1.

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:

a. Fourth-quarter sales for 20X0 are 55,000 units.

b. 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    

c. 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.

d. 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    

e. Each mass-storage unit uses 5 hours of direct labor and three units of direct materials.
Laborers are paid $10 per hour, and one unit of direct materials costs $80.

f. 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.
 g. 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.

h. 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.

i. Variable overhead is budgeted at $6 per direct labor hour. All variable overhead
expenses are paid for in the quarter incurred.

j. Fixed selling and administrative expenses total $250,000 per quarter, including $50,000
depreciation.

k. Variable selling and administrative expenses are budgeted at $10 per unit sold. All
selling and administrative expenses are paid for in the quarter incurred.

l. 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  

m.

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.

 n. 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 master budget for Optima Company for each quarter of 20X1 and for the year in total. The
following component budgets must be included:

1.  Sales Budget (units and budgeted sales in thousands)

Optima Company

Sales Budget

For the Year Ending December 31, 20X1

Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total

Units 65 70 75 90 300

Unit $ $ $ $ $
price 400 400 400 400 400

Total $ $ $ $ $
sales 26000 28000 30000 36000 120000

2.  Production budget (amounts in full, not in thousands) If an amount is zero, enter "0".

Optima Company

Production Budget

For the Year Ending December 31, 20X1

Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total

Sales 65000 70000 75000 90000 300000

Desired
ending 13000 15000 20000 10000 10000

inventory

Total 78000 85000 95000 100000 310000

needs

Less: 0 13000 15000 20000 0

Beginning
 inventory

Production 78000 72000 80000 80000 310000

3.  Direct Materials Purchases Budget (in thousands, except for per unit/hour data) If required, round
answers to one decimal place.

Optima Company

Direct Materials Purchases Budget

For the Year Ending December 31, 20X1

Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total

Production 78 72 80 80 310

Materials/unit 3 3 3 3 3

Production 234 216 240 240 930

needs

Desired
ending 63 67.5 81 65.7 65.7

inventory

Total needs 297 283.5 321 305.7 995.7

Less:
Beginning 65.7 63 67.5 81 65.7

inventory

Purchases 231.3 220.5 253.5 224.7 930.0

$ $ $ $ $
Cost per unit
80 80 80 80 80

$ $ $ $ $
Purchase cost
18504 17640 20280 17976 74400

4.  Direct Labor Budget (in thousands, except per unit/hour data)

Optima Company
 Direct Labor Budget

For the Year Ending December 31, 20X1

Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total

Production 78 72 80 80 310

Hours per 5 5 5 5 5
unit

Hours 390 360 400 400 1550

needed

Cost per $ $ $ $ $
hour 10 10 10 10 10

$ $ $ $ $
Total cost
3900 3600 4000 4000 15500

5.  Overhead Budget (in thousands, except per unit/hour data)

Optima Company

Overhead Budget

For the Year Ending December 31, 20X1

Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total

Budgeted 390 360 400 400 1550

hours

Variable $ $ $ $ $
rate 6 6 6 6 6

Budgeted $ $ $ $ $
VOH 2340 2160 2400 2400 9300

Budgeted 1000 1000 1000 1000 4000

FOH

$ $ $ $ $
Total OH 3340 3160 3400 3400 13300

6.  Selling and Administrative Expenses Budget (in thousands, except per unit/hour data)
 Optima Company

Selling and Administrative Expenses Budget

For the Year Ending December 31, 20X1

Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total

Planned 65 70 75 90 300
sales

Variable $ $ $ $ $
rate 10 10 10 10 10

Variable $ $ $ $ $
expenses 650 700 750 900 3000

Fixed 250 250 250 250 1000

expenses

Total $ $ $ $ $
expenses 900 950 1000 1150 4000

7.  Ending finished goods inventory budget. Enter amounts in full, not in thousands. Round to the
nearest cent.

Optima Company

Ending Finished Goods

Inventory Budget

For the Year Ending

December 31, 20X1

Unit cost
computation:

Direct $
materials 240

Direct labor 50

Overhead:

Variable 30
 Fixed 12.90

Total unit $
cost 332.90

Finished $
goods 3329000

8.  Cost of goods sold budget (Note: Assume that there is no change in work-in-process inventories.)
Enter amounts in full, not in thousands. If an amount is zero, enter "0".

Optima Company

Cost of Goods Sold Budget

For the Year Ending

December 31, 20X1

Direct $
materials used 74400000

Direct labor 15500000

used

Overhead 13300000

Budgeted $
manufacturing 103200000
costs

Add: Beginning
finished goods 0

inventory

Cost of goods $
available for 103200000
sale

Less: Ending
finished goods 3329000

inventory

Budgeted cost $
of goods sold 99871000
9.  Cash Budget (in thousands)

Optima Company

Cash Budget

For the Year Ending December 31, 20X1

Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total

Beginning cash $ $ $ $ $
bal. 250 1110 3128 5568 250

Collections:

Credit sales:

Current quarter 22100 23800 25500 30600 102000

Prior quarter 3300 3900 4200 4500 15900

$ $ $ $ $
Cash available 25650 28810 32828 40668 118150

Less
disbursements:

Direct
materials:

$ $ $ $ $
Current quarter 9252 8820 10140 8988 37200

Prior quarter 7248 9252 8820 10140 35460

Direct labor 3900 3600 4000 4000 15500

Overhead 2990 2810 3050 3050 11900

Selling and 850 900 950 1100 3800

admin.

Dividends 300 300 300 300 1200

Equipment 2000 2000

 Total cash $ $ $ $ $
needs 24540 25682 27260 29578 107060

$ $ $ $ $
Ending cash
1110 3128 5568 11090 11090

10.  Pro forma income statement (using absorption costing). Enter amounts in full, not in thousands.
(Note: Ignore income taxes.)

Optima
Company

Pro Forma
Income
Statement

For the Year

Ending
December
31, 20X1

$
  120000000

  99871000

$
 
20129000

  4000000

$
  16129000

11.  Pro forma balance sheet. Enter amounts in full, not in thousands. List all assets and liabilities in
order of liquidity. (Note: Ignore income taxes.)

Optima Company

Pro Forma Balance Sheet

December 31, 20X1

Assets
 $
 
11090000

  5400000

  5256000

  3329000

  33900000

$
Total assets
58975000

Liabilities and
stockholders'
equity

$
  8988000

  27000000

  22987000

Total
liabilities and $
stockholders' 58975000

equity

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