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Chapter 20: Q10E (page 918)

Blue Wave Co. predicts the following unit sales for the coming four months: September, 4,000 units; October, 5,000 units; November, 7,000 units; and December, 7,600 units. The company’s policy is to maintain finished goods inventory equal to 60% of the next month’s sales. At the end of August, the company had 2,400 finished units on hand. Prepare a production budget for each of the months of September, October, and November.

Short Answer

Expert verified

The total number of units to be produced in September, October and November will be 4,600 units, 6,200 units and 7,360 units.

Step by step solution

01

Introduction

The production budget is the type of budget prepared for the production department of an organization responsible for the manufacturing of goods and services.

02

Production budget

Blue Wave Co
Production budget
For the month of September, October and November

Particulars

September

October

November

Budgeted sales

5,000

7,000

7,600

Multiply: Finished goods

60%

60%

60%

Budgeted ending inventory

3,000

4,200

4,560

Add: Budgeted unit sales

4,000

5,000

7,000

Required units

7,000

9,200

11,560

Less: Beginning inventory

2,400

3,000

4,200

Units to be produced

4,600

6,200

7,360

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Most popular questions from this chapter

Question: Merline Manufacturing makes its product for \(75 per unit and sells it for \)150 per unit. The sales staff receives a 10% commission on the sale of each unit. Its December income statement follows.

Management expects December’s results to be repeated in January, February, and March of 2018 without any changes in strategy. Management, however, has an alternative plan. It believes that unit sales will increase at a rate of 10% each month for the next three months (beginning with January) if the item’s selling price is reduced to \(125 per unit and advertising expenses are increased by 15% and remain at that level for all three months. The cost of its product will remain at \)75 per unit, the sales staff will continue to earn a 10% commission, and the remaining expenses will stay the same.

Required

  1. Prepare budgeted income statements for each of the months of January, February, and March that show the expected results from implementing the proposed changes. Use a three-column format, with one column for each month.

Analysis Component

  1. Use the budgeted income statements from part 1 to recommend whether management should implement the proposed changes. Explain.

Miami Solar manufactures solar panels for industrial use. The company budgets production of 5,000 units (solar panels) in July and 5,300 units in August. Each unit requires 3 pounds of direct materials, which cost $6 per pound. The company’s policy is to maintain direct materials inventory equal to 30% of the next month’s direct materials requirement. As of June 30, the company has 4,500 pounds of direct materials in inventory, which complies with the policy.

Prepare a direct materials budget for July

Black Diamond Company produces snow skis. Each ski requires 2 pounds of carbon fiber. The company’s management predicts that 5,000 skis and 6,000 pounds of carbon fiber will be in inventory on June 30 of the current year and that 150,000 skis will be sold during the next (third) quarter. A set of two skis sells for \(300. Management wants to end the third quarter with 3,500 skis and 4,000 pounds of carbon fiber in inventory. Carbon fiber can be purchased for \)15 per pound. Each ski requires 0.5 hours of direct labor at \(20 per hour. Variable overhead is applied at the rate of \)8 per direct labor hour. The company budgets fixed overhead of $1,782,000 for the quarter.

Required

1. Prepare the third-quarter production budget for skis.

2. Prepare the third-quarter direct materials (carbon fiber) budget; include the dollar cost of purchases.

3. Prepare the direct labor budget for the third quarter.

4. Prepare the factory overhead budget for the third quarter.

The management of Nabar Manufacturing prepared the following estimated balance sheet for June 2017:

NABAR MANUFACTURING

Estimated Balance Sheet

June 30, 2017

Assets

Liabilities and Equity

Cash

\( 40,000

Accounts payable

\) 51,400

Accounts receivable

249,900

Income taxes payable.

10,000

Raw materials inventory

35,000

Short-term notes payable

24,000

Finished goods inventory

241,080

Total current liabilities

85,400

Total current assets

565,980

Long-term note payable

300,000

Equipment

720,000

Total liabilities

385,400

Accumulated depreciation

(240,000)

Common stock

600,000

Equipment, net.

480,000

Retained earnings

60,580

Total stockholders’ equity

660,580

Total assets.

\(1,045,980

Total liabilities and equity

\)1,045,980

To prepare a master budget for July, August, and September of 2017, management gathers the following information:

  1. Sales were 20,000 units in June. Forecasted sales in units are as follows: July, 21,000; August, 19,000; September, 20,000; and October, 24,000. The product’s selling price is \(17 per unit and its total product cost is \)14.35 per unit.
  2. Company policy calls for a given month’s ending finished goods inventory to equal 70% of the next month’s expected unit sales. The June 30 finished goods inventory is 16,800 units, which does not comply with the policy.
  3. Company policy calls for a given month’s ending raw materials inventory to equal 20% of the next month’s materials requirements. The June 30 raw materials inventory is 4,375 units (which also fails to meet the policy). The budgeted September 30 raw materials inventory is 1,980 units. Raw materials cost \(8 per unit. Each finished unit requires 0.50 units of raw materials.
  4. Each finished unit requires 0.50 hours of direct labor at a rate of \)16 per hour.
  5. Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is \(2.70 per direct labor hour. Depreciation of \)20,000 per month is treated as fixed factory overhead.
  6. Monthly general and administrative expenses include \(9,000 administrative salaries and 0.9% monthly interest on the long-term note payable.
  7. Sales representatives’ commissions are 10% of sales and are paid in the month of the sales. The sales manager’s monthly salary is \)3,500.
  8. The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none are collected in the month of the sale).
  9. All raw materials purchases are on credit, and no payables arise from any other transactions. One month’s raw materials purchases are fully paid in the next month.
  10. Dividends of \(20,000 are to be declared and paid in August.
  11. Income taxes payable at June 30 will be paid in July. Income tax expense will be assessed at 35% in the quarter and paid in October.
  12. Equipment purchases of \)100,000 are budgeted for the last day of September.
  13. The minimum ending cash balance for all months is $40,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.

Required

Prepare the following budgets and other financial information as required. All budgets and other financial information should be prepared for the third calendar quarter, except as otherwise noted below. Round calculations to the nearest whole dollar.

  1. Sales budget.
  2. Production budget.
  3. Raw materials budget.
  4. Direct labor budget.
  5. Factory overhead budget.
  6. Selling expense budget.
  7. General and administrative expense budget.
  8. Cash budget.
  9. Budgeted income statement for the entire quarter (not for each month separately).
  10. Budgeted balance sheet as of September 30, 2017.

Ramos Co. provides the following sales forecast and production budget for the next four months:

The company plans for finished goods inventory of 120 units at the end of June. In addition, each finished unit requires 5 pounds of direct materials and the company wants to end each month with direct materials inventory equal to 30% of next month’s production needs. Beginning direct materials inventory for April was 663 pounds. Direct materials cost \(2 per pound. Each finished unit requires 0.50 hours of direct labor at the rate of \)16 per hour. The company budgets variable overhead at the rate of \(20 per direct labor hour and budgets fixed overhead of \)8,000 per month. Prepare a direct materials budget for April, May, and June.
See all solutions

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