EXAMPLE: MASTER BUDGET PREPARATION Dean's Devices Corporation has the following balance sheet at December 31, 2022: The company is preparing its budget for the first quarter of 2023 and has collected the data below: a. The sales forecast is 2,000; 1,700; 1,600; and 1,500 units for January, February, March, and April, respectively. The unit sales price is $16. All sales are on credit and collections are 40% in the month of sale and 60% the following month. Accounts receivable is for credit sales only. b. At the end of each month Dean's Devices wants a finished goods inventory equal to 70% of the next month's sales and a direct materials inventory of 120% of that month's production requirement. c. A unit of finished product requires 3 pounds of direct material at $2 a pound, and 30 minutes of direct labor at \$7 an hour. Direct materials purchases are paid 25% in the month of purchase and 75% in the following month. Accounts payable is for credit purchases only. All other costs are paid in the month incurred. d. Dean's Devices applies manufacturing overhead to units of product based on direct labour hours. The variable manufacturing overhead rate is $3 per direct labour hour. Fixed manufacturing overhead consists of: salaries $3,000 per month, depreciation $1,500 per month, and other fixed costs $1,110 per month. e. Selling costs are sales commissions ( $0.30 per unit sold) and shipping ( $0.14 per unit sold). Administrative costs each month are: salaries $800; rent $500; and depreciation $400. f. Dean's Devices plans to buy equipment costing $10,000 in January. This will be paid in cash. g. Dean's Devices management requires a minimum cash balance on hand of $10,000. The company can obtain short-term financing at a rate of 8% per year. Borrowings are received at the beginning of the month and repayments are made at the end of the month (both in $1,000 increments). Any interest incurred is paid at the end of the month following the advance. Prepare the master budget for the first quarter of 2023 for each month and the quarter in total. Key formulas for budget preparation process: For Production Budget: \begin{tabular}{l} Finished \\ units to be \\ produced \end{tabular}=\begin{tabular}{l} Expected \\ sales in \\ units \end{tabular}+\begin{tabular}{l} Desired ending \\ inventory of \\ finished units \end{tabular}\begin{tabular}{l} Beginning \\ inventory of \\ finished units \end{tabular} For Direct Materials Purchase Budget: \begin{tabular}{l} Required \\ purchases of \\ production \end{tabular}=\begin{tabular}{l} Amount \\ required for \\ direct materials \end{tabular}+\begin{tabular}{l} Desired ending \\ inventory of \\ direct materials \end{tabular}\begin{tabular}{l} Beginning \\ inventory of direct materials \end{tabular} For Direct Labour Budget
