BUDGETING AND AUDITING TUTORIAL 1 Question 1 Pop's Tops makes one style of men's hats. Sales and collections for the first three months of 2001 are expected to be March February 2600 April 9500 Sales quantity 3700 January 3200 $57,600 $58,080 Revenue $46,800 $66,600 $171,000 Collections $48,960 $62,640 $169,680 The December 31, 2000, balance sheet revealed the following selected balances: Cash. $18,760; Raw Material Inventory, $3,812.50; Finished Goods Inventory, $10,500; and Accounts Payable, $3,800. The Raw Material Inventory balance represents 457.50 yards of felt and 12,200 inches of ribbon. The Finished Goods Inventory consists of 800 hats. During the first quarter of 2001, management expects that all work started within a month will be finished within that month, so no work in process is anticipated. Management plans to have enough hats on hand at the end of each month to satisfy 25 percent of the subsequent month's sales. In this regard, the company predicts both production and sales of 3,600 hats in April. Each hat requires 3/4 of a yard of felt and 20 inches of ribbon. Felt costs $7 per yard and ribbon costs $0.05 per inch. Ending inventory policy for raw materials is 20 percent of the next month's production. The company normally pays for 80 percent of a month's purchases of raw materials in the month of purchase (on which it takes a 2 percent cash discount). The remaining 20 percent is paid in full in the month following the month of purchase. The cost of direct labor is budgeted at $3 per hat produced and is paid in the month of production. Total out-of-pocket factory overhead can be predicted as $5,200 per month plus $2.25 per hat produced. Total nonfactory cash costs are equal to $2,800 per month plus 10 percent of sales revenue. All factory and nonfactory cash expenses are paid in the month of incurrence. In addition, the company plans to make an estimated quarterly tax payment of $5,000 and pay executive bonuses of $15,000 in January 2001. The management of Pop's Tops wishes to have a minimum of $12,000 of cash at the end of each month. If the company has to borrow funds, it will do so in $1,000 multiples at the beginning of a month at a 12 percent annual interest rate. Loans are to be repaid at the end of a month in multiples of $1,000. Interest is paid only when a repayment is made. Required: i. ii. iii. Prepare a production budget by month and in total for the first quarter of 2001. Prepare a raw material purchases budget by month and in total for the first quarter of 2001. Prepare a schedule of cash payments for purchases by month and in total for the first quarter of 2001. The Accounts Payable balance on December 31, 2000, represents the unpaid 20 percent of December purchases. Prepare a cash budget for each month and in total for the first quarter of 2001. iv
