Royal Company is preparing budgets for the quarter ending June 30. The marketing department of Royal Company

Question:

Royal Company is preparing budgets for the quarter ending June 30. The marketing department of Royal Company prepares the following information that will be used to prepare a budget for the quarter ending June 30. The selling price is $10.50 per unit. Budgeted sales for the next five months are:

April .........................10,000

May .........................30,000

June .........................25,000

July .........................17,000

August .....................17,500

• The management at Royal wants to minimize the probability of a stockout of inventory items. A policy has been implemented that requires the company to maintain ending inventory of 15 percent of the following month's budgeted sales. At the beginning of the quarter, Royal had 5,000 units in inventory.

• Each good unit of output requires 2 kilograms of direct material. Management does not want to run out of direct materials, so a policy has been established that materials on hand at the end of each month must equal 20 percent of the following month's production. At the beginning of the month, Royal has 13,000 kilograms of direct material on hand. Each kilogram of direct material costs 25 cents.

• At Royal, each unit of product requires 0.1 hours (6 minutes) of direct labour. The company pays employees a standard wage rate of $12 per hour.

• Royal applies overhead on the basis of direct labour hours. The variable manufacturing overhead rate is $12 per direct labour hour. The fixed overhead is $35,500 per month, of which $10,000 is noncash costs, primarily depreciation on the factory assets.

• Royal has a variable and fixed component to its selling and administrative expenses. The company estimates variable selling and administrative expenses at 50 cents per unit sold. Fixed selling and administrative expenses are estimated at $70,000 per month. Of this amount, $10,000 are noncash expenses, primarily depreciation.

• All sales at Royal are made on account. The company collects 70 percent of the sales revenue in the month of sale, and 30 percent in the following month. At the start of the quarter, Royal had $30,000 in accounts receivable that were deemed to be fully collectible.

• Recall that Royal pays 25 cents per kilogram of direct materials. The company pays for one- half of its purchases in the month of the purchase and one-half in the following month. At the beginning of the quarter, Royal owed creditors $12,000 for purchases of direct materials.

• For the cash budget, note the following information:

• Maintains a 16 percent open line of credit for $75,000

• Maintains a minimum cash balance of $30,000

• Borrows on the first day of a month and repays loans on the last day of a month

• Will pay cash dividend of $15,000 in June

• Will purchase $43,700 of equipment in May and $12,250 in June (both purchases paid in cash)

• Has an April 1 cash balance of $40,000

• Royal reported the following account balances prior to preparing its budgeted financial statements:

• Land of $50,000

• Common shares of $200,000

• Retained earnings of $109,110

• Equipment of $175,000

• Accumulated amortization of $60,000

Required:

1. Prepare a sales budget for each month and for the quarter.

2. Prepare the production budget for the months of April, May, and June, and for the quarter-end.

3. Prepare the direct materials budget for the months of April, May, and June, and for the quarter-end.

4. Prepare the direct labour budget for the months of April, May, and June, and for the quarter-end.

5. Prepare the overhead budget for the months of April, May, and June, and for the quarter -end.

6. Prepare the ending finished goods inventory budget for the quarter ending June 30.

7. Prepare a cost of goods sold budget for the quarter ending June 30.

8. Prepare the selling and administrative expense budget for the months of April, May, and June, and for the quarter-end.

9. Prepare a budgeted income statement for the quarter-end.

10. Prepare the schedule of expected cash collections on sales for the months of April, May, and June, and for the quarter-end.

11. Prepare the schedule of expected cash disbursements for the months of April, May, and June, and for the quarter-end.

12. Prepare a cash budget for the months of April, May, and June, and for the quarter-end.

13. Prepare the budgeted balance sheet as at June 30, ignoring any depreciation charge.

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