Question

Question: Completing a comprehensive budgeting problem—manufacturing company

The Gerard Tire Company manufactures racing tires for bicycles. Gerard sells tires for \(90 each. Gerard is planning for the next year by developing a master budget by quarters. Gerard’s balance sheet for December 31, 2018, follows:

Other data for Gerard Tire Company:

a. Budgeted sales are 1,500 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 10% of total sales, with the remaining 90% of sales on account.

b. Finished Goods Inventory on December 31, 2018, consists of 300 tires at \)33 each.

c. Desired ending Finished Goods Inventory is 30% of the next quarter’s sales; first quarter sales for 2020 are expected to be 2,300 tires. FIFO inventory costing method is used.

d. Raw Materials Inventory on December 31, 2018, consists of 600 pounds of rubber compound used to manufature the tires.

e. Direct materials requirements are 2 pounds of a rubber compound per tire. The cost of the compound is \(8.50 per pound.

f. Desired ending Raw Materials Inventory is 40% of the next quarter’s direct materials needed for production; desired ending inventory for December 31, 2019 is 600 pounds; indirect materials are insignificant and not considered for budgeting purposes.

g. Each tire requires 0.4 hours of direct labor; direct labor costs average \)12 per hour.

h. Variable manufacturing overhead is \(4 per tire.

i. Fixed manufacturing overhead includes \)6,000 per quarter in depreciation and \(16,770 per quarter for other costs, such as utilities, insurance, and property taxes.

j. Fixed selling and administrative expenses include \)12,500 per quarter for salaries; \(3,000 per quarter for rent; \)450 per quarter for insurance; and \(2,000 per quarter for depreciation.

k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include \)15,000 for new manufacturing equipment, to be purchased and paid in the first quarter.

m. Cash receipts for sales on account are 70% in the quarter of the sale and 30% in the quarter following the sale; December 31, 2018, Accounts Receivable is received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes.

n. Direct materials purchases are paid 60% in the quarter purchased and 40% in the following quarter; December 31, 2018, Accounts Payable is paid in the first quarter of 2019. o. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.

p. Income tax expense is projected at \(1,500 per quarter and is paid in the quarter incurred.

q. Gerard desires to maintain a minimum cash balance of \)55,000 and borrows from the local bank as needed in increments of \(1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of \)1,000; interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

Requirements

1. Prepare Gerard’s operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours. Round all calculations to the nearest dollar.

2. Prepare Gerard’s annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.

Short answer

Answer

Closing balance of cash is $363,570.

Step-by-step solution

Preparation of sales budget

GERARD TYRE Company Sales Budget For the first quarter, 2019
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Budgeted Tires to be sold	1,500	1,700	1,900	2,100	7,200
Sales price per unit	$90	$90	$90	$90	$90
Total budgeted sales	$135,000	$153,000	$171,000	$189,000	$648,000

Preparation of production budget

GERARD TYRE Company Production Budget For the first quarter, 2019
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Budgeted Tires to be sold	1,500	1,700	1,900	2,100	7,200
Plus: Desired Tires in ending inventory	510	570	630	690	2,400
Total Tires needed	2,010	2,270	2,530	2,790	9,600
Less: Tires in beginning inventory	300	510	570	630	2,010
Tires to be produced	1,710	1,760	1,960	2,160	7,590

Preparation of direct materials budget

GERARD TYRE Company Direct Materials Budget For the first quarter, 2019
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Budgeted Tires to be produced	1,710	1,760	1,960	2,160	7,590

Direct material required (Pounds) per Tires	2	2	2	2	2
Direct material needed for production	3,420	3,520	3,920	4,320	15,180
Plus: Desired direct materials in ending inventory (Pounds)	1,408	1,568	1,728	600	6,432
Total direct material needed	2,012	1,952	2,192	3,720	9,876
Less: Direct materials in the beginning inventory	600	1,408	1,568	1,728	5,304
Budgeted purchase of the raw material	1,412	544	624	1,992	4,572
Direct material cost per ounce	$8.50	$8.50	$8.50	$8.50	$8.50
Budgeted cost of direct material purchases	$12,002	$4,624	$5,304	$16,932	$38,862`

Preparation of direct labor budget

GERARD TYRE Company Direct Labor Budget For the first quarter, 2019
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Budgeted Tires to be produced	1,710	1,760	1,960	2,160	7,590
Direct labor hours needed for production	0.4	0.4	0.4	0.4	0.4
Direct labor hours needed for production	684	704	784	864	3,036
Direct labor cost per hour	$12	$12	$12	$12	$12
Budgeted direct labor cost	$8,208	$8,448	$9,408	$10,368	$36,432

 Step 5: Preparation of manufacturing overhead budget

GERARD TYRE Company Direct Materials Budget For the first quarter, 2019
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Budgeted Tires to be produced	1,710	1,760	1,960	2,160	7,590
VOH per Tires	$4	$4	$4	$4	$4
Budgeted variable overhead	$6,840	$7,040	$7,840	$8,640	$30,360
Budgeted FOH Cost:
Depreciation	$6,000	$6,000	$6,000	$6,000	$24,000
Other FOH	$16,770	$16,770	$16,770	$16,770	$67,080
Budgeted manufacturing overhead cost					$121,440
Direct labor hours					3,036
Predetermined overhead allocation rate ($25,440/2,240)					$40

 Step 6: Preparation of cost of goods sold budget

GERARD TYRE Company Cost of goods sold Budget For the first quarter, 2019
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Beginning inventory	$9,900	$30,855	$34,485	$38,115	$113,355
Tires produced and sold in 2019 @60.5	$90,750	$102,850	$114,950	$127,050	$435,600
Total budgeted cost of goods sold	$100,650	$133,705	$149,435	$165,165	$548,955

Preparation of selling and administrative budget

GERARD TYRET Company Selling and administrative Budget For the first quarter, 2019
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Salaries	$12,500	$12,500	$12,500	$12,500	$50,000
Rent	$3,000	$3,000	$3,000	$3,000	$12,000
Insurance	$450	$450	$450	$450	$1,800
Depreciation	$2,000	$2,000	$2,000	$2,000	$8,000
Variable selling and administrative expenses	$2,700	$3,060	$3,420	$3,780	$12,960
Total	$20,650	$20,650	$20,650	$20,650	$82,600

Preparation of schedule of cash receipts from customers 

GERARD TYRE Company Schedule of cash receipts from customers For the first quarter, 2018
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Total Sales	$135,000	$153,000	$171,000	$189,000	$648,000
Cash receipts from customers (75% of Sales)	$94,500	$107,100	$119,700	$132,300	$453,600
Cash receipts from last quarter	$20,000	$40,500	$45,900	$51,300	$157,700
Total cash received from customers	$114,500	$147,600	$165,600	$183,600	$611,300

Preparation of schedule of cash payments

GERARD TYRE Company Schedule of cash payments For the first quarter, 2018
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Total direct material purchases	$12,002	$4,624	$5,304	$16,932	$38,862`
Cash payments:
Direct material purchased (60%)	$7,201	$2,774	$3,184	$10,159	$23,317
Accounts payable	$8,000	$4,808	$1,850	$2,122	$16,500
Direct labor cost	$8,208	$8,448	$9,408	$10,368	$36,432
Variable manufacturing overhead	$6,840	$7,040	$7,840	$8,640	$30,360
Fixed manufacturing overhead	$22,770	$22,770	$22,770	$22,770	$91,080
Salaries	$12,500	$12,500	$12,500	$12,500	$50,000
Rent expense	$3,000	$3,000	$3,000	$3,000	$12,000
Insurance expense	$450	$450	$450	$450	$1,800
Depreciation	$2,000	$2,000	$2,000	$2,000	$8,000
Variable selling and administrative expenses	$2,700	$3,060	$3,420	$3,780	$12,960
Capital expenditure	$15,000				$15,000
Income tax expenses	$1,500	$1,500	$1,500	$1,500	$6,000
Total cash payments	$90,169	$68,350	$67,922	$77,289	$303,449

 Step 10: Preparation of schedule of cash budget

GERARD TYRE Company Cash Budget For the first quarter, 2018
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter
Opening cash balance	$56,000	$80,331	$159,581	$257,259
Cash receipts	$114,500	$147,600	$165,600	$183,600
Total cash payments	$90,169	$68,350	$67,922	$77,289
Ending cash balance	$80,331	$159,581	$257,259	$363,570