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Forrest Company Limited Budgeting Project

George Gerden is the Chief Executive Officer of Forrest's Company Limited, the principal supplier of the finest wooden dining tables with glass tops in Jupiter. George has just concluded a meeting with the budget committee in September 2017 where the preparation of the company's master budget for 2018 was discussed extensively. Arising out of the meeting, it was decided that a new industrial sander and polisher equipment would be purchased on 1^st January 2018. It is expected to take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment.

In response to the issue about financing the acquisition of new equipment, George stated that the sander and polisher equipment will cost $1,100,000 with an additional cost of $250,000 for ancillary equipment. The total acquisition will be financed with a one-year loan from N2M Bank and Trust Company on 1^st January 2018. The agreement of the loan is interest rate will be 10 percent per annum with one payment of principal and interest payments on 31^st December 2018.

Forrest's Company Limited is a manufacturer of wooden tables with glass tops, large and small.The firm's two products are designated as L (large table; 60 x 24 inches) and S (small table; 36 x 18 inches).The primary raw materials are lumber and glass sheets 60x30 inches. Large table requires thirteen square feet of lumber while S small wooden table requires nine square feet of lumber.Allowing for normal breakage and scrap glass, the company can get either 2 Small table tops or one large table top out of a glass sheet.Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials.

George Gerden, Chief Finance Officer of Forrest's Company Limited is in charge of preparing the master budget for 2018.He gathers the following information:

1.Sales, principal budget factor, in the fourth quarter 2017 are expected to be 10,000 large tables and 15,000 Small tables.Based on improved economic outlook, the sales manager predicts that for the next two years 2018 and 2019, sales for Small tables will grow by 1,100 each quarter over the previous quarter while large tables will grow by 1,000 each quarter over the previous quarter.

2.Forrest Company Limited sales history indicates that 80 percent of all sales are on credit, with the remainder of the sales in cash.The company's collection experience shows that 60 percent of the credit sales are collected during the quarter in which the sale is made and the remainder is collected in the following quarter.

3.Currently, the large table sells for $850 each, and the Small table sells for $500 each.It is expected that prices will hold firm throughout 2018.

4.The production manager attempts to end each quarter with enough finished-goods inventory in each product line to cover 20 percent of the following quarter's sales.Moreover, an attempt is made to end each quarter with 25 percent of the glass sheets needed for the following quarter's production. Assume an ending inventory of 4,840 glass sheets, 2,200 large tables and 3,220 Small tables for the fourth quarter of 2017.Lumber is purchased locally, the company buys them on a just-in-time basis; inventory is negligible.

5.All direct-material purchases are made on account, and 80 percent of each quarter's purchases are paid in cash during the same quarter as the purchase.The remainder is paid in the next quarter.

6.Indirect materials are purchased with cash as needed.Work-in-process is insignificant.

7.Projected manufacturing costs for 2018 are as follows:

Large TableSmall Table

Direct material $$

Lumber:

Large: 13sq. ft. @ $24 per sq. foot 312

Small: 9sq.ft. @ $24 per sq. foot 216

Glass sheets:

Large: 1sheet @ $70 per sheet70

Small: sheet @ $70 per sheet 35

Direct labour:

Large:5 hours @ $36 per hour 180

Small:3 hours @ $36 per hour 108

Manufacture overhead

0.5 direct-labour hour x $20 per hour 1010

Total product cost per unit 572369

8.The following production overheads are budgeted for 2018.

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Indirect material

102,000

112,000

122,000

132,000

Indirect labour

408,000

448,000

488,000

528,000

Other overhead

310,000

360,000

410,000

460,000

Depreciation

300,000

300,000

300,000

300,000

Total overhead costs

$1,120,000

$1,220,000

$1,320,000

$1,420,000

9.The following relates to past sales as well as selling and administrative expenses. (Use regression analysis to derive a cost function and use this cost function to estimate selling and administrative cost for each quarter of year 2018).

Year

Quarter

Large and Small tables (sales units)

Selling and Administration($)

2016

2

18,700

1,800,000

3

20,800

1,900,000

4

22,900

2,100,000

2017

1

27,100

2,300,000

2

29,200

2,400,000

3

31,300

2,650,000

4

33,400

2,750,000

10.George anticipates for each quarter dividend of $320,000 will be declared and paid in cash.

11.Income tax to be paid six months from the end of the financial period; tax rate is 25%.

12.Forrest's Company Limited projected balance sheet as of December 31, 2017, follows:

$

Plant, Property and Equipment (net book value)10,000,000

Cash564,728

Accounts receivable5,120,000

Inventory:

Raw material 338,800

Finished goods2,446,580

Total assets18,470,108

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Common stock @ $115,000,000

Retained earnings2,209,813

Accounts payable1,260,295

Total liabilities and shareholders' equity18,470,108

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Required:

Prepare Forrest Company Limited master budget for each quarter of 2018 and in total for the year by completing the following schedules and statements:

(a)Sales budget(8 marks)

(b)Schedule of cash collected from customers(10 marks)

(c) Production budget (19 marks)

(d)Direct-material budget (19marks)

(e)Schedule of cash disbursement to suppliers for direct material(8 marks)

(f)Direct labour budget.(3 marks)

(g)Production overhead budget.(4 marks)

(h)Selling and administrative budget. (5 marks)

(Round off variable cost to 2 decimal places and fixed cost to the nearest whole number). Show regression computation.

(i)Cash budget16 marks)

(j)Budgeted Cost of Goods Manufactured and Sold for the year 2018(9 marks)

(Show budget for the entire year only)

(k)Budgeted Income Statement for 2018

(Show budget for the entire year only)(5 marks)

(l)Budgeted Statement of Retained Earnings for 2018

(Show budget for the entire year only).

(4 marks)

(m) Budgeted Balance Sheet as of 31st December 31, 2018.(10 marks)

(Total = 120 marks)