CASE 9-29 Master Budget for a Manufacturer [LO3,LO4]

Garneau Manufacturing Ltd. produces and distributes a special type of chemical compound called Compound WX. The information below about Garneau's operations has been assembled to assist budget preparation. The company is preparing its master budget for the first quarter of 2016. The budget will detail each month's activity and the activity for the quarter in total. The master budget will be based on the following information:

a. Selling price is $60 per unit in 2015 and will not change for the first two quarters of 2016. Actual and estimated sales are as follows:

Actual 2015 Estimated 2016

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: 10,000 units

b. The company produces enough units each month to meet that month's sales plus a desired inventory level equal to 20% of next month's estimated sales. Finished Goods inventory at the end of 2015 consisted of 2,200 units at a variable cost of $33 each.

c. The company purchases enough raw materials each month for the current month's production requirement and 25% of next month's 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 2015. Garneau pays 40% of raw material purchases in the month of purchase and the remaining 60% in the following month.

d. Each unit of finished product requires 1.25 labour-hours. The average wage rate is $16 per hour.

e. Variable manufacturing overhead is 50% of the direct labour cost.

f. Credit sales are 60% of total sales. The company collects 50% of the credit sales during the first month following the month of sale and 50% during the second month.

g. 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

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

Advertising ........................................... $300

Depreciation ........................................ 9,000

Insurance ............................................ 250

Salaries ............................................... 4,000

Other .................................................. 14,550

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

j. 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 2016. The monthly depreciation expense on the additional capital assets will be $6,000.

k. The balance sheet as of December 31, 2015, 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 (100,000) 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 shareholder's equity $1,672,700

Additional information is as follows:

• All cash payments except purchases of raw materials are made monthly as incurred.
• All borrowings 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.
• A 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 2016:

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.

2. Budgeted income statement for each of the first three months of 2016 and a budgeted balance sheet as at March 31, 2016.