EYK 9-1 Business Decision Case
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-1. Business Decision Case The sales department of Donovan Manufacturing, Inc. has completed the following sales forecast for the months of January through March 20X1 for its only two products: 50,000 units of J to be sold at $90 each and 30,000 units of K to be sold at $70 each. The desired unit inventories at March 31, 20X1, are 10% of the next quarter's unit sales forecast, which are 60,000 units of J and 30,000 units of K. The January 1, 20X1, unit inventories were 5,000 units of J and 2,000 units of K. Each unit of J requires 3 pounds of material A and 2 pounds of material B for its manufacture; K requires 2 pounds of A and 4 pounds of B. The purchase cost of A is $9 per pound and the purchase cost of B is $5 per pound. Materials A and B on hand at January 1, 20X1, were 19,000 pounds of A and 7.000 pounds of B. Desired inventories at March 31, 20X1, are 14,000 pounds of A and 8,000 pounds of B. Each unit of J requires 0.5 hours of direct labor in the factory, each unit of K requires 1.0 hour of direct labor. The average hourly rate for direct labor is $12 per hour. Estimated manufacturing overhead cost is $6 per direct labor hour plus $90,000 per month. Selling and administrative expenses are estimated to be 10% of sales revenue plus $180,000 per month. Cash sales for the first quarter are estimated to be $300,000 per month. It is forecast that 30% of the credit sales for the quarter ended March 31, 20X1, will occur in January, 30% in February, and 40% in March. Of credit sales (December through March), 40% will be collected as cash in the month of sale and 55% will be collected in the following month. The remainder will be uncollectible. Cash collected in January 20X1 from December 20X0 sales will be $1,050,000. The January 1, 20X1, cash balance was $70,000. The minimum acceptable cash balance at the end of each month is $60,000. Short-term borrowings (6-month term) are made in multiples of $10,000. Interest is charged at the rate of 1% per month on short-term borrowings. The first interest payment is made the month following the borrowing. Cash disbursements (excluding interest on short-term borrowings) are estimated as follows: Manufacturing costs. Selling and administrative expenses Interest expense. Income tax payment. January February March $1,500,000 $1,300,000 $1,400,000 390,000 410,000 400,000 90,000 90,000 90,000 0 0 210,000 Capital expenditures. 124,000 110,000 50,000 Cash dividends. 300,000 0 0 ter 9 Planning and Budgeting Cambridge Business Publishers a. e. EYK9-2. Required Prepare the sales budget for the quarter ended March 31, 20X1. b. Prepare the production budget for the quarter ended March 31, 20X1. c. Prepare the direct materials budget for the quarter ended March 31, 20X1. d. Prepare the direct labor budget for the quarter ended March 31, 20X1. Prepare the manufacturing overhead budget for the quarter ended March 31, 20X1. f. Prepare the selling and administrative expense budget for the quarter ended March 31, 20X1. g. Prepare a schedule of cash collected from customers for the quarter ended March 31, 20X1. h. Prepare the cash budget for the quarter ended March 31, 20X1. Ethics Case Steve Waller is the corporate accounting manager for Giant Video Stores. As part of the budgeting process for the entire corporation, he has asked the manager of each video store to prepare a store master budget. The manager of one of the largest stores, Jeff Miller, decides to understate the sales budget and overstate all the budgets related to expenses. Jeff believes this is a more conservative approach than using the estimated numbers he honestly believes will be achieved for the year. He also thinks that the corporate office will look more favorably on his store's actual achievements when they are subsequently compared to this budget. Jeff has asked Lisa Dorton, his assistant manager, to review the budget before it is submitted. Lisa is aware of the real estimates that Jeff made. Required What is the impact of Jeff Miller's budget for the corporation? What ethical issues face Lisa Dorton? Donovan Manufacturing, Inc. Sales Budget For the Quarter Ended March 31, 20x1 Forecast Unit Sales Planned Unit Sales Volume Price Budgeted Total Sales Product ) Total sales revenue b. Donovan Manufacturing, Inc. Production Budget For the Quarter Ended March 31, 20X1 Units of Finished Product K Forecast unit sales Desired ending for each product Quantities to be available Less: Beginning inventories Total production to be scheduled C. Donovan Manufacturing, Inc. Direct Material Budget For the Quarter Ended March 31, 20X1 Material Material Direct material required: Product ): Product K: Desired ending materials inventories Total pounds of material to be available Less: Beginning materials inventories Total pounds of material to be purchased Unit purchase price Total material purchases d. Donovan Manufacturing, Inc. Direct labor Budget For the Quarter Ended March 31, 20X1 $ Direct labor hours required for production: Product: Product K: d. Donovan Manufacturing, Inc. Direct labor Budget For the Quarter Ended March 31, 20X1 Direct labor hours required for production: Product: Product K: Total direct labor hours Hourly rate for direct labor Total direct labor cost Donovan Manufacturing, Inc. Manufacturing Overhead Budget For the Quarter Ended March 31, 20X1 Total direct labor hours Variable manufacturing overhead rate Variable manufacturing overhead cost Fixed manufacturing overhead cost Total manufacturing overhead cost . f. Donovan Manufacturing, Inc. Selling and Administrative Budget For the Quarter Ended March 31, 20x1 Total sales revenue Variable selling and administrative rate Variable selling and administrative expenses Fixed selling and administrative expenses Total selling and administrative expenses Donovan Manufacturing, Inc. Schedule of Cash Collections For the Quarter Ended March 31, 20X1 January February March Cash sales Credit sales: December January February March: Total credit sales Donovan Manufacturing, Inc. Schedule of Cash Collections For the Quarter Ended March 31, 20X1 January February March Cash sales Credit sales: December January: February March: Total credit sales Total sales Donovan Manufacturing, Inc. Cash Budget For the Quarter Ended March 31, 20X1 January February March Beginning cash balance Cash receipts: Cash sales Collections from customers Short-term borrowing Cash available Cash disbursements: Manufacturing costs Selling and administrative expenses Interest expense Income tax payments Capital expenditures Cash dividends Total disbursements Ending cash balance Remember the ending balance of one month becomes the beginning balance of the next month -1. Business Decision Case The sales department of Donovan Manufacturing, Inc. has completed the following sales forecast for the months of January through March 20X1 for its only two products: 50,000 units of J to be sold at $90 each and 30,000 units of K to be sold at $70 each. The desired unit inventories at March 31, 20X1, are 10% of the next quarter's unit sales forecast, which are 60,000 units of J and 30,000 units of K. The January 1, 20X1, unit inventories were 5,000 units of J and 2,000 units of K. Each unit of J requires 3 pounds of material A and 2 pounds of material B for its manufacture; K requires 2 pounds of A and 4 pounds of B. The purchase cost of A is $9 per pound and the purchase cost of B is $5 per pound. Materials A and B on hand at January 1, 20X1, were 19,000 pounds of A and 7.000 pounds of B. Desired inventories at March 31, 20X1, are 14,000 pounds of A and 8,000 pounds of B. Each unit of J requires 0.5 hours of direct labor in the factory, each unit of K requires 1.0 hour of direct labor. The average hourly rate for direct labor is $12 per hour. Estimated manufacturing overhead cost is $6 per direct labor hour plus $90,000 per month. Selling and administrative expenses are estimated to be 10% of sales revenue plus $180,000 per month. Cash sales for the first quarter are estimated to be $300,000 per month. It is forecast that 30% of the credit sales for the quarter ended March 31, 20X1, will occur in January, 30% in February, and 40% in March. Of credit sales (December through March), 40% will be collected as cash in the month of sale and 55% will be collected in the following month. The remainder will be uncollectible. Cash collected in January 20X1 from December 20X0 sales will be $1,050,000. The January 1, 20X1, cash balance was $70,000. The minimum acceptable cash balance at the end of each month is $60,000. Short-term borrowings (6-month term) are made in multiples of $10,000. Interest is charged at the rate of 1% per month on short-term borrowings. The first interest payment is made the month following the borrowing. Cash disbursements (excluding interest on short-term borrowings) are estimated as follows: Manufacturing costs. Selling and administrative expenses Interest expense. Income tax payment. January February March $1,500,000 $1,300,000 $1,400,000 390,000 410,000 400,000 90,000 90,000 90,000 0 0 210,000 Capital expenditures. 124,000 110,000 50,000 Cash dividends. 300,000 0 0 ter 9 Planning and Budgeting Cambridge Business Publishers a. e. EYK9-2. Required Prepare the sales budget for the quarter ended March 31, 20X1. b. Prepare the production budget for the quarter ended March 31, 20X1. c. Prepare the direct materials budget for the quarter ended March 31, 20X1. d. Prepare the direct labor budget for the quarter ended March 31, 20X1. Prepare the manufacturing overhead budget for the quarter ended March 31, 20X1. f. Prepare the selling and administrative expense budget for the quarter ended March 31, 20X1. g. Prepare a schedule of cash collected from customers for the quarter ended March 31, 20X1. h. Prepare the cash budget for the quarter ended March 31, 20X1. Ethics Case Steve Waller is the corporate accounting manager for Giant Video Stores. As part of the budgeting process for the entire corporation, he has asked the manager of each video store to prepare a store master budget. The manager of one of the largest stores, Jeff Miller, decides to understate the sales budget and overstate all the budgets related to expenses. Jeff believes this is a more conservative approach than using the estimated numbers he honestly believes will be achieved for the year. He also thinks that the corporate office will look more favorably on his store's actual achievements when they are subsequently compared to this budget. Jeff has asked Lisa Dorton, his assistant manager, to review the budget before it is submitted. Lisa is aware of the real estimates that Jeff made. Required What is the impact of Jeff Miller's budget for the corporation? What ethical issues face Lisa Dorton? Donovan Manufacturing, Inc. Sales Budget For the Quarter Ended March 31, 20x1 Forecast Unit Sales Planned Unit Sales Volume Price Budgeted Total Sales Product ) Total sales revenue b. Donovan Manufacturing, Inc. Production Budget For the Quarter Ended March 31, 20X1 Units of Finished Product K Forecast unit sales Desired ending for each product Quantities to be available Less: Beginning inventories Total production to be scheduled C. Donovan Manufacturing, Inc. Direct Material Budget For the Quarter Ended March 31, 20X1 Material Material Direct material required: Product ): Product K: Desired ending materials inventories Total pounds of material to be available Less: Beginning materials inventories Total pounds of material to be purchased Unit purchase price Total material purchases d. Donovan Manufacturing, Inc. Direct labor Budget For the Quarter Ended March 31, 20X1 $ Direct labor hours required for production: Product: Product K: d. Donovan Manufacturing, Inc. Direct labor Budget For the Quarter Ended March 31, 20X1 Direct labor hours required for production: Product: Product K: Total direct labor hours Hourly rate for direct labor Total direct labor cost Donovan Manufacturing, Inc. Manufacturing Overhead Budget For the Quarter Ended March 31, 20X1 Total direct labor hours Variable manufacturing overhead rate Variable manufacturing overhead cost Fixed manufacturing overhead cost Total manufacturing overhead cost . f. Donovan Manufacturing, Inc. Selling and Administrative Budget For the Quarter Ended March 31, 20x1 Total sales revenue Variable selling and administrative rate Variable selling and administrative expenses Fixed selling and administrative expenses Total selling and administrative expenses Donovan Manufacturing, Inc. Schedule of Cash Collections For the Quarter Ended March 31, 20X1 January February March Cash sales Credit sales: December January February March: Total credit sales Donovan Manufacturing, Inc. Schedule of Cash Collections For the Quarter Ended March 31, 20X1 January February March Cash sales Credit sales: December January: February March: Total credit sales Total sales Donovan Manufacturing, Inc. Cash Budget For the Quarter Ended March 31, 20X1 January February March Beginning cash balance Cash receipts: Cash sales Collections from customers Short-term borrowing Cash available Cash disbursements: Manufacturing costs Selling and administrative expenses Interest expense Income tax payments Capital expenditures Cash dividends Total disbursements Ending cash balance Remember the ending balance of one month becomes the beginning balance of the next month
