Allison Manufacturing produces a subassembly used in the production of jet aircraft engines. The assembly is sold to engine manufacturers and aircraft maintenance facilities. Projected sales in units for the coming 5 months follow:

January 40,000

February 50,000

March 60,000

April 60,000

May 62,000

The following data pertain to production policies and manufacturing specifications followed by Allison Manufacturing:

A. Finished goods inventory on January 1 is 32,000 units, each costing $166.06. The desired ending inventory for each month is 80% of the next month's sales.

B. The data on materials used are as follows:

Direct Material	Per-Unit Usage	DM Unit Cost
Metal	10 lbs.	$8
Components	6	5

Inventory policy dictates that sufficient materials be on hand at the end of the month to produce 50% of the next month's production needs. This is exactly the amount of material on hand on December 31 of the prior year.

C. The direct labor used per unit of output is 3 hours. The average direct labor cost per hour is $14.25.

D. Overhead each month is estimated using a flexible budget formula. (Note: Activity is measured in direct labor hours.)

	Fixed-Cost Component	Variable-Cost Component
Supplies	-	$1.00
Power	-	0.50
Maintenance	$30,000	0.40
Supervision	16,000	-
Depreciation	200,000	-
Taxes	12,000	-
Other	80,000	0.50

E. Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. (Note: Activity is measured in units sold.)

	Fixed Costs	Variable Costs
Salaries	$50,000	-
Commissions	-	$2.00
Depreciation	40,000	-
Shipping	-	1.00
Other	20,000	0.60

F. The unit selling price of the subassembly is $205.

G. All sales and purchases are for cash. The cash balance on January 1 equals $400,000. The firm requires a minimum ending balance of $50,000. If the firm develops a cash shortage by the end of the month, sufficient cash is borrowed to cover the shortage. Any cash borrowed is repaid at the end of the quarter, as is the interest due (cash borrowed at the end of the quarter is repaid at the end of the following quarter). The interest rate is 12% per annum. No money is owed at the beginning of January.

Required:

1.Prepare a monthly operating budget for the first quarter with the following schedules. (Note: Assume that there is no change in work-in-process inventories.)

A. Sales budget

B. Production budget

C. Direct materials purchases budget

D. Direct labor budget

E. Overhead budget

F. Selling and administrative expenses budget

G. Ending finished goods inventory budget

H. Cost of goods sold budget

I. Budgeted income statement

J. Cash Budget

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