Question
Hansell Companys management wants to prepare budgets for one of its products, duraflex, for July 2013. The firm sells the product for $79.00 per unit
Hansell Companys management wants to prepare budgets for one of its products, duraflex, for July 2013. The firm sells the product for $79.00 per unit and has the following expected sales ( in units) for these months in 2013:
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The production process requires 3.5 pounds of dura-1000 and 1.7 pounds of flexplas. The firms policy is to maintain an ending inventory each month equal to 10% of the following months budgeted sales, but in no case less than 490 units. All materials inventories are to be maintained at 5% of the production needs for the next month, but not to exceed 900 pounds. The firm expects all inventories at the end of June to be within the guidelines. The purchase department expects the materials to cost $1.20 per pound and $4.50 per pound for dura-1000 and flexplas, respectively. |
The production process requires direct labor at two skill levels. The rate for labor at the K102 level is $47.00 per hour and for the K175 level is $19.00 per hour. The K102 level can process one batch of dura-flex per hour; each batch consists of 95 units. The manufacturing of duraflex also requires 0.09 of an hour of K175 workers time for each unit manufactured. |
Variable manufacturing overhead is $1,150 per batch plus $73 per direct labor-hour. The company uses an actual cost system with a LIFO cost-flow assumption. In addition to variable overhead, the firm has a monthly fixed factory overhead of $49,500, of which $18,200 is depreciation expense. The firm pays all manufacturing labor and factory overhead when incurred. |
Hansell Company expects its trial balance on June 30 to be as follows: | |||||||
HANSELL COMPANY | |||||||
Budgeted Balances | |||||||
June 30, 2013 | |||||||
Cash | $40,000 | ||||||
Accounts receivable | $78,000 | ||||||
Allowance for bad debts | $3,260 | ||||||
Inventory | $23,700 | ||||||
Plant, property, and equipment | $576,000 | ||||||
Accumulated depreciation | $315,000 | ||||||
Accounts payable | $94,500 | ||||||
Wages and salaries payable | $20,000 | ||||||
Note payable (short term bank borrowing) | $79,200 | ||||||
Stockholders equity | $205,740 |
Typically, cash sales represent 19% of sales while credit sales represent 81%. Credit sales terms are 2/10, n/30. Hansell bills customers on the first day of the month following the month of sale. Experience has shown that 57% of the billings will be collected within the discount period, 22% by the end of the month after sales, 16% by the end of the second month after the sale, and 5% will ultimately be uncollectible. The firm writes off uncollectible accounts after 12 months. |
The purchase terms for materials are 2/15, n/60. The firm makes all payments within the discount period. Experience has shown that 80% of the purchases are paid in the month of the purchase and the remainder are paid in the month immediately following. | |||||||||||||
In addition to variable overhead, the firm has a monthly fixed factory overhead of $49,500, of which $18,200 is depreciation expense. The firm pays all manufacturing labor and factory overhead when incurred. | |||||||||||||
Total budgeted marketing, distribution, customer service, and administrative costs for 2013 are $2,000,000. Of this amount, $1,000,000 is considered fixed and includes depreciation expense of $123,600. The remainder varies with sales. The budgeted total sales for 2013 are $3.960 million. All marketing and administrative costs are paid in the month incurred. | |||||||||||||
The management of Hansell wishes to contribute to charitable organizations 9% of Operating Income. | |||||||||||||
Management desires to maintain an end-of-month minimum cash balance of $40,000. The firm has an agreement with a local bank to borrow its short-term needs in multiples of $900 up to $96,000 at an annual interest rate of 12%. Borrowings are assumed to occur at the beginning of the month. Bank borrowing at July 15 $79,200. | |||||||||||||
g. Prepare the cash budget for July 2013. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
h. Prepare the budgeted income statement for July 2013.
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