Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 44

Comprehensive Budget Plan

Brighton, Inc., manufactures kitchen tiles. The company recently expanded, and the controller believes that it will need to borrow cash to continue operations. It began negotiating for a one-month bank loan of $500,000 starting May 1. The bank would charge interest at the rate of 1 percent per month and require the company to repay interest and principal on May 31. In considering the loan, the bank requested a projected income statement and cash budget for May. The following information is available:

• The company budgeted sales at 600,000 units per month in April, June, and July and at 450,000 units in May. The selling price is $4 per unit.

• The inventory of finished goods on April 1 was 120,000 units. The finished goods inventory at the end of each month equals 20 percent of sales anticipated for the following month. There is no work in process.

• The inventory of raw materials on April 1 was 57,000 pounds. At the end of each month, the raw materials inventory equals no less than 40 percent of production requirements for the following month. The company purchases materials in quantities of 62,500 pounds per shipment.

• Selling expenses are 10 percent of gross sales. Administrative expenses, which include depreciation of $2,500 per month on office furniture and fixtures, total $165,000 per month.

• The manufacturing budget for tiles, based on normal production of 500,000 units per month, follows:

Materials (1/4 pound per tile, 125,000 pounds, $4 per pound)	$ 500,000
Labor	400,000
Variable overhead	200,000
Fixed overhead (includes depreciation of $200,000)	400,000
Total	$1,500,000

Required

a. Prepare schedules computing inventory budgets by months for

(1) Production in units for April, May, and June.

(2) Raw materials purchases in pounds for April and May.

b. Prepare a projected income statement for May. Cost of goods sold should equal the variable manufacturing cost per unit times the number of units sold plus the total fixed manufacturing cost budgeted for the period. Assume cash discounts of 1 percent and bad debt expense of 0.5 percent.

(CPA adapted)

Step 1 of 2

a.?(1)

Brighton, Inc. Schedule Computing Production Budget (Units) For April, May, and June
	April		May				June
Budgeted sales—Units?	600,000			450,000				600,000
Inventory required at end of montha?	90,000			120,000				120,000
Total to be accounted for?	690,000			570,000				720,000
Less inventory on hand at beginning of month?	120,000			90,000				120,000
Budgeted production—Units?	570,000			480,000				600,000

?a?April:??450,000 x .2 = 90,000

??May:?600,000 x .2 = 120,000

??June:?600,000 x .2 = 120,000

?(2)

Schedule Computing Raw Materials Inventory Purchase Budget (Pounds) For April and May
	April				May
Budgeted production—Pounds (1/4 lb. per Unit)a???		142,500				120,000
Inventory required at end of monthb?		48,000				60,000
Total to be accounted for?		190,500				180,000
Less inventory on hand at beginning of month?		57,000				102,000c
Balance required by purchase?		133,500				78,000
Budgeted purchases—Pounds(Based on Minimum Shipments of 62,500 lbs. each) ?		187,500				125,000

?aApril:?570,000 x .25 = 142,500

?? May:?480,000 x .25 = 120,000

?bApril:?480,000 x .4 x .25 = 48,000

?? May:?600,000 x .4 x .25 = 60,000

?c 102,000 = 57,000 + 187,500 – 142,500