The Effect of Changes in Activity Part 6

Exercise 8-15 Direct Labor and Manufacturing Overhead Budgets The Production Department of Hruska Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year: 1st Quarter2nd Quarter3rd Quarter4th Quarter Units to be produced 12,000 10,000 13,000 14,000 Each unit requires 0.2 direct labor-hours and direct laborers are paid $12.00 per hour. In addition, the variable manufacturing overhead rate is $1.75 per direct labor-hour. The fixed manufacturing overhead is $86,000 per quarter. The only noncash element of manufacturing overhead is depreciation, which is $23,000 per quarter. Required: 1. Calculate the company’s total estimated direct labor cost for each quarter of the the upcoming fiscal year and for the year as a whole. Assume that the direct labor workforce is adjusted each quarter to match the number of hours required to produce the estimated number of units produced. 2&3. Calculate the company’s total estimated manufacturing overhead cost and the cash disbursements for manufacturing overhead for each quarter of the the upcoming fiscal year and for the year as a whole. Explanation Exercise 8-16 Direct Materials and Direct Labor Budgets The production department of Zan Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year: 1st Quarter2nd Quarter3rd Quarter4th Quarter Units to be produced 5,000 8,000 7,000 6,000 In addition, 6,000 grams of raw materials inventory is on hand at the start of the 1st Quarter and the beginning accounts payable for the 1st Quarter is $2,880. Each unit requires 8 grams of raw material that costs $1.20 per gram. Management desires to end each quarter with an inventory of raw materials equal to 25% of the following quarter’s production needs. The desired ending inventory for the 4th Quarter is 8,000 grams. Management plans to pay for 60% of raw material purchases in the quarter acquired and 40% in the following quarter. Each unit requires 0.20 direct labor-hours and direct laborers are paid $11.50 per hour. Required: 1.&2. Calculate the estimated grams of raw material that need to be purchased and the cost of raw material purchases for each quarter and for the year as a whole. 3. Calculate the expected cash disbursements for purchases of materials for each quarter and for the year as a whole. 4. Calculate the estimated direct labor cost for each quarter and for the year as a whole. Assume that the direct labor workforce is adjusted each quarter to match the number of hours required to produce the estimated number of units produced. Explanation CHAPTER CASE Problem 8-31 Completing a Master Budget Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter: a. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances: Cash $ 48,000 Accounts receivable 224,000 Inventory 60,000 Buildings and equipment (net) 370,000 Accounts payable $ 93,000 500,000 Common stock 109,000 Retained earnings $702,000 $702,000 b. Actual sales for December and budgeted sales for the next four months are as follows: December(actual) $280,000 January $400,000 February $600,000 March $300,000 April $200,000 c. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales. d. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.) e. Monthly expenses are budgeted as follows: salaries and wages, $27,000 per month: advertising, $70,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,000 for the quarter. f. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold. g. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid in the following month. h. During February, the company will purchase a new copy machine for $1,700 cash. During March, other equipment will be purchased for cash at a cost of $84,500. i. During January, the company will declare and pay $45,000 in cash dividends. j. Management wants to maintain a minimum cash balance of $30,000. 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. 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 data above, complete the following statements and schedules for the first quarter: 1. Schedule of expected cash collections: 2-a. Merchandise purchases budget: 2-b. Schedule of expected cash disbursements for merchandise purchases: 3. Cash budget: 4. Prepare an absorption costing income statement for the quarter ending March 31. 5. Prepare a balance sheet as of March 31. Explanation 2. a. Add desired ending merchandise inventory: At March 31: $200,000 April sales × 60% cost ratio × 25% = $30,000. 3. Interest ($80,000 × 1% × 3) = ($2,400) February: $27,000 + $70,000 + [$600,000 × (5% + 3%)] = $145,000. 4. Cost of goods sold: A simpler computation would be: $1,300,000 x 60% = $780,000. Selling and administrative expenses: Salaries and wages ($27,000 × 3) = $81,000 Advertising ($70,000 × 3) = $210,000 Shipping (5% of sales) = $65,000 Other expenses (3% of sales) = $39,000 5. Assets: Accounts receivable (80% × $300,000) = $240,000 Buildings and equipment, net ($370,000 + $86,200 – $42,000) = $414,200 Liabilities and Stockholders’ Equity: Accounts payable (50% × $165,000) = $82,500 Retained earnings: Beginning retained earnings$109,000 Add net income 80,600 Total 189,600 Deduct cash dividends 45,000 Ending retained earnings $144,600