Question

Completing a comprehensive budgeting problem—manufacturing company The Gavin Tire Company manufactures racing tires for bicycles. Gavin sells tires for \(70 each. Gavin is planning for the next year by developing a master budget by quarters. Gavin’s balance sheet for December31, 2018, follows:

Other data for Gavin Tire Company: a. Budgeted sales are 1,000 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 \)36 each.

c. Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2020 are expected to be 1,800 tires; FIFO inventory costing method is used. d. Raw Materials Inventory on December 31, 2018 consists of 750 pounds of rubber compound used to manufacture the tires. e. Direct materials requirements are 2.5 pounds of rubber compound per tire. The cost of the compound Is \(4 per pound. f. Desired ending Raw Materials Inventory is 40% of the next quarter’s direct materials needed for production; desired ending inventory for December 31, 2019 is 750 pounds; indirect materials are insignificant and not considered for budgeting purposes. g. Each tire requires 0.30 hours of direct labor; direct labor costs average \)20 per hour. h. Variable manufacturing overhead is \(3 per tire. i. Fixed manufacturing overhead includes \)6,000 per quarter in depreciation and \(10,860 per quarter for other costs, such as utilities, insurance, and property taxes. j. Fixed selling and administrative expenses include \)8,000 per quarter for salaries; \(4,800 per quarter for rent; \)1,950 per quarter for insurance; and \(2,000 per quarter for depreciation. k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include \)25,000 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 50% in the quarter purchased and 50% 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 \(3,500 per quarter and is paid in the quarter incurred. q. Gavin desires to maintain a minimum cash balance of \)20,000 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 12% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

Requirements

1. Prepare Gavin’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 basedon direct labor hours. Round all calculations to the nearest dollar.

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

Short 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	1,000	1,200	1,400	1,600	5,200
Sales price per unit	$70	$70	$70	$70	$70
Total budgeted sales	$70,000	$84,000	$98,000	$112,000	$364,000

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	1,000	1,200	1,400	1,600	5,200
Plus: Desired Tires in ending inventory	480	560	640	720	2,400
Total Tires needed	1,480	1,760	2,040	2,320	7,600
Less: Tires in beginning inventory	300	480	560	640	1,980
Tires to be produced	1,180	1,280	1,480	1,680	5,620

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	1,180	1,280	1,480	1,680	5,620
Direct material required (Pounds) per Tires	2.5	2.5	2.5	2.5	2.5
Direct material needed for production	2,950	3,200	3,700	4,200	14,050
Plus: Desired direct materials in ending inventory (Pounds)	1,280	1,480	1,680	750	5,190
Total direct material needed	4,230	4,680	5,380	4,950	19,240
Less: Direct materials in the beginning inventory	750	1,280	1,480	1,680	5,190
Budgeted purchase of the raw material	3,480	3,400	3,900	3,270	14,050
Direct material cost per Pounds	$4	$4	$4	$4	$4
Budgeted cost of direct material purchases	$13,920	$13,600	$15,600	$13,080	$56,200

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	1,180	1,280	1,480	1,680	5,620
Direct labor hours needed for production	0.3	0.3	0.3	0.3	0.3
Direct labor hours needed for production	354	384	444	504	1,686
Direct labor cost per hour	$20	$20	$20	$20	$20
Budgeted direct labor cost	$7,080	$7,680	$8,880	$10,080	$33,720

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	1,180	1,280	1,480	1,680	5,620
VOH per Tires	$3	$3	$3	$3	$3
Budgeted variable overhead	$3,540	$3,840	$4,440	$5,040	$16,860
Budgeted FOH Cost:
Depreciation	$6,000	$6,000	$6,000	$6,000	$24,000
Other FOH	$10,860	$10,860	$10,860	$10,860	$43,440
Budgeted manufacturing overhead cost	$20,400	$20,700	$21,300	$21,900	$84,300
Direct labor hours					1,686
Predetermined overhead allocation rate ($25,440/2,240)					$50

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	$10,800				$10,800
Tires produced and sold in 2019 @$74	$74,000	$88,800	$103,600	$118,400	$384,800
Total budgeted cost of goods sold	$84,800	$88,800	$103,600	$118,400	$395,600

Step 6: 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	$8,000	$8,000	$8,000	$8,000	$32,000
Rent	$4,800	$4,800	$4,800	$4,800	$19,200
Insurance	$1,950	$1,950	$1,950	$1,950	$7,800
Depreciation	$2,000	$2,000	$2,000	$2,000	$8,000
Variable selling and administrative expenses	$1,400	$1,680	$1,960	$2,240	$7,280
Total	$18,150	$18,150	$18,150	$18,150	$72,600

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	$70,000	$84,000	$98,000	$112,000	$364,000
Cash receipts from customers	$79,000	$79,800	$93,800	$107,800	$360,400
Total cash received from customers	$79,000	$79,800	$93,800	$107,800	$360,400

 Step 8: 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	$13,920	$13,600	$15,600	$13,080	$56,200
Cash payments:
Direct material purchased (60%)	$8,352	$8,160	$9,360	$7,848	$33,720
Accounts payable	$16,000	$5,568	$5,440	$5,232	$32,240
Direct labor cost	$7,080	$7,680	$8,880	$10,080	$33,720
manufacturing overhead	$20,400	$20,700	$21,300	$21,900	$84,300
Salaries	$8,000	$8,000	$8,000	$8,000	$32,000
Rent expense	$4,800	$4,800	$4,800	$4,800	$19,200
Insurance expense	$1,950	$1,950	$1,950	$1,950	$7,800
Depreciation	$2,000	$2,000	$2,000	$2,000	$8,000
Variable selling and administrative expenses	$1,400	$1,680	$1,960	$2,240	$7,280
Capital expenditure	$25,000				$25,000
Income tax expenses	$3,500	$3,500	$3,500	$3,500	$3,500
Total cash payments	$98,482	$64,038	$67,190	$67,550	$286,760

Preparation of schedule of cash budget 

GERARD TYRE Company Cash Budget For the first quarter, 2018
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total
Opening cash balance	$20,000	$20,518	$20,680	$42,140	$20,000
Cash receipts	$79,000	$79,800	$93,800	$107,800	$360,400
Total cash payments	$98,482	$64,038	$67,190	$67,550	$286,760
Ending cash balance	$518	$36,280	$47,290	$82,390
Finance:
Borrowings	$20,000
Interest payment		$600	$150
Principal repayment		$15,000	$5,000
Closing balance	$20,518	$20,680	$42,140	$82,390