304	12,456	9,900	14,850	9,900	14,850
Total raw material needed	29,124	43,686	30,584	45,876	37,580	56,370	82,300	123,450
Deduct: Beginning inventory of raw material	6,732	10,098	6,684	10,026	8,304	12,456	6,732	10,098
Direct material to purchase	22,392	33,588	23,900	35,850	29,276	43,914	75,568	113,352
× Cost per unit	$4	$7	$4	$7	$4	$7	$4	$7
Total purchase cost	$89,568	$235,116	$95,600	$250,950	$117,104	$307,398	$302,272	$793,464

Notes: Desired ending inventory of raw material is computed as follows

Particulars	January	February	March	April	May
Sales in units	10,000	10,600	13,300	$16,000	$18,500
Add: Desired ending finished inventory	2,120	2,660	3,200	3,700
Total units needed	12,120	13,260	16,500	19,700
Deduct: Beginning finished inventory	900	2,120	2,660	3,200
Units to be produced	11,220	11,140	13,840	16,500

Particulars	January		February		March		April
	Part #K298	Part #C30	Part #K298	Part #C30	Part #K298	Part #C30	Part #K298	Part #C30
Units to be produced	11,220	11,220	11,140	11,140	13,840	13,840	16,500	16,500
× Direct material per unit	2	3	2	3	2	3	2	3
Total production needs	22,440	33,660	22,280	33,420	27,680	41,520	33,000	49,500
Add: Desired ending inventory	6,684	10,026	8,304	12,456	9,900	14,850

Requirement 4. Prepare direct labor budget as follows

Particulars	January	February	March	Total
Units to be produced	11,220	11,140	13,840	36,200
× Direct labor time per unit	1.5	1.5	1.5	1.5
Budgeted direct labor hours	16,830	16,710	20,760	54,300
× Wages per hour	$20	$20	$20	$20
Total direct labor cost	$336,600	$334,200	$415,200	$1,086,000

Requirement 5. Prepare the overhead budget as follows

Particulars	January	February	March	Total
Budgeted direct labor hours	16,830	16,710	20,760	54,300
Variable overhead rate ($1 +$0.20 + $1.10 + $1.60)	$3.90	$3.90	$3.90	$3.90
Budgeted variable overhead	$65,637	$65,169	$80,964	$211,770
Add: Budgeted fixed overhead	$161,800	$161,800	$161,800	$485,400
Total overhead cost	$227,437	$226,969	$242,764	$697,170

Note: Fixed overhead = $161,800 ($12,500 + $14,000 + $45,000 + $4,300 + $86,000)

Requirement 6. Prepare the selling and administrative expense budget as follows

Particulars	January	February	March	Total
Sales in units	10,000	10,600	13,300	33,900
× Unit variable selling and admin expenses ($1.40 + $3.60 + $1.60)	$6.60	$6.60	$6.60	$6.60
Total variable expense (a)	$66,000	$69,960	$87,780	$223,740
Fixed selling and admin expenses:
Salaries	$88,600	$88,600	$88,600	$265,800
Depreciation	$25,000	$25,000	$25,000	$75,000
Other	$137,000	$137,000	$137,000	$411,000
Total fixed selling and admin expenses (b)	$250,600	$250,600	$250,600	$751,800
Total selling and admin expenses (a) + (b)	$316,600	$320,560	$338,380	$975,540