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Understanding Relationships, Master Budget, Comprehensive Review
Optima Company is a high-technology organization that produces a mass-storage system. The design of Optima’s system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (20X1). The budget will detail each quarter’s activity and the activity for the year in total. The master budget will be based on the following information:
Fourth-quarter sales for 20X0 are 55,000 units.
Unit sales by quarter (for 20X1) are projected as follows:
| First quarter | 65,000 | ||
| Second quarter | 70,000 | ||
| Third quarter | 75,000 | ||
| Fourth quarter | 90,000 |
The selling price is $400 per unit. All sales are credit sales. Optima collects 85% of all sales within the quarter in which they are realized; the other 15% is collected in the following quarter. There are no bad debts.There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter:
| First quarter | 13,000 units | ||
| Second quarter | 15,000 units | ||
| Third quarter | 20,000 units | ||
| Fourth quarter | 10,000 units |
Each mass-storage unit uses five hours of direct labor and three units of direct materials. Laborers are paid $10 per hour, and one unit of direct materials costs $80.
There are 65,700 units of direct materials in beginning inventory as of January 1, 20X1. At the end of each quarter, Optima plans to have 30% of the direct materials needed for next quarter’s unit sales. Optima will end the year with the same amount of direct materials found in this year’s beginning inventory.
Optima buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition, and the remaining half are paid for in the following quarter. Wages and salaries are paid on the 15th and 30th of each month.
Fixed overhead totals $1 million each quarter. Of this total, $350,000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year’s total fixed overhead by the year’s budgeted production in units.
Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred.
Fixed selling and administrative expenses total $250,000 per quarter, including $50,000 depreciation.
Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.
The balance sheet as of December 31, 20X0, is as follows:
| Assets | |||
| Cash | $ 250,000 | ||
| Direct materials inventory | 5,256,000 | ||
| Accounts receivable | 3,300,000 | ||
| Plant and equipment, net | 33,500,000 | ||
| Total assets | $42,306,000 | ||
| Liabilities and Stockholders’ Equity | ||||
| Accounts payable | $ 7,248,000* | |||
| Capital stock | 27,000,000 | |||
| Retained earnings | 8,058,000 | |||
| Total liabilities and stockholders’ equity | $42,306,000 | |||
| * For purchase of direct materials only. | ||||
Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2 million of equipment will be purchased.
Required:
Prepare a budget for Optima Company for each quarter of 20X1 and for the year in total. The following component budgets must be included:
1. Selling and Administrative costs
2. Ending finished goods inventory budget
3. Cost of goods sold budget ( Assume that there is no change in work in progress inventories)
4. Cash budget
5. Pro forma Income Statement (using absorption costing)
6. Pro forma Balance Sheet
Expert Answer
| Answer 1. a | |||||
| Sales Budget | |||||
| Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | Total | |
| Budgeted Units Sales | 65,000 | 70,000 | 75,000 | 90,000 | 300,000 |
| SP Per Unit | 400 | 400 | 400 | 400 | 400 |
| Total Budgeted Sales in $ | 26,000,000 | 28,000,000 | 30,000,000 | 36,000,000 | 120,000,000 |
| Answer 1. b | |||||
| Schedule of Expected Cash Collections from Sales | |||||
| Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | Total | |
| Collection from Accounts Receivables | |||||
| AR – 20X0 – Qtr 4 | 3,300,000 | 3,300,000 | |||
| Qtr 1 – Sales collections | 22,100,000 | 3,900,000 | 26,000,000 | ||
| Qtr 2 – Sales collections | 23,800,000 | 4,200,000 | 28,000,000 | ||
| Qtr 3 – Sales collections | – | – | 25,500,000 | 4,500,000 | 30,000,000 |
| Qtr 4 – Sales collections | 30,600,000 | 30,600,000 | |||
| Total cash Collections | 25,400,000 | 27,700,000 | 29,700,000 | 35,100,000 | 117,900,000 |
| Answer 1.c | |||||
| Merchandise Production Budget | |||||
| Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | Total | |
| Budgeted Units Sales | 65,000 | 70,000 | 75,000 | 90,000 | 300,000 |
| Add: Closing Inventory in units | 13,000 | 15,000 | 20,000 | 10,000 | 10,000 |
| Total Needs | 78,000 | 85,000 | 95,000 | 100,000 | 310,000 |
| Less: opening Inventory in uints | – | (13,000) | (15,000) | (20,000) | – |
| Required Production in Units | 78,000 | 72,000 | 80,000 | 80,000 | 310,000 |
| Answer 1. d | |||||
| Direct Material Purchase Budget | |||||
| Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | Total | |
| Required Production in Units | 78,000 | 72,000 | 80,000 | 80,000 | 310,000 |
| No. of Units Required – Direct Material | 3 | 3 | 3 | 3 | 3 |
| Total Units Required – Direct Material | 234,000 | 216,000 | 240,000 | 240,000 | 930,000 |
| Add: Closing Inventory in units | 21,600 | 24,000 | 24,000 | 65,700 | 65,700 |
| Total Needs | 255,600 | 240,000 | 264,000 | 305,700 | 995,700 |
| Less: opening Inventory in uints | (65,700) | (21,600) | (24,000) | (24,000) | (65,700) |
| Required Units Purchased – Direct Material | 189,900 | 218,400 | 240,000 | 281,700 | 930,000 |
| Cost per Unit | 80 | 80 | 80 | 80 | 80 |
| Required Purchases | 15,192,000 | 17,472,000 | 19,200,000 | 22,536,000 | 74,400,000 |
| Direct Labor Budget | |||||
| Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | Total | |
| Required Production in Units | 78000 | 72000 | 80000 | 80000 | 310000 |
| Direct Labor hours Required per unit | 5 | 5 | 5 | 5 | 5 |
| Total Labor Hours Required | 390,000 | 360,000 | 400,000 | 400,000 | 1,550,000 |
| Cost per Labor hour | 10 | 10 | 10 | 10 | 10 |
| Total Labor Cost | 3,900,000 | 3,600,000 | 4,000,000 | 4,000,000 | 15,500,000 |
| Schedule of Cash payments to Suppliers (Direct Material) | |||||
| Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | Total | |
| Cash Payment | |||||
| Accounts Payable -Qtr 4 – 20X0 | 7,248,000.00 | 7,248,000.00 | |||
| Qtr 1 Purchases | 7,596,000.00 | 7,596,000.00 | 15,192,000.00 | ||
| Qtr 2 Purchases | 8,736,000.00 | 8,736,000.00 | 17,472,000.00 | ||
| Qtr 3 Purchases | 9,600,000.00 | 9,600,000.00 | 19,200,000.00 | ||
| Qtr 4 Purchases | 11,268,000.00 | 11,268,000.00 | |||
| Total Cash Payment to Suppliers | 14,844,000.00 | 16,332,000.00 | 18,336,000.00 | 20,868,000.00 | 70,380,000.00 |
| Factory Overhead Budget | |||||
| Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | Total | |
| Fixed Overhead | 650,000 | 650,000 | 650,000 | 650,000 | 2,600,000 |
| Depreciation | 350,000 | 350,000 | 350,000 | 350,000 | 1,400,000 |
| Variable Overhead | 2,340,000 | 2,160,000 | 2,400,000 | 2,400,000 | 9,300,000 |
| Total Overhead | 3,340,000 | 3,160,000 | 3,400,000 | 3,400,000 | 13,300,000 |
| Selling & Administrative Expenses | |||||
| Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | Total | |
| Fixed Selling & Admn. Exp. | 200,000 | 200,000 | 200,000 | 200,000 | 800,000 |
| Depreciation | 50,000 | 50,000 | 50,000 | 50,000 | 200,000 |
| Variable Selling & Admn. Exp. | 650,000 | 700,000 | 750,000 | 900,000 | 3,000,000 |
| Total Selling & Admn. Exp. | 900,000 | 950,000 | 1,000,000 | 1,150,000 | 4,000,000 |
| Calculation of Cost per Unit: | |||||
| Direct Material – 3 Units X $80 | 240.00 | ||||
| Direct Labor – 5 hrs X $10 | 50.00 | ||||
| Variable Factory Overhead – 5 Hrs X $6 | 30.00 | ||||
| Fixed Factory Overhead – $4,000,000 / 310,000 Unit | 12.90 | ||||
| Total Cost per Unit | 332.90 | ||||
| Cost of Goods Sold Budget | |||||
| Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | Total | |
| No. of Units Sold | 65,000 | 70,000 | 75,000 | 90,000 | 300,000 |
| Cost per Unit | 332.90 | 332.90 | 332.90 | 332.90 | 332.90 |
| Cost of Good Sold | 21,638,710 | 23,303,226 | 24,967,742 | 29,961,290 | 99,870,968 |
| Cash budget | |||||
| Qtr 1 | Qtr 2 | Qtr 3 | Qtr 4 | Total | |
| Opening cash Balance | 250,000 | 2,766,000 | 6,524,000 | 9,588,000 | 250,000 |
| Add: receipts | |||||
| Collection from Customers | 25,400,000 | 27,700,000 | 29,700,000 | 35,100,000 | 117,900,000 |
| Total Cash available from operations | 25,650,000 | 30,466,000 | 36,224,000 | 44,688,000 | 118,150,000 |
| Less: Cash Disbursements | |||||
| Direct Material | (14,844,000) | (16,332,000) | (18,336,000) | (20,868,000) | (70,380,000) |
| Direct Labor | (3,900,000) | (3,600,000) | (4,000,000) | (4,000,000) | (15,500,000) |
| Factory Overhead Expenes | (2,990,000) | (2,810,000) | (3,050,000) | (3,050,000) | (11,900,000) |
| Selling & Admn. Exp. | (850,000) | (900,000) | (950,000) | (1,100,000) | (3,800,000) |
| Dividends Paid | (300,000) | (300,000) | (300,000) | (300,000) | (1,200,000) |
| Total Disbursement | (22,884,000) | (23,942,000) | (26,636,000) | (29,318,000) | (102,780,000) |
| Investments (Assets Using Cash) | |||||
| Short term – interest bearing | – | – | – | – | |
| Land Purchased | – | – | (2,000,000) | (2,000,000) | |
| Net Cash Balance Closing | 2,766,000 | 6,524,000 | 9,588,000 | 13,370,000 | 13,370,000 |
| Income Statement | |||||
| Sales | 120,000,000 | ||||
| Cost of Goods Sold | (99,870,968) | ||||
| Gross Margin | 20,129,032 | ||||
| Less: Selling & Admn. Exp. | (4,000,000) | ||||
| Net Income | 16,129,032 | ||||
| Balance Sheet | |||||
| Assets | |||||
| Current Assets | |||||
| Cash | 13,370,000 | ||||
| Accounts receivables | 5,400,000 | ||||
| Direct Material Inventory | 5,256,000 | ||||
| Finished Goods Inventory – 10,000 Units X $332.90 | 3,329,032 | 27,355,032 | |||
| Plant & Equipment | 33,500,000 | ||||
| Add: Additions | 2,000,000 | ||||
| Less: Depreciation | (1,600,000) | 33,900,000 | |||
| Total Assets | 61,255,032 | ||||
| Liabilities | |||||
| Accounts Payable | 11,268,000 | ||||
| Other Liabilities | – | ||||
| Total liabilities | 11,268,000 | ||||
| Shareholders’s Equity | |||||
| Common Stock | 27,000,000 | ||||
| Retained Earnings | 22,987,032 | ||||
| Total Stockholders equity | 49,987,032 | ||||
| Total liabilities & Stockholders’ Equity | 61,255,032 | – | |||
| Schedule of Retained Earnings | |||||
| Opening Balance | 8,058,000 | ||||
| Add: net income | 16,129,032 | ||||
| Less: Dividend Paid | (1,200,000) | ||||
| Closing Balance | 22,987,032 | ||||
