Case 9-29 Master Budget for a Manufacturer

Garneau manufacturing Ltd. produces and distributes a special type of chemical compound called compound WX. The information below about Garneaus operations has been assembled to assist budget preparation. The company is preparing its master budget for the first quarter of 2019. The budget will detail each months activity and the activity for the quarter in total. The master budget will be based on the following information:

1. Selling price is $60 per unit in 2018 and will not change for the first two quarters of 2019. Actual and estimates sales are as follows:

Actual 2018	Estimated 2019
November: 10,000 Units	January: 11,000 units
December: 12,000 units	February: 10,000 units
	March: 13,000 units
	April: 11,000 units
	May: 11,000 units

2. The company produces enough units each month to meet that months sales plus a desired inventory level equal to 20% of next months estimated sales. Finished Goods inventory at the end of 2018 consisted of 2,200 units at a variable cost of $33
3. The company purchases enough raw materials each month for the current months production requirement and 25% of next months production requirements. Each unit of product requires 5 kilograms of raw material at 0.60 per kilogram. There were 13,500 kilograms of raw materials in inventory at the end of 2018. Garneau pays 40% of raw material purchases in the month of purchase and the remaining 60% in the following month.
4. Each unit of finished product requires 1.25 labor-hours. The average wage rate is $16 per hour.
5. Variable manufacturing overhead is 50% of the direct labor cost
6. Credit sales are 60% of total sales. The company collects 50% during the second month
7. Fixed overhead costs (per month) are as follows:

Factory supervisors salary	75,000
Factory insurance	1,400
Factory rent	8,000
Depreciation of factory equipment	1,200

8. Total fixed selling and administrative expenses are as follows:

Advertising	300
Depreciation	9,000
Insurance	250
Salaries	4,000
Other	14,550

1. Variable selling and administrative expenses consist of $4 for shipping and 10% of sales for commissions

10. The company will acquire assets for use in the sales office at a cost of $300,000 which will be paid at the end of January 2019. The monthly depreciation expense on the additional capital assets will be $6,000
11. The balance sheet as of December 31, 2018, is as follows:

Assets
Cash			80,000
Accounts Receivable			612,000
Inventory: Raw materials		8,100
Finished goods		72,600	80,700
Plant and equipment		1,000,000
Less accumulated depreciation		(1,000,000)	900,000
Total Assets			1,672,700
Liabilities and Equity
Accounts payable			24,000
6% long-term notes payable			900,000
Common shares			735,000
Retained earnings			13,700
Total Liabilities and shareholders equity			1,672,700

Additional information is as follows:

• All cash payments except purchases of raw materials are made monthly as incurred
• All borrowing occur at the beginning of each month and all repayments occur at the end of the month. Borrowings and repayments may occur in any amount
• All interest on borrowed funds is paid at the end of each month at a rate of 0.5% per month
• All minimum cash balance of $30,000 is required at the end of each month

Required:

1. Prepare the following budgets for each of the first three months of 2019:

a. Sales budget

b. Production budget

c. Raw Materials purchases budget

d. Direct labour and manufacturing overhead budget

e. Selling and administrative budget

f. Cash budget