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Developing a Master Budget for a Merchandising Organization

(LO3)

Peyton Department Store prepares budgets quarterly. Thefollowing information is available for use in

planning the second quarter budgets for 2014.

PEYTON DEPARTMENT STORE

Balance Sheet

March 31, 2014

Assets Liabilities and Stockholders

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Bunny Greenfelder
Bunny GreenfelderLv2
28 Sep 2019

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Completing a comprehensive budgeting problem—manufacturingcompany

The Arthur Tire Company manufactures racing tires for bicycles.Arthur sells tires for $55 each. Arthur is

planning for the next year by developing a master budget byquarters. Arthur’s balance sheet for December

31, 2014, follows:

ARTHUR TIRE COMPANY

Balance Sheet December 31, 2014

Assets

Current Assets:

Cash $ 22,000

Accounts Receivable 22,000

Raw Materials Inventory 3,200

Finished Goods Inventory 7,250

Total Current Assets $ 54,450

Property, Plant, and Equipment:

Equipment 175,000

Less: Accumulated Depreciation (55,000)120,000

Total Assets $ 174,450

Liabilities

Current Liabilities:

Accounts Payable $ 7,500

Stockholders' Equity

Common Stock $ 135,000

Retained Earnings 31,950

Total Stockholders' Equity 166,950

Total Liabilities and Stockholders' Equity $ 174,450

Other data for Arthur Tire Company:

a. Budgeted sales are 800 tires for the first quarter andexpected to increase by 100 tires per quarter. Cash

sales are expected to be 30% of total sales, with the remaining70% sales on account.

b. Finished Goods Inventory on December 31 consists of 250 tiresat $29 each.

c. Desired ending Finished Goods Inventory is 30% of the nextquarter’s sales; first quarter sales for 2016

are expected be 1,200 tires; FIFO inventory costing method isused.

d. Direct materials cost is $16 per tire.

e. Desired ending Raw Materials Inventory is 20% of the nextquarter’s direct materials needed for

production; desired ending inventory for December 31 is $3,000;indirect materials are insignificant and not

considered for budgeting purposes.

f. Each tire requires 0.20 hours of direct labor; direct laborcosts average $20 per hour.

g. Variable manufacturing overhead is $2 per tire.

h. Fixed manufacturing overhead includes $3,000 per quarter indepreciation and $4,820 per quarter for

other costs, such as utilities, insurance, and propertytaxes.

i. Fixed selling and administrative expenses include $10,000 perquarter for salaries; $1,800 per quarter for

rent; $500 per quarter for insurance; and $600 per quarter fordepreciation.

j. Variable selling and administrative expenses include suppliesat 1% of sales.

k. Capital expenditures include $30,000 for new manufacturingequipment, to be purchased and paid in the

first quarter.

l. Cash receipts for sales on account are 50% in the quarter ofthe sale and 50% in the quarter following the

sale; December 31, 2014, Accounts Receivable is received in thefirst quarter of 2015; uncollectible

accounts are considered insignificant and not considered forbudgeting purposes.

m. Direct materials purchases are paid 75% in the quarterpurchased and 25% in the following quarter;

December 31, 2014, Accounts Payable is paid in the first quarterof 2015.

n. Direct labor, manufacturing overhead, and selling andadministrative costs are paid in the quarter

incurred.

o. Income tax expense is projected at $2,000 per quarter and ispaid in the quarter incurred.

p. Arthur desires to maintain a minimum cash balance of $30,000and borrows from the local bank as

needed in increments of $1,000 at the beginning of the quarter;principal repayments are made at the

beginning of the quarter when excess funds are available and inincrements of $1,000; interest is 12% per

year and paid at the beginning of the quarter based on theamount outstanding from the previous quarter.

Requirements

1. Prepare Arthur’s operating budget and cash budget for 2015,by quarter. Required schedules and

budgets include: sales budget, production budget, directmaterials budget, direct labor budget,

manufacturing overhead budget, cost of goods sold budget,selling and administrative expense budget,

cash receipts, cash payments, and cash budget. Manufacturingoverhead costs are allocated based on

direct labor hours.

2. Prepare Arthur’s annual financial budget for 2015, includingbudgeted income statement, budgeted

balance sheet, and budgeted statement of cash flows.

SIMID SPROTSCOMPANY
Estimated Balance Sheet
21-Dec-13
Assets
Cash 18,000
Accounts receivable 262,500
Inventory 75,000
Total Current Assets 355,500
Equipment 270,000
Less accumulated dep 33,750 236250
Total Assets 591,750
Libalities and Equity
Accounts Payable 180,000
Bank Loan Payable 7,500
Taxes payable (due 3.15.2014) 45,000
Total Liabiliities 232,500
Common Stock 236,250
Retained Earnings 123,000
Total Stockholders equity 359,250
Total Liabilities and equity 591,750

To prepare a master budget for January, February, and March of2014, management has gathered the following information:
• Simid Sports’ single product is purchased for $30 per unit andresold for $55 per unit. The expected inventory level of 2,500units on December 31, 2013, is more than management’s desired levelfor 2014 which is 20% of the next month’s expected sales (inunits). Expected sales are:
o January, 3,500 units;
o February, 4,500 units;
o March, 5,500 units; and
o April, 5,000 units.
• Cash sales and credit sales represent 25% and 75%, respectively,of total sales. Of the credit sales, 60% is collected in the firstmonth after the month of sale and 40% in the second month after themonth of sale. For the December 31, 2013, accounts receivablebalance, $62,500 is collected in January and the remaining $200,000is collected in February.
• Merchandise purchases are paid for as follows: 20% in the firstmonth after the month of purchase and 80% in the second month afterpurchase. For the December 31, 2013, accounts payable balance,$40,000 is paid in January and the remaining $140,000 is paid inFebruary.
• Sales commissions equal to 20% of sales are paid each month.Sales salaries (excluding commissions) are $30,000 per year.
• General and administrative salaries are $72,000 per year.Maintenance expense equals $1,000 per month and is paid incash.
• Equipment reported in the December 31, 2013, balance sheet waspurchased in January 2013. It is being depreciated over eight yearsusing the straight-line method with no salvage value. The followingamounts for new equipment purchases are planned in the comingquarter: January, $18,000; February, $48,000; and March, $14,400.This equipment will be depreciated using the straight-line methodover eight years with no salvage value. A full month’s depreciationis taken for the month in which equipment is purchased.
• The company plans to acquire land at the end of March at a costof $75,000, which will be paid for with cash on the last day of themonth.
• Simid Sports has a working arrangement with its bank to obtainadditional loans as needed. The interest rate is 12% per year, andinterest is paid at each month-end based on the beginning balance.Partial or full payments on these loans can be made on the last dayof the month. The company has agreed to maintain a minimum endingcash balance of $12,500 each month.
• The income tax rate for the company is 40%. Income taxes on thefirst quarter’s income will not be paid until April 15.

Using the information in the above document, prepare a masterbudget for each of the first three months of 2014, include thefollowing component budgets (show supporting calculations asneeded, and round amounts to the nearest dollar):

1. Monthlysales budgets (showing both budgeted unit sales and dollarsales)

2. Monthlymerchandise purchases budgets

3. Monthlyselling expense budgets

4. Monthlygeneral and administrative expense budgets

5. Monthlycapital expenditure budgets

6. Monthlycash budgets

7. Budgetedincome statement for the entire first quarter (not for eachmonth)

8. Budgetedbalance sheet as of March 31, 2014.

I have the solution to parts 1-6,but need help with 7 & 8.

Check My Work (2 remaining) eBook Problem-Solving StrategyBudgeted Income Statement and Supporting Budgets The budgetdirector of Gold Medal Athletic Co., with the assistance of thecontroller, treasurer, production manager, and sales manager, hasgathered the following data for use in developing the budgetedincome statement for March 2014: a.Estimated sales for March:b.Estimated inventories at March 1: c.Desired inventories at March31: d.Direct materials used in production: e.Anticipated cost ofpurchases and beginning and ending inventory of direct materials:f.Direct labor requirements: g.Estimated factory overhead costs forMarch: h.Estimated operating expenses for March: i.Estimated otherincome and expense for March: j.Estimated tax rate: 30% Required:1. Prepare a sales budget for March. Enter all amounts as positivenumbers. Gold Medal Athletic Co. Sales Budget For the Month EndingMarch 31, 2014 Unit Sales Volume Unit Selling Price Total SalesBatting helmet $ $ Football helmet Total revenue from sales $ 2.Prepare a production budget for March. Enter all amounts aspositive numbers. Gold Medal Athletic Co. Production Budget For theMonth Ending March 31, 2014 Units Batting helmet Football helmetExpected units to be sold Plus desired inventory, March 31, 2014Total Less estimated inventory, March 1, 2014 Total units to beproduced 3. Prepare a direct materials purchases budget for March.Enter all amounts as positive numbers. Gold Medal Athletic Co.Direct Materials Purchases Budget For the Month Ending March 31,2014 Plastic Foam Lining Total Units required for production:Batting helmet Football helmet Plus desired units of inventory,March 31, 2014 Total Less estimated units of inventory, March 1,2014 Total units to be purchased Unit price $ $ Total directmaterials to be purchased $ $ $ 4. Prepare a direct labor costbudget for March. Enter all amounts as positive numbers. Gold MedalAthletic Co. Direct Labor Cost Budget For the Month Ending March31, 2014 Molding Department Assembly Department Total Hoursrequired for production: Batting helmet Football helmet TotalHourly rate $ $ Total direct labor cost $ $ $ 5. Prepare a factoryoverhead cost budget for March. Enter all amounts as positivenumbers. Gold Medal Athletic Co. Factory Overhead Cost Budget Forthe Month Ending March 31, 2014 Indirect factory wages $Depreciation of plant and equipment Power and light Insurance andproperty tax Total $ 6. Prepare a cost of goods sold budget forMarch. Work in process at the beginning of March is estimated to be$15,300, and work in process at the end of March is desired to be$14,800. Enter all amounts as positive numbers. Gold Medal AthleticCo. Cost of Goods Sold Budget For the Month Ending March 31, 2014SelectDirect materials inventory, March 1, 2014Direct materialsinventory, March 31, 2014Direct materials purchasesFactoryOverheadFinished goods inventory, March 1, 2014Finished goodsinventory, March 31, 2014 SelectDirect materials inventory, March1, 2014Direct materials inventory, March 31, 2014Direct materialspurchasesFactory OverheadWork in process inventory, March 1,2014Work in process inventory, March 31, 2014 Direct materials:SelectDirect materials inventory, March 1, 2014Direct materialsinventory, March 31, 2014Finished goods inventory, March 1,2014Finished goods inventory, March 31, 2014Work in processinventory, March 1, 2014Work in process inventory, March 31, 2014SelectDirect laborDirect materials purchasesFactoryoverheadFinished goods inventory, March 31, 2014Work in processinventory, March 1, 2014Work in process inventory, March 31, 2014Cost of direct materials available for use SelectLess: Directmaterials inventory, March 1, 2014Less: Direct materials inventory,March 31, 2014Less: Finished goods inventory, March 1, 2014Less:Finished goods inventory, March 31, 2014Less: Work in processinventory, March 1, 2014Less: Work in process inventory, March 31,2014 Cost of direct materials placed in production SelectDirectlaborDirect materials purchasesFinished goods inventory, March 1,2014Finished goods inventory, March 31, 2014Work in processinventory, March 1, 2014Work in process inventory, March 31, 2014SelectDirect materials purchasesFactory overheadFinished goodsinventory, March 1, 2014Finished goods inventory, March 31,2014Work in process inventory, March 1, 2014Work in processinventory, March 31, 2014 Total manufacturing costs Total work inprocess during the period SelectLess: Direct materials inventory,March 1, 2014Less: Direct materials inventory, March 31, 2014Less:Finished goods inventory, March 1, 2014Less: Finished goodsinventory, March 31, 2014Less: Work in process inventory, March 1,2014Less: Work in process inventory, March 31, 2014 Cost of goodsmanufactured Cost of finished goods available for sale SelectLess:Direct materials inventory, March 1, 2014Less: Direct materialsinventory, March 31, 2014Less: Finished goods inventory, March 1,2014Less: Finished goods inventory, March 31, 2014Less: Work inprocess inventory, March 1, 2014Less: Work in process inventory,March 31, 2014 Cost of goods sold 7. Prepare a selling andadministrative expenses budget for March. Enter all amounts aspositive numbers. Gold Medal Athletic Co. Selling andAdministrative Expenses Budget For the Month Ending March 31, 2014Selling expenses: Sales salaries expense Advertising expenseTelephone expense—selling Travel expense—selling Total sellingexpenses Administrative expenses: Office salaries expenseDepreciation expense—office equipment Telephoneexpense—administrative Office supplies expense Miscellaneousadministrative expense Total administrative expenses Totaloperating expenses 8. Prepare a budgeted income statement forMarch. Enter all amounts as positive numbers. Gold Medal AthleticCo. Budgeted Income Statement For the Month Ending March 31, 2014SelectGross profitIncome before income taxInterest expenseInterestrevenueRevenue from sales SelectAdministrative expensesCost ofgoods soldIncome tax expenseInterest expenseSelling expensesSelectGross profitInterest revenueNet incomeNet lossRevenue fromsales Operating expenses: SelectCost of goods soldInterestrevenueNet incomeNet lossSelling expenses SelectAdministrativeexpensesGross profitInterest revenueNet incomeNet loss Totaloperating expenses Income from operations Other income: SelectGrossprofitInterest expenseInterest revenueNet incomeRevenue from salesOther expenses: SelectCost of goods soldGross profitInterestexpenseInterest revenueNet loss Income before income tax SelectCostof goods soldGross profitIncome tax expense (30% rate)InterestrevenueNet loss Net income

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