Comprehensive Master Budget case- Manufacturing Company:

Cairo Manufacturing Company Provided the following information for preparing its
budgets for the first quarter of 2017:

The following is the balance sheet at 1/12017

Cash $110,000
AR $1,770,000
Materials inventory (20,400 kg) 163,200
Finished goods inventory (12,000 units) 540,000
Equipment (net) 1,200,000
Total assets 3,783,200
AP 571,200
Common stock 1,500,000
Retained earnings 1/12017 1,712,000
Total liabilities and shareholders’ equity 3,783,200

1- Actual sales November 2016 $1,500,000 Actual sales December

2016 $2,100,000
2- Budgeted units of sales for the first 5 month of 2017
January 30,000 units , February 40,000 units, March 50,000 units
April 45,000 units, May 35,000 units
The budgeted sale price is $60.
All sales are made on account. 30% collected in the month of sale, 50%
collected in the first month following the month of sale, and 20% collected in
the second month following the month of sale.
3- The company's policy is to maintain finished goods inventory equals 40% of
next month budgeted units of sales.
4- Each unit of production requires 3kg of materials. The company's policy is to
maintain materials inventory equals 20% of next month production needs. The
budgeted purchase price per kg is $8.
5- All purchases of materials are made on account. 30% of the month purchases
are paid in the month of purchase while the remaining 70% is paid in the
following month.
6- Each unit of production requires 2 direct labor hours. The direct labor rate per
hour is $6. All labor cost is paid by the end of the month.
7- Variable manufacturing overhead per direct labor hour is $2. The budgeted
monthly fixed manufacturing overhead is $200,000 which includes monthly
depreciation of $25,000.
8- Variable selling expenses per unit sold is $3. The budgeted monthly fixed
selling and administrative expenses is $120,000 which includes monthly
depreciation of $20,000.
9- The company plans to acquire equipment cash for $300,000 in January and to
make dividends payments of $150,000 in March.

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10- The company's policy is to maintain ending cash balance of $50,000. The
company has a line of credit with its bank with annual interest rate of 12%.
Borrowing if needed occurs at the beginning of the month of borrowing.
Repayment from the principal and the related interest occurs at the end of the
month of repayment. Borrowing and repayment from the principal occur at
$5,000 and its multiples.
Required:
a- Prepare the sales budget for each month of the first quarter
b- Prepare the schedule of expected cash collections for each month of the first
quarter.
c- Prepare the production budget for each month of the first quarter.
d- Prepare the direct materials purchases budget for each month of the first
quarter
e- Prepare the schedule of budgeted cash payments to suppliers for each month
of the first quarter..
f- Prepare the direct labor cost budget for each month of the first quarter.
g- Prepare the manufacturing overhead budget for each month of the first quarter
h- Prepare the operating expenses budget for each month of the first quarter
i- Prepare the cash budget for each month of the first quarter
j- Prepare the budgeted income statement for the first quarter
k- Prepare the budgeted balance sheet at March 31, 2017

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(1) Sales Budget:

Jan. Feb. Mar. 1stQ

Budgeted units of sales 30,000 40,000 50,000 120,000

Budgeted unit sale price $60 $60 $60 $60

Budgeted sales dollars $1,800,000 $2,400,000 $3,000,000 $7,200,000

Budgeted sales dollars for the quarter appears on the budgeted income statement for
the quarter.

If all sales made cash, sales for each month and for the quarter will appear on the cash
budget.

If sales are made on account, a schedule of budgeted cash collections is needed to

determine cash collections from customers.

Schedule of cash collections from credit sales:

Credit sales collected over 3 month period 30%, 50% and 20%

Jan Feb March 1st Q

20% from November sales 300,000 300,000

50%, and 20% from

December sales 1,050,000 420,000 1,470,000

30%, 50%, and 20%

From January sales 540,000 900,000 360,000 1,800,000

30% and 50% from

February sales 720,000 1,200,000 1,920,000

30% from March sales 900,000 900,000

Budgeted cash collections 1,890,000 2,040,000 2,460,000 6,390,000

**The budgeted cash collections from customers will appear on the cash budget

Budgeted accounts receivable balance which will appear on the budgeted

balance sheet: 20% from Feb. sales and 70% from march sales

(2,400,000 *20%) + (3,000,000 *70%) = $2,580,000

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2- Production Budget:

The budgeted units of production is based on the following equation:

Budgeted units of sales xxxxx

+ Desired units of ending inventory xxxxx

Total needs xxxxx

(-) units of beginning inventory (xxxx)

Budgeted units of production xxxxx

Budgeted units of production is very important number because it is used to determine

quantity of materials needed for production, direct labor hours needed for production.

Jan Feb. March. 1stQ Apr

Budgeted units of sales 30,000 40,000 50,000 120,000 45,000

+desired ending inventory

Units 16,000 20,000 18,000 18,000 14,000

Total needs 46,000 60,000 68,000 138,000 59,000

(-) units of beginning

Inventory (12,000) (16,000) (20,000) (12,000) (18,000)

Budgeted production units 34,000 44,000 48,000 126,000 41,000

 Desired ending inventory= next month budgeted units of sales * 40%

 Ending inventory units for the quarter = units of ending inventory for the last
month of the quarter
 Beginning inventory units for the quarter= units of beginning inventory for the
first month of the quarter
 Month of April is included because it will be necessary to determine desired
ending inventory of direct materials units for the month of March which is
necessary when preparing direct materials purchases budget.

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3- Direct Materials Purchases Budget:

**Direct materials purchases in units of materials is based on the following equation:

DM needed for production= Units of production * units of materials per unit xx

+ desired ending inventory of DM units xxxx

Total quantity of DM needs xxxx

(-) beginning inventory of DM units ( xxxx)

DM purchases in units of materials xxxxx

** DM purchases Dollars= DM purchases in units * Cost price per unit of DM

Jan. Feb. Mar. 1stQ

Budgeted units of production 34,000 44,000 48,000 126,000

DM per unit 3 kg 3 kg 3 kg 3 kg

DM production needs 102,000 132,000 144,000 378,000

+ desired ending inventory

Of DM units 26,400 28,800 24,600 24,600

Total DM needs 128,400 160,800 168,600 402,600

(-) DM beginning inventory

In units (20,400) (26,400) (28,800) (20,400)

DM purchases in units 108,000 134,400 139,800 382,200

*$8 per kg $8 $8 $8 $8

DM purchases in $ $864,000 $1,075,200 $1,118,400 $3,057,600

*** desired ending inventory of DM units= Next month production needs * 20%

*** DM needs for April production= 41,000 units * 3 kg= 123,000 kg

Therefor desired ending inventory at end of March= 123,000 kg * 20%= 24,600 kg

**** If all purchases made cash, DM purchases $ for each month will appear on the
cash budge. But if purchases are made on account, a schedule of cash payments to
suppliers is needed to determined cash payments for DM.

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Schedule of Cash Payments to Suppliers:

Purchases on account paid over 2 months period 30% in the month of purchase and
70% in the month following the month of purchase.

Jan. Feb. Mar. 1stQ

AP balance at 1/1 571,200 571,200

Jan. purchases 259,200 604,800 864,000

Feb. purchases 322,560 752,640 1,075,200

Mr. purchases 335,520 335,520

Budgeted cash

Payments to suppliers 830,400 927,360 1,088,160 2,845,920

***Budgeted cash payments for each month will appear on the cash budget

*** Budgeted Accounts payable balance at the end of the quarter, 70% of March
purchases = 1,118,400 * 70%= 782,880 will appear on the budgeted balance
sheet at the end of the quarter.

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4- Direct Labor Cost Budget:

Direct labor cost for a particular month = Direct labor hours needed for the month
production * direct labor rate per hour.

If all labor cost is paid by the end of the month, the direct labor cost will appear as
payments for labor cost.

Jan. Feb. Mar. 1st Q

Budgeted production units 34,000 44,000 48,000 126,000

 Labor hours per unit 2h 2h 2h 2h

Direct labor hours need 68,000 h 88,000 h 96,000 h 252,000 h

 DL rate per hour $6 $6 $6 $6

Budgeted DL cost $408,000 $528,000 $576,000 $1,512,000

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5- Manufacturing Overhead Cost Budget:

MOH includes variable and fixed cost . Variable MOH is allocated to production on
the basis of DL hours, therefore, direct labor hours needed for production will be used
to determine the variable MOH component. Fixed MOH is taken as a total for each
month.

MOH as a part of manufacturing cost is determined under accrual basis of accounting.

But for the purpose of preparing the cash budget noncash fixed MOH items are
excluded ( examples: Depreciation exp and expired portion of prepaid expenses paid
in previous period).

Jan. Feb. Mar. 1stQ

Budgeted DL hours 68,000 88,000 96,000 252,000

Variable MOH rate

Per DLH $2 $2 $2 $2

Variable MOH $136,000 $176,000 $192,000 $504,000

+ Fixed MOH $200,000 $200,000 $200,000 $600,000

Total budgeted MOH $336,000 $376,000 $392,000 $1,104,000

(-) DEp. Exp (25,000) (25,000) (25,000) (75,000)

Cash disbursements

For MOH $311,000 $351,000 $367,000 $1,029,000

***Budgeted MOH per DLH= $1,104,000 / 252,000 DLH = $4.38095

Budgeted Manufacturing unit cost:

DM 3 kg * $8 = $24

DL 2 h * $6 = $12

MOH 2h * $4.38095= $8.7619

$44.7619

***Budgeted manufacturing unit cost is used to compute the budgeted

manufacturing cot for the quarter and the budgeted cost of finished goods
inventory ( assuming FIFO) .

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6- Operating expenses budget:

Operating expenses represent period cost that will appear on the income statement for
the quarter. For preparing the budgeted income statement, operating expenses will be
under accrual basis but to prepare the cash budget, noncash operating expenses are
excluded.

Jan. Feb. Mar. 1stQ

Sales commission

($3 per unit sold) $90,000 $120,000 $150,000 $360,000

+ monthly admin. $120,000 $120,000 $120,000 $360,000

Budgeted monthly

Operating exp. $210,000 $240,000 $270,000 $720,000

(-) monthly dep. exp (20,000) (20,000) (20,000) (60,000)

Cash disbursements

For operating exp $190,000 $220,000 $250,000 $660,000

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7- Cash Budget:

Jan. Feb. Mar. 1stQ

Cash. Beg. Balance $110,000 $50,600 $54,040 $110,000

+ cash collections $1,890,000 $2,040,000 $2,460,000 $6,390,000

(a)Total cash available

Befor financing $2,000,000 $2,090,600 $2,514,040 $6,500,000

Cash disbursements:

For materials $830,400 $927,360 $1,088,160 $2,845,920

For labor $408,000 $528,000 $576,000 $1,512,000

For MOH $311,000 $351,000 $367,000 $1,029,000

For Op. exp $190,000 $220,000 $250,000 $660,000

For buying equipment $300,000 $300,000

For paying dividends $150,000 $150,000

------------- ------------- ------------ -------------

(b)Total cash disb. $2,039,400 $2,026,360 $2,431,160 $6,496,920

Exess or deficit

( a- b) (39,400) 64,240 82,880 $3,080

Financing:

Borrowing 90,000 90,000

Repayment (10,000) ( 30,000 ) (40,000)

Interest (200) (900) (1,100)

------------ ------------ ------------ ------------

Total financing 90,000 (10,200) (30,900) 48,900

Ending cash bal. $50,500 $54,040 $51,980 $51,980

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Notes on the cash budget:

1- Beginning cash balance for the quarter is equal to beginning cash balance for
the first month of the quarter.
2- Ending cash balance for the quarter = ending cash balance for the last month
of the quarter.
3- Borrowing in January
Cash deficit 39,400
+ minimum cash balance 50,000
89,400
Since borrowing and repayment from the principal occur at 5,000 and its
multiples, therefore borrowing in January become 90,000

4- Excess in Feb. 64,240

Keep minimum cash balance (50,000)
Available for repayment from principal and related interest 14,240

Repayment from principal 10,000

Interest on payment from principal 10,000* 1% *2 month = 200

5- Excess in March 82,880

Keep minimum cash balance (50,000)
Avialable for payment from principal and related interest 32,880

Payment from principal 30,000

Payment of interest 30,000*1% * 3 month = 900

****** Outstanding loan = 90,000 – (10,000 + 30,000) = 50,000

Accrued interest exp. = 50,000 * 1% * 3 month = 1,500

******* interest exp. on income statement= 1,100 + 1,500= 2,600

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8- Budgeted Income Statement for the quarter:

Sales $7,200,000

Less: Cost of goods sold

Cost of beginning finished goods inventory $540,000

+ cost of units produced !126,000 units * $44.7619 $5,640,000

Cost of goods available for sale $6,180,000

(-) Cost of ending inventory (18,000 units * 44.7619) (805,715) (5,374,285)

Gross margin $1,825,715

(-) operating expenses (720,000

Operating income $1,105,715

(-) Interest exp. (2,600)

Net income $1,103,115

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9- Budgeted Balance Sheet:

Assets:

Cash $51,980

Accounts receivable $2,580,000

Materials inventory ( 24,600 kg * $8) $196,800

Finished goods inventory $805,715

Equipment *** $1,365,000

Total assets $4,999,945

Liabilities and shareholders’ equity:

Accounts payable $782,880

Bank Loan 50,000

Accrued interest exp. 1,500

Common stock 1,500,000

Retained earnings***** 2,665,115

Total liabilities and shareholders’ equity $4,999,945

Equipment at end of the quarter:

Equipment at beginning 1,200,000

+ equipment purchased 300,000

(-) depreciation 75,000 + 60,000 (135,000)

Equipment at end of the quarter 1,365,000

Retained earnings at end of the quarter:

RE beginning 1,712,000

+ net income 1,103,115

(-) dividends declared (150,000)

RE at end of the quarter 2,665,115

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