Question & Answer: Freese, Inc., is in the process of preparing the fourth quarter budget for 2016, and the following data have been assembled: •The company sells a single product at…..

Freese, Inc., is in the process of preparing the fourth quarter budget for 2016, and the following data have been assembled: •The company sells a single product at a price of $53 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 $468,520 on September 30, 2016. •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, 2016, is expected to be 3,600 units. •To make one unit of finished product, 6 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 30,240 pounds on September 30, 2016. •The cost per pound of raw material is $5, 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 $113,940 on September 30, 2016. Required: a. Prepare a sales budget in units and dollars, by month and in total, for the fourth quarter (October, November, and December) of 2016. b. Prepare a schedule of cash collections from sales, by month and in total, for the fourth quarter of 2016. c. Prepare a production budget in units, by month and in total, for the fourth quarter of 2016. d. Prepare a materials purchases budget in pounds, by month and in total, for the fourth quarter of 2016. e. Prepare a schedule of cash payments for materials, by month and in total, for the fourth quarter of 2016. (Do not round intermediate calculations.)

Expert Answer

 

a) sales budget in units and dollars, by month and in total, for the fourth quarter (October, November, and December) of 2016.

Particulars Oct Nov Dec Total
Sales in Units 12000 14000 20000 46000
Sales in dollars   (Units * 53) 636000 742000 1060000 2438000

b) schedule of cash collections from sales, by month and in total, for the fourth quarter of 2016.

Particulars Oct Nov Dec Total
Collection in same month ( 30% of same month sales) 190800 222600 318000 731400
Collection of previous month (68% of previous month sales) 468520 432480 504560 1405560
Total collections 659320 655080 822560 2136960

Note: Cash sale are calculated by taking 30% of the same month. and collection from receivables = 68% of previous month sales.

Question – c Production budget in units, by month and in total, for the fourth quarter of 2016.

Particulars Oct Nov Dec Total
Sales in Units 12000 14000 20000 46000
(+) Desired End Inventory 4200 6000 2700 2700
(-) Beginning Inventory 3600 4200 6000 3600
Production for the month 12600 15800 16700 45100

Note : End inventory of Oct = 30% of 14000 sales of Nov, End inventory of Nov = 30% of 20000 sales of Dec and End inventory of December = 30% of 9000 sales of January. Beginning inventory is automatically the end inventory of previous month.

d. materials purchases budget in pounds, by month and in total, for the fourth quarter of 2016.

Particulars Oct Nov Dec Total
Production for the month 12600 15800 16700 45100
Raw materail need @ 6 pounds Per unit 75600 94800 100200 270600
(+) Desired End Inventory 37920 40080 22320 22320
(-) Beginning Inventory 30240 37920 40080 30240
Raw material purchases in pounds 83280 96960 82440 262680

Raw material needed is calculated as = Production * 6 pounds per unit

End Inventory = 40% of subsequent month raw material usage. For example in oct = 40%(94800)

But we need to be carefull with december. Becasue we have calculate 40% of January. But we have not calculated the production budget for january. So make a working note as

January production = sales 9000 + end inventory (30% of Feb 10000) – Beginning inventory 2700 = 9300

Now Material usage for january = 9300 * 6 = 55800

December ending inventory for raw material = 55800 * 40% = 22320

e. a schedule of cash payments for materials, by month and in total, for the fourth quarter of 2016.

Particulars Oct Nov Dec Total
Raw material ( in dollars) = Pounds* $ % 416400 484800 412200 1313400
Paid in the same month = 70% 291480 339360 288540 919380
Paid in the next month = 30% 113940 124920 145440 384300
Total payments to accounts payable 405420 464280 433980 1303680
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