Question

Gulf Corporation manufactures and sells a seasonal product that has peak sales in the third quarter of the fiscal year. The following information concerns operations for Year 2017 and for the first two quarters of Year 2018 2018 Quarter 2017 Quarter ed Unit Sales40 60,000 100,000 50,000 70,00080,000 a) The company's single product sells for AED 8 per unit (all sales are on credit). b) Credit sales are collected in the following pattern: 75% in the quarter the sales are made, and the remaining 25% in the following quarter. On January 1, 2017, the company's balance sheet showed AED 65,000 in accounts receivable, all of which will be collected in the first quarter of the year. Bad debts are negligible and can be ignored. c) The company desires an ending finished goods inventory at the end of each quarter equal to 30% of the budgeted unit sales for the next quarter. On December 31, 2016, the company had 12,000 units on hand. d) Five pounds of raw materials are required to complete one unit of product. The company requires ending raw materials inventory at the end of each quarter equal to 10% of the following quarter's production needs. On December 31, 2016, the company had 23,000 pounds of raw materials on hand. e) The raw material costs AED 0.80 per pound. Raw material purchases are paid for in the following pattern: 60% paid in the quarter the purchases are made, and the remaining 40% paid in the following quarter. On January 1, 2017, the company's balance sheet showed AED 81,500 in accounts payable for raw material purchases, all of which will be paid for in the first quarter of the year ) At Gulf Corporation, one and a half hours of direct labor are required to produce each unit of finished goods, and the anticipated hourly wage rate is AED 8. g) Gulf Corporation expects variable costs to fluctuate with production volume on the basis of the following rates per total direct labor hour Indirect labor AED 1.20/hr Maintenance AED 0.25/hr Indirect materials AED 1.00/hr Utilities AED 0.30/hr Required Prepare the following budgets and schedules for the year ending on December 31, 2017 showing both quarterly and total figures: A sales budget A schedule of expected cash collections. A production budget. A direct materials budget A schedule of expected cash payments for purchases of materials. A Direct labor budget Manufacturing Overhead Budget (Variable portion) 1. 2. 3. 4. 5. 6. 7.

Answer 1

1. Sales budget = Sales units $\times$ Selling price = (40000+60000+100000+50000) $\times$ 8 = AED 2,000,000

2. Production budget = Sales units + Desired ending inventory - Beginning inventory

  Sales units = 40000+60000+100000+50000 = 250000 units

Desired ending inventory = 30% of budgeted sales units of next quarter (from the information "c")

= 70000 $\times$ 30% = 21000

Beginning inventory = 12000 (from the information C)

Production budget = 250000 + 21000 - 12000 = 241000 units

3. Direct materials(DM) purchase budget = (DM required for production + Desired DM ending inventory - DM beginning inventory) $\times$ purchase price of DM

  DM required for production = 241000 $\times$ 5 = 1205000 pounds (from the information given in "d" 5 pounds of raw material are required to produce one finished good)

  Desired DM ending inventory = 10% of DM required for quarter 1, 2018

DM required for quarter 1, 2018 = 70000 + (80000 $\times$ 30%) - (70000 $\times$ 30%)

73000 $\times$ 5 = 365000 pounds

Desired DM ending inventory = 365000 $\times$ 10% = 36500 pounds

DM beginning inventory = 23000 pounds (from the information "d")

Direct materials(DM) purchase budget = (1205000 + 36500 - 23000)  $\times$ 0.80

= 1264500 $\times$ 0.80 = 1011600

4. Schedule of cash collection

Sales for each quarter

Quarter 1 = 40000 $\times$ 8  = 320000

  Quarter 2 = 60000 $\times$ 8  = 480000

Quarter 3 = 100000 $\times$8 = 800000

Quarter 4 = 50000 $\times$8 = 400000

Collection for quarter 1 = 75% of Q1 sales + Accounts receivable balance at Jan 1

= 320000 $\times$ 75% + 65000 = 305000

Collection for quarter 2 = 75% of Q2 sales + 25% of Q1 sales

= 480000 $\times$ 75% + 320000 $\times$ 25% = 440000

Collection for quarter 3 = 75% of Q3 sales + 25% of Q2 sales

= 800000 $\times$ 75% + 480000 $\times$ 25% = 720000

Collection for quarter 4 = 75% of Q4 sales + 25% of Q3 sales

= 400000 $\times$ 75% + 800000 $\times$ 25% = 500000