ACC 311 Master Budget Problem Innovate Company is a highly-progressive organization that produces Netbook computers. The design of Innovate's system is unique and represents the latest breakthrough in touch-screen portable computers. The company is preparing to build its master budget for the coming year (20XX). The annual budget is segmented into detail for each quarter's activity and for the year in total. The master budget will be based on the following information: a. Fourth quarter sales from the prior year are 5,500 units. b. Unit sales by quarter (for 20XX) are projected as follows: First quarter 6,000 Second quarter 8,000 Third quarter 8,000 Fourth quarter 9,000 The selling price is $650 per unit. All sales are on credit. Innovate collects 85 percent of all sales within the quarter in which they are realized; the other 15 percent are collected in the following quarter. Innovate will start recording bad debt expense this year. The company estimates that 1 percent of the balance of accounts receivable will be uncollected and will make an adjustment entry at the end of the year (it will not affect the cash account for the current year, but it will affect certain income statement and balance sheet accounts). c. There is no beginning inventory of finished goods. Innovate is planning the following ending finished goods inventories for the quarter: First quarter 1,300 units Second quarter 1,500 units Third quarter 2,000 units Fourth quarter 1,000 units d. Innovate leases machines used in production. Per terms of the capital lease, the company has the right to use the machines, but must pay maintenance on the machines. At current capacity, Innovate's expense due to leasing will be $660,000 per quarter. The fixed utility cost is $40,000 per quarter and the salaries of factory supervisors and staff will be $300,000 per quarter. e. Variable overhead consists primarily of machine maintenance and the costs incurred to run the machines. From past experience, Innovate estimates machine maintenance expense to be $1 per direct labor hour (DLH) and the cost of utilities and labor to run the machines is $5 per DLH. Overhead is allocated based on direct labor hours used in production. All overhead expenses are paid for in the quarter incurred. f. The selling and administrative staff is based in a separate building from where the Netbook computers are produced. Rent expense for the administrative building is $40,000 per month, the fixed portions of telephone and utility expenses averages $20,000 per month, and the fixed fee for technical support is $20,000 every three months. Depreciation expense is $50,000 per quarter. g. Variable selling and administration expenses consist of billing expenses of $1 per unit sold, sales commissions $7 per unit, and the variable portion of telephone and utility expenses is $2 per unit sold. All selling and administrative expenses are paid for in the quarter incurred. h. Each Netbook computer unit assembly require five hours of direct labor and three items of direct materials. Workers are paid $10 per hour, and although the items of direct materials are different (case, motherboard, and peripheral package), each item of materials average cost is $80. i. There are 6,570 items of direct materials in beginning inventory as of January 1, 20XX. At the end of each quarter, Innovate plans to have 20 percent of the direct materials needed for next quarter's unit sales. Innovate will end the year with the same level of direct materials found in this year's beginning inventory. j. Innovate buys direct materials on account. One-half of the purchases are paid for in the quarter of acquisition, and the remaining half is paid for in the following quarter. Direct labor wages are paid on the fifteenth and thirtieth of each month. k. The trial-balance as of December 31, of the prior year is as follows: Cash Accounts receivable Plant and equipment Total Assets Assets 525,600 $ 607,000 536,250 27,310,950 $28,979,800 Liabilities and Equity Accounts payable Capital stock $ 724,800 20,197,000 Retained earnings Total liabilities and equity 8,058,000 $28,979,800 Innovate will pay dividends of $50,000 in the first and third quarter. At the end of the fourth quarter, $2 million of equipment will be purchased. Inventory REQUIRED: Prepare a master budget for Innovate Company for each quarter of 20XX and for the year in total. The following component budgets must be included: a. Sales budget b. Production budget c. Direct materials purchases budget d. Direct labor budget e. Overhead budget f. Selling and administration expense budget g. Ending finished goods inventory budget h. Costs of goods sold budget i. Cash budget j. Pro forma income statement (using absorption costing) k. Pro forma balance sheet Sales in Units x Unit Price Total Sales Revenue Sales (in units) Add: Desired ending inventory Total needs Less: Beginning inventory Required Production (in units) Innovate Company Schedule 1: Sales Budget For Year Ended December 31, 20XX Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year Innovate Company Schedule 2: Production Budget For Year Ended December 31, 20XX Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year Qtr 3 Qtr 4 Year Production (in units) x Materials/unit Production needs Add: Desired ending inventory Total needs Less: Beginning inventory Required Purchases x Cost per unit Cost of Purchases Innovate Company Schedule 3: Direct Materials Budget For Year Ended December 31, 20XX Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year Production (in units) x Hours per unit Hours needed x Cost per hour Total Direct Labor Cost Innovate Company Schedule 4: Direct Labor Budget For Year Ended December 31, 20XX Qtr 1 Qtr 2 Budgeted hours x Variable OH Rate Total Budgeted Variable OH Cost Budgeted Fixed OH Cost: Lease Expense Utility Expense Salaries Expense Total Budgeted Fixed OH Cost Total OH Cost Innovate Company Schedule 5: Overhead Budget For Year Ended December 31, 20XX Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year Innovate Company Schedule 6: Selling & Administration Expense Budget For Year Ended December 31, 20XX Sales (in units) x Variable Selling & Admin. Rate Total Variable S. & A. Expense Total Fixed S. & A. Expense Total Selling & Admin. Expense Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year Unit cost comparison Innovate Company Schedule 7: Ending Finished Goods Inventory Budget For Year Ended December 31, 20XX Direct materials (3 units @ $80) Direct labor (5 hours @ $10) Overhead: Variable (5 DLH @ $6/DLH) Fixed (5 DLH @ ?/DLH) Total unit cost Finished Goods: Units Cost per unit Total Amount Direct materials used (Sch 3) Direct labor used (Sch 4) Overhead (Sch 5) Add: Budgeted manufacturing cost Beginning finished goods Goods available for sale Less: Ending finished goods (Sch 7) Budgeted cost of goods sold Innovate Company Schedule 8: Cost of Goods Sold Budget For Year Ended December 31, 20XX Qtr 3 Qtr 4 Year Beginning cash bal. Add Collections: Credit Sales: Current quarter Prior quarter Total cash available Less Disbursements: Innovate Company Cash Budget For Year Ended December 31, 20XX Qtr 1 Qtr 2 Direct Materials: Current quarter Prior quarter Direct labor Overhead Selling and admin. Dividends Equipment Total cash needs Ending cash balance Sales (Sch 1) Less: Cost of Goods Sold (Sch 8) Gross Margin Less: Selling & Admin expenses (Sch 6) Bad Debt Expense Operating income before taxes Innovate Company Pro Forma Income Statement For Year Ended December 31, 20XX Assets: Cash Accounts Receivable Less: Allowance for Doubtful Accounts Inventory: Direct Materials Finished Goods Plant and equipment Total Assets Liabilities and Equity: Current Liabilities: Accounts Payable Stockholder's Equity: Capital Stock Retained Earnings Total Liabilities and Equity Calculations: Beginning P&E Add: New Equipment Less: Depreciation Expense Ending P&E Beginning RE Add: Net Income Less: Dividends Paid Ending RE Innovate Company Pro Forma Balance Sheet At Year Ended December 31, 20XX