Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 78

Sales, production, purchases, and cash budgets Rolen, Inc., is in the process of preparing the fourth quarter budget for 2010, and the following data have been assembled:

•         The company sells a single product at a price of $25 per unit. The estimated sales volume for the next six months is as follows:

September	13,000 units
October	12,000 units
November	14,000 units
December	20,000 units
January	9,000 units
February	10,000 units

•         All sales are on account. The company’s collection experience has been that 30% of a month’s sales are collected in the month of sale, 68% are collected in the month following the sale, and 2% are uncollectible. It is expected that the net realizable value of accounts receivable (i.e., accounts receivable less allowance for uncollectible accounts) will be $211,000 on September 30, 2010.

•         Management’s policy is to maintain ending finished goods inventory each month at a level equal to 30% of the next month’s budgeted sales. The finished goods inventory on September 30, 2010, is expected to be 3,600 units.

•         To make one unit of finished product, 5 pounds of materials are required. Management’s policy is to have enough materials on hand at the end of each month to equal 40% of the next month’s estimated usage. The raw materials inventory is expected to be 25,200 pounds on September 30, 2010.

•         The cost per pound of raw material is $2, and 70% of all purchases are paid for in the month of purchase; the remainder is paid in the following month. The accounts payable for raw material purchases is expected to be $37,980 on September 30, 2010.

Required:

a. Prepare a sales budget in units and dollars, by month and in total, for the fourth quarter (October, November, and December) of 2010.

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b. Prepare a schedule of cash collections from sales, by month and in total, for the fourth quarter of 2010.

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c. Prepare a production budget in units, by month and in total, for the fourth quarter of 2010.

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d. Prepare a materials purchases budget in pounds, by month and in total, for the fourth quarter of 2010.

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e. Prepare a schedule of cash payments for materials, by month and in total, for the fourth quarter of 2010.

Step 1 of 10

Sales budget :

Sales budget is the estimated sales made in the budgeted period. It is a forecast of the demand in market. It helps to plan the production and purchase budget accordingly.