Camarillo Manufacturing Company was established to manufacture two types of pipe fittings, XL1

and XL2. The manufacturing process involves molding the fittings and then smoothing them.

The firm

was initially capitalized with $500,000 as an S Corporation. The firm purchased

equipment for $450,000 with cash of $125,000 and a note payable o

f $325,000. It also acquired

furniture

for $120,000 with cash of $60,000 and a note payable of $60,000. Mana

gement is now

preparing the master budget for the first year of operations.

Sales Budget

Management expects to meet established market prices for its pipe fittings of $40 for XL1 and $32

for XL2. Sales representatives have estimated that total sales of

XL1 fittings will be 4,500 units

and sales of XL2 will be 12,000 units.

Production Budget

Management has expressed a desire to have 1,000 units of XL1 and 3,000 units of XL2 in ending

inventory.

Material Acquisition Budget

The firms industrial enginee

r has prep

ared standards that call for 0.6

pounds of material per XL1

casting and 0.4 pounds per XL2 casting.

Both products require the same material. Management

also desires to end the period with 1,000 pounds of material in raw materials inventory. Th

e

purchasing agent anticipates that the metal can be purchased at an average cost of $5 per pound.

Direct Labor Budget

The standa

rds for a unit of XL1 call for

0.5 hours of direct labor in Molding and 0.3 hours in

Smoothing. The standards for a unit of

XL2 call for 0.4 hours in

Molding

and 0.2 hours in

Smoothing. Managements anticipated average cost for labor is $16 per hour.

Factory Overhead Budget

Service Department 1 handles personnel matters. The firm anticipates having 12 factory

employees and expects the variable costs to operate the personnel department to average $1,000

per employee. The cost of this department is allocated to other departme

nts on the assumption

that there will be three employees in the maintenance department, five employees in the molding

department, and four employees in the smoothing department. The personnel departments fixed

costs are estimated to be $15,000 and will b

e allocated on a lump sum basis at $3,000 to

maintenance, $6,000 to molding and $6,000 to smoothing.

The maintenance department is budgeted to make 100

service calls during the period,

60 calls for

the molding department and 40 calls for the smoothing dep

artment.

The maintenance manager

estimates that it will cost an average of $150 in variable costs per service call. The fixed costs of

$14,000 are thought to benefit the two production departments equally.

The molding department is expected to incur $29

,000 in variable overhead and $42,000 in fixed

overhead. The smoothing department is expected to have $32,000 in variable overhead and $8,000

in fixed overhead.

Management has decided to allocated 60% of the fixed overhead cost of molding to XL1 and 40%

to XL2 and split the fixed smoothing costs evenly between the two products. Variable costs will

be allocated based on direct labor hours.

Selling and Administration Expenses Budget

Budgeted selling and ad

ministration expenses are $126,4

00. This

includes sales commissions at

10% of sales or $56,400; administration salaries of $30,000; advertising of $6,000; supplies of

$2,000 and interest of $32,000.

Budgeting

Cash Receipts and Di

sbursements

Sales are presumed to be

$100,000 in the first quarter

; $140,000 in the second quarter; $200,000

in the third quarter and $124,000 in the fourth quarter. Seventy percent of sales will be paid for in

the quarter in which they are made and thirty percent will be paid in the quarter following the sale.

Product

ion will be spread uniformly over the year. The firm will pay for materials, supplies, and

labor in the quarter the cost is incurred. Utilities will be paid one month after incurred. Half the

property tax is aid in the first and third quarters. The fir

st payment

for

a new company is not made

until the third quarter. Sales commissions are paid in the quarter a sale is made. Other selling and

administration costs are incurred and paid uniformly. Finally, the firm makes note payments of

$30,000 per quar

ter which consists of $22,000 of principal repayment and $8,000 of interest. Total

Cos

ts include depreciation of $27,000; $21,0

00 for equ

i

pment

and $6,000 for the furniture

.

Additional Information

Factory Overhead Budget

Personnel

Maintenance

Molding

Smoothing

Variable Overhead Items

Indirect Labor

$6,000

$8,000

$9,000

$18,000

Supplies

4,000

3,000

19,000

8,000

Utilities

2,000

1,000

1,000

6,000