Question

Storm Tools has formed a new business unit to produce battery-powered drills. The business unit was formed by the transfer of selected assets and obligations from the parent company. The unit's initial balance sheet on January 1 contained cash ($500,000), plant and equipment ($2,500,000), notes payable to the parent ($1,000,000), and residual equity ($2,000,000).

The business unit is expected to repay the note at $50,000 per month, plus all accrued interest at 1/2% per month. Payments are made on the last day of each month.
The unit is scheduled to produce 25,000 drills during January, with an increase of 2,500 units per month for the next three months. Each drill requires $40 of raw materials. Raw materials are purchased on account, and paid in the month following the month of purchase. The plant manager has established a goal to end each month with raw materials on hand, sufficient to meet 25% of the following month's planned production.
The unit expects to sell 20,000 drills in January; 25,000 in February, 25,000 in March, and 30,000 per month thereafter. The selling price is $100 per drill. Half of the drills will be sold for cash through a website. The others will be sold to retailers on account, who pay 40% in the month of purchase, and 60% in the following month. Uncollectible accounts are not material. Each drill requires 20 minutes of direct labor to assemble. Labor rates are $24 per hour. Variable factory overhead is applied at $9 per direct labor hour. The fixed factory overhead is $25,000 per month; 60% of this amount is related to depreciation of plant and equipment. With the exception of depreciation, all overhead is funded as incurred.
Selling, general, and administrative costs are funded in cash as incurred, and consist of fixed components (salaries, $100,000; office, $40,000; and advertising, $75,000) and variable components (15% of sales). Prepare a monthly comprehensive budget plan for Storm's new business unit for January through March. The plan should include the (a) sales and cash collections budget, (b) production budget, (c) direct materials purchases and payments budget, (d) direct labor budget, (e) factory overhead budget, (f) ending finished goods budget (assume total factory overhead is applied to production at the rate of $11.73 per direct labor hour), (g) SG&A budget, and (h) cash budget.
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Sales Budget
For the Three Months January to March
January February March
Expected Cash Collections From Sales
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Production Budget
For the Three Months January to March
January February March
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Direct Materials Budget
For the Three Months January to March
January February March
Expected Cash Payments for Materials Purchases
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Direct Labor Budget
For the Three Months January to March
January February March
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Factory Overhead Budget
For the Three Months January to March
January February March
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Ending Finished Goods Inventory
31-Mar
Units Per Unit Cost Per Unit Total
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Selling, General, and Administrative Budget
For the Three Months January to March
January February March
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Cash Budget
For the Three Months January to March
January February March
Beginning cash balance
Plus: Customer receipts
Available cash
Less disbursements:
Direct materials
Direct labor
Factory overhead
SG&A
Total disbursements
Cash surplus/(deficit)
Financing:
Planned repayment
Interest on note (1/2% of unpaid balance)
Ending cash balance

Answer 1

Storm Tools

STORM TOOLS

1. Sales Budget

For the Three Months January to March

January February March

Expected Cash Collections

From Sales $1,400,000 $2,275,000 $2,500,000

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2. Production Budget

For the Three Months January to March

January February March

Production Schedule 25,000 27,500 30,000

Cost of direct materials $1,000,000 $1,100,000 $1,200,000

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4. Direct Materials Budget

For the Three Months January to March

January February March

Expected Cash Payments

for Materials Purchases $1,025,000 $1,125,000

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5. Direct Labor Budget

For the Three Months January to March

January February March

Direct labor costs $200,000 $220,000 $240,000

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6. Factory Overhead Budget

For the Three Months January to March

January February March

Variable overhead $75,000 $82,500 $90,000 $97,500

Fixed overhead 25,000 25,000 25,000 25,000

Total overhead $100,000 $107,500 $115,000 $122,500

Depreciation cost 15,000 15,000 15,000 15,000

Cash payment for o/h $85,000 $92,500 $100,000 $107,500

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7. Ending Finished Goods Inventory

31-Mar

Units Per Unit Cost Per Unit Total

January 5,000 $51.91 $259,550

February 7,500 $51.91 $389,325

March 12,500 $51.91 $648,875

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Selling, General, and Administrative Budget

For the Three Months January to March

January February March

Fixed overhead:

Salaries $100,000 $100,000 $100,000

Office expenses 40,000 40,000 40,000

Advertising 75,000 75,000 75,000

Fixed overhead $215,000 $215,000 $215,00

Variable overhead 210,000 341,250 375,000

Selling, General, and Admin. $425,000 $556,250 $590,000

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Cash Budget

For the Three Months January to March

January February March

Beginning cash balance $500,000 $1,135,000 $1,461,500

Plus: Customer receipts 1,400,000 2,275,000 2,500,000

Available cash $1,900,000 $3,410,000 $3,961,500

Less disbursements:

Direct materials $0 $1,025,000 $1,125,000

Direct labor 200,000 220,000 240,000

Factory overhead 85,000 92,500 100,000

SG&A 425,000 556,250 590,000

Total disbursements $710,000 $1,893,750 $2,055,000

Cash surplus/(deficit) $1,190,000 $1,516,250 $1,906,500

Financing:

Planned repayment $50,000 $50,000 $50,000

Interest on note

(1/2% of unpaid balance) 5,000 4,750 4,500

Ending cash balance $1,135,000 $1,461,500 $1,852,000

Step-by-step explanation:

a) Data and Calculations:

Initial Balance Sheet on January 1:

Cash $500,000

Plant and equipment $2,500,000

Total assets $3,000,000

Notes payable $1,000,000

Residual equity $2,000,000

Total liabilities and equity $3,000,000

Repayment of note:

Note payment $50,000 per month

Accrued interest 250

Total repayment $50,250 per month

January February March April

Production Schedule 25,000 27,500 30,000 32,500

Cost of direct materials $1,000,000 $1,100,000 $1,200,000 $1,300,000

Ending raw materials 6,875 7,500 8,125

Production Schedule 25,000 27,500 30,000 32,500

Beginning raw materials 6,250 6,875 7,500 8,125

Purchase of materials 25,625 28,125 30,625

Cost price = $40 per drill

Payment for materials $1,025,000 $1,125,000 $1,225,000

Beginning Finished goods 5,000 7,500 12,500

Production 25,000 27,500 30,000 32,500

Ending Finished goods 5,000 7,500 12,500 15,000

Sales 20,000 25,000 25,000 30,000

Selling price = $100 per drill

Credit sales: $1,000,000 $1,250,000 $1,250,000 $1,500,000

40% month of sale 400,000 625,000 625,000 750,000

60% following month 400,000 625,000 625,000

Cash sales 1,000,000 1,250,000 1,250,000 1,500,000

Total sales collection $1,400,000 $2,275,000 $2,500,000 $2,875,000

Direct labor per drill = 20 minutes

Labor rates = $24 per hour

Variable overhead = $9 per direct labor hour

Production Schedule 25,000 27,500 30,000 32,500

Total labor hours 8,333 9,167 10,000 10,833

Direct labor costs $200,000 $220,000 $240,000 $260,000

Variable overhead $75,000 $82,500 $90,000 $97,500

Fixed overhead 25,000 25,000 25,000 25,000

Total overhead $100,000 $107,500 $115,000 $122,500

Depreciation cost 15,000 15,000 15,000 15,000

Cash payment for o/h $85,000 $92,500 $100,000 $107,500

Selling, general, and administrative costs:

Fixed overhead $215,000 $215,000 $215,000 $215,000

Variable overhead 210,000 341,250 375,000 431,250

Total selling, etc $425,000 $556,250 $590,000 $628,250

Cost of production:

Cost of direct materials $1,000,000 $1,100,000 $1,200,000 $1,300,000

Direct labor costs $200,000 $220,000 $240,000 $260,000

Overhead applied 97,746 107,529 117,300 127,071

Total costs of prodn. $1,297,746 $1,427,529 $1,557,300 $1,687,071

Production Schedule 25,000 27,500 30,000 32,500

Cost per unit $51.91 $51.91 $51.91 $51.91