Prepare a budgeted balance sheet as of may 31

Question 1

Fogerty Company makes two products—titanium Hubs and Sprockets. Data regarding the two products follow:

Direct Labor-Hours per Unit

Annual Production

Hubs

0.70

23,000

units

Sprockets

0.30

45,000

units

Additional information about the company follows:

a. Hubs require $24 in direct materials per unit, and Sprockets require $13.

b. The direct labor wage rate is $13 per hour.

c. Hubs require special equipment and are more complex to manufacture than Sprockets.

d. The ABC system has the following activity cost pools:

Estimated

Activity

Activity Cost Pool (Activity Measure)

Overhead Cost

Hubs

Sprockets

Total

Machine setups (number of setups)

$

24,300

135

108

243

Special processing (machine-hours)

$

171,000

3,800

0

3,800

General factory (organization-sustaining)

$

191,600

NA

NA

NA

Required:

1. Compute the activity rate for each activity cost pool.

2. Determine the unit product cost of each product according to the ABC system.

Question 2

Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown:

Hi-Tek Manufacturing Inc. Income Statement

Sales

$

1,716,000

Cost of goods sold

1,253,424

Gross margin

462,576

Selling and administrative expenses

600,000

Net operating loss

$

(137,424

)

Hi-Tek produced and sold 60,400 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below:

B300

T500

Total

Direct materials

$

400,400

$

162,600

$

563,000

Direct labor

$

120,500

$

43,000

163,500

Manufacturing overhead

526,924

Cost of goods sold

$

1,253,424

The company has created an activity-based costing system to evaluate the profitability of its products. Hi-Tek’s ABC implementation team concluded that $55,000 and $107,000 of the company’s advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company’s manufacturing overhead to four activities as shown below:

Manufacturing Overhead

Activity

Activity Cost Pool (and Activity Measure)

B300

T500

Total

Machining (machine-hours)

$

205,824

90,800

62,800

153,600

Setups (setup hours)

160,200

76

280

356

Product-sustaining (number of products)

100,400

1

1

2

Other (organization-sustaining costs)

60,500

NA

NA

NA

Total manufacturing overhead cost

$

526,924

Required:

1. Compute the product margins for the B300 and T500 under the company’s traditional costing system.

2. Compute the product margins for B300 and T500 under the activity-based costing system.

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments.

Question 4

Minden Company is a wholesale distributor of premium European chocolates. The company’s balance sheet as of April 30 is given below:

Minden Company Balance Sheet April 30

Assets

Cash

$

10,500

Accounts receivable

57,000

Inventory

42,500

Buildings and equipment, net of depreciation

236,000

Total assets

$

346,000

Liabilities and Stockholders’ Equity

Accounts payable

$

72,750

Note payable

21,200

Common stock

180,000

Retained earnings

72,050

Total liabilities and stockholders’ equity

$

346,000

The company is in the process of preparing a budget for May and has assembled the following data:

a. Sales are budgeted at $296,000 for May. Of these sales, $88,800 will be for cash; the remainder will be credit sales. One-half of a month’s credit sales are collected in the month the sales are made, and the remainder is collected in the following month. All of the April 30 accounts receivable will be collected in May.

b. Purchases of inventory are expected to total $192,000 during May. These purchases will all be on account. Forty percent of all purchases are paid for in the month of purchase; the remainder are paid in the following month. All of the April 30 accounts payable to suppliers will be paid during May.

c. The May 31 inventory balance is budgeted at $51,500.

d. Selling and administrative expenses for May are budgeted at $98,700, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,150 for the month.

e. The note payable on the April 30 balance sheet will be paid during May, with $220 in interest. (All of the interest relates to May.)

f. New refrigerating equipment costing $6,800 will be purchased for cash during May.

g. During May, the company will borrow $23,200 from its bank by giving a new note payable to the bank for that amount. The new note will be due in one year.

Required:

1. Calculate the expected cash collections for May.

2. Calculate the expected cash disbursements for merchandise purchases for May.

3. Prepare a cash budget for May.

4. Prepare a budgeted income statement for May.

5. Prepare a budgeted balance sheet as of May 31.

Question 5

The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods:

Current assets as of March 31:

Cash

$

7,900

Accounts receivable

$

21,600

Inventory

$

42,000

Building and equipment, net

$

132,000

Accounts payable

$

25,050

Common stock

$

150,000

Retained earnings

$

28,450

a. The gross margin is 25% of sales.

b. Actual and budgeted sales data:

March (actual)

$

54,000

April

$

70,000

May

$

75,000

June

$

100,000

July

$

51,000

c. Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales.

d. Each month’s ending inventory should equal 80% of the following month’s budgeted cost of goods sold.

e. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory.

f. Monthly expenses are as follows: commissions, 12% of sales; rent, $2,700 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $990 per month (includes depreciation on new assets).

g. Equipment costing $1,900 will be purchased for cash in April.

h. Management would like to maintain a minimum cash balance of at least $4,000 at the end of each month. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $20,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

Required:

Using the preceding data:

1. Complete the schedule of expected cash collections.

2. Complete the merchandise purchases budget and the schedule of expected cash disbursements for merchandise purchases.

3. Complete the cash budget.

4. Prepare an absorption costing income statement for the quarter ended June 30.

5. Prepare a balance sheet as of June 30.

Question 6

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price—$16 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

January (actual)

22,000

June (budget)

52,000

February (actual)

28,000

July (budget)

32,000

March (actual)

42,000

August (budget)

30,000

April (budget)

67,000

September (budget)

27,000

May (budget)

102,000

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid $5.00 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable:

Sales commissions

4

% of sales

Fixed:

Advertising

$

300,000

Rent

$

28,000

Salaries

$

126,000

Utilities

$

12,000

Insurance

$

4,000

Depreciation

$

24,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $21,000 in new equipment during May and $50,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $22,500 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

Assets

Cash

$

84,000

Accounts receivable ($44,800 February sales; $537,600 March sales)

582,400

Inventory

134,000

Prepaid insurance

26,000

Property and equipment (net)

1,050,000

Total assets

$

1,876,400

Liabilities and Stockholders’ Equity

Accounts payable

$

110,000

Dividends payable

22,500

Common stock

1,000,000

Retained earnings

743,900

Total liabilities and stockholders’ equity

$

1,876,400

The company maintains a minimum cash balance of $60,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $60,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

1. a. A sales budget, by month and in total.

b. A schedule of expected cash collections, by month and in total.

c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $60,000.

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

4. A budgeted balance sheet as of June 30.