Question

Smithfield Company manufactures widgets. Smithfield’s sales budget shows monthly sales for the upcoming quarter as follows:

                                                July                              10,000 units

                                                August                        8,000 units

                                                September                   12,000 units

                                                October                       14,000 units

Each unit sells for $20.00. 80% of sales are on account. Smithfield’s collections on sales on account are expected as follows:

                                                65% in the month of the sale

                                                20% in the month following the month of sale

                                                12% in the second month following the month of sale

                                                3% uncollectible

Smithfield’s accounts receivable balance as of June 30 is $93,000 (net of expected bad debts which are reserved for) of which $30,000 represents uncollected May sales and $63,000 represents uncollected June sales. These amounts just represent what is collectible (uncollectible amounts have been written off).

Company policy is to have a finished goods inventory at the end of each month equal to 20% of the next month’s sales. Variable product costs are as follows:

                        DM (2 pounds of steel at $4 per pound)        $8.00

                        DL (1/4 hour at $12 per hour)                                   $3.00

                        Variable Overhead (50% of DL)                                $1.50

Ending inventory levels for raw materials should equal 40% of the production needs for the next month. Smithfield pays for 20% of direct material purchases during the month of purchase and the remaining 80% is paid during the following month. Other variable costs are incurred and paid during the month of production. The fixed operating costs total $10,000 a month (including depreciation of $3,000). Payments related to fixed overhead are made during the month incurred.

Raw Materials and Finished goods inventories at the beginning of July were in accordance with the company’s inventory policy.

1. What were total sales for each of the following months?

1. May                                                          
2. June

2. What are the expected cash collections for each of the following months?

1. July
2. August

3. How many widgets does Smithfield expect to produce during the months of July, August and September?

4.   What is the RM purchases budget for July and August (in pounds and dollars)?

5.   Prepare a cash budget for August.

Answer 1

1	Accounts receivable balance as of June 30= $93,000 (net of expected bad debts which are reserved for)
	80% of sales are on account
	Expected baddebts=3%
	Collections on sales on account:
	65% in the month of the sale
	20% in the month following the month of sale
	12% in the second month following the month of sale
a)	Uncollected may sales=$ 30000
	As on June 30,12% is uncollected
	May credit sales=30000/12%=$ 250000
	Total sales=250000/80%=$ 312500
b)	Uncollected June sales=$ 63000
	As on June 30,32% (20+12) is uncollected
	June credit sales=63000/32%=$ 196875
	Total sales=196875/80%=$ 246094

2	Expected cash collections:
							July	August
	Units sold			a			10000	8000
	Unit price			b			20	20
	Sales revenue			c=a*b			200000	160000
	Collections:
	Cash sales at 20%						40000	32000
	May credit sales						30000
	June credit sales
	20% in the month following				(196875*20%)		39375
	12% in the second month following				(196875*12%)			23625
	July credit sales		(200000*80%=$ 160000)
	65% in the month of the sale				(160000*65%)		104000
	20% in the month following				(160000*20%)			32000
	August sales		(160000*80%=$ 128000)
	65% in the month of the sale				(128000*65%)			83200
	Total cash collections						213375	170825
3			Production budget
					July	Aug	Sep
	Units sold				10000	8000	12000
	Plus desired ending inventory				1600	2400	2800
	(20% of the next month’s sales)				(8000*20%)	(12000*20%)	(14000*20%)
	Total				11600	10400	14800
	Less beginning inventory				2000	1600	2400
					(10000*20%)
	Total units (Widgets) to be produced				9600	8800	12400

4 RM purchases budget Total units (Widgets) to be produced Plus desired RM ending inventory (40% of the production needs for the next month) Total Less estimated RM beginning inventory July Aug 9600 8800 3520 4960 (8800*40%) (12400*40%) 13120 13760 3840 3520 (9600*40%) 9280 10240 2 2 18560 20480 a b Total units to be purchased Pounds required per unit Total pounds required Unit price Total RM cost of purchase C=a*b d 4 4 e=c*d 74240 81920