Klandon Company manufactures decorative rocks for aquariums. Kim Klandon is preparing the budget for the quarter ended June 30. She has gathered the following information. 1. Klandon's sales manager reported that the company sold 12,000 bags of rocks in March. He has developed the following sales forecast. The expected sales price is $10 per bag. April 20,000 bags May 50,000 bags June 30,000 bags July 25,000 bags August 15,000 bags 2. Sales personnel receive a 5 percent commission on every bag of rocks sold. The following monthly fixed selling and administrative expenses are planned for the quarter. However, these amounts do not include the depreciation increase resulting from the budgeted equipment purchase in June (see part 7). Monthly Fixed Selling and Administrative Costs. Variable Cost/Unit Depreciation $10,000 Salaries of sales personnel 25,000 $0.50 Advertising 1,000 Management salaries 10,000 Miscellaneous 500 Bad debts 0.50 Total costs $46,500 $1.00 3. The standard labor allowed for one bag of rocks is 15 minutes. The current direct labor rate is $10 per hour. 4. After experiencing difficulty in supplying customers in a timely fashion due to inventory shortages, the company established a policy requiring the ending finished goods inventory to equal 20 percent of the following month's budgeted sales, in units. On March 31, 4,000 bags were on hand. 5. Five pounds of raw materials are required to fill each bag of finished rocks. The company wants to have raw materials on hand at the end of each month equal to 10 percent of the following month's production needs. On March 31, 13,000 pounds of materials were on hand. 6. The raw materials used in production cost $0.40 per pound. Half of the month's purchases is paid for in the month of purchase, the other half, in the following month. No discount is available. 7. On June 1, the company plans to spend $48,000 to upgrade its office equipment that is fully depreciated. The new equipment is expected to have a five-year life, with no residual value. 8. The budgeted monthly variable and total fixed overhead are as follows. Variable overhead is based on the number of units produced. The fixed overhead budget is based on an annual production of 400,000 bags. Fixed Monthly Overhead Variable Cost/Unit Depreciation Indirect materials 1,000 $0.05 Indirect labor 10.000 0.20 Utilities 20,000 Property taxes 5,000 Maintenance 6,000 0.15 Total costs $50.000 $0.50 9. All sales are made on account. Historically, the company has collected 70 percent of its sales in the month of sale and 25 percent in the month following the sale. The remaining 5 percent of sales is uncollectible. 10. Klandon must maintain a minimum cash balance of $30,000. An open line of credit at a local bank allows the company to borrow up to $175,000 per quarter in $1,000 increments. $8,000 0.10 11. All borrowing is done at the beginning of the month, and all repayments are made at the end of a month in $1,000 increments. Accrued interest is paid only when principal is repaid. The interest rate is 12 percent per year. 12. A quarterly dividend of $49,000 will be declared and paid in April. 13. Income taxes payable for the first quarter will be paid on April 15. Klandon's tax rate is 30 percent. 14. The March 31 balance sheet is as follows: March 31 Cash $40,000 Accounts receivable 30,000 Finished goods inventory 26,000 Raw materials inventory 5,200 Plant & equipment 200.000 Accumulated Depreciation (50.000) Total assets $251.200 Accounts payable $12.000 Income taxes payable 50,000 Common stock 52,000 Retained 3amnings 137.200 Total liabilities and equities S251.200 Required a. Prepare all components of Klandon's master budget for the second quarter. Use the template's provided below to prepare the budgets and pro-forma statements. April May June Quarter Sales Budget Budgeted units sold Budgeted sales price Budgeted sales revenue May June Quarter Or solve your own way and solve the rest of the problem: Selling & Administrative Expense Budget April Depreciation Sales personnel compensation Advertising Management salaries Miscellaneous Bad debts Total budgeted expenses Less non-cash expenses Depreciation $ Bad debts ol Jun $ $ $ $ April May June Total Cash Receipts Bad Debts Accounts Receivat Unit costs: Direct materials Direct labor Overhead Total standard unit cost x Ending inventory units Ending finished goods inventory Cost of Goods Sold Beginning work in process inventory Direct materials used Direct labor Manufacturing overhead Total manufacturing costs Less: Ending work in process inventory Cost of goods manufactured Add: Beginning finished goods inventory Less: Ending finished goods inventory Cost of goods sold Cash Receipts Budget March sales $120,000 x 25% April sales $200,000 x 70% $200,000 x 25% $200,000 x 5% May sales $500,000 x 70% $500,000 x 25% $500,000 x 5% June sales $300,000 x 70% $300,000 x 25% $300,000 x 5% Totals Cash Payments for Materials Budget A/P from March April purchases $56,000 x 50% $56,000 X 50% May purchases $88,600 x 50% $88,600 x 50% June purchases $56,800 x 50% $56,800 x 50% $ April May June Total Cash Payments Accounts Payable Total $ $ $ $ April May June Quarter Cash Budget Beginning cash balance Collections from sales Total cash available Less disbursements Materials purchases Direct labor Manufacturing overhead Selling & administrative expense Income taxes Equipment purchase Dividends Total cash disbursements Cash excess (deficiency) Minimum cash balance Cash excess (deficiency) Financing Borrowings Repayments Interest Total financing Ending cash balance $ b. Prepare a pro forma income statement for the second quarter. Solve: Sales Cost of goods sold Gross profit Selling & administrative expense Operating income Interest expense Income before taxes Income tax expense (30%) Net Income c. Prepare a pro forma balance sheet as of June 30. a Solve: Cash A/R Finished Goods Raw Materials Inventory Property, Plant & Equipment Less: Accumulated Depreciation Total Assets A/P Income Taxes Payable Note Payable Common Stock Retained Earnings Total Liabilities & Equities $ May June Quarter July May June Quarter July $ May June Quarter Total cash costs Production Budget April Budgeted unit sales + Budgeted ending inventory = Total units required - Beginning inventory = Budgeted production Materials Purchase Budget April Budgeted production x Standard pounds/unit = Production needs + Budgeted ending inventory = Total pounds required - Beginning inventory = Budgeted purchases x Standard price/pound = Budgeted purchases cost Direct Labor Budget April Budgeted production x Standard DLH/unit = Total direct labor hrs required x Standard wage rate = Budgeted direct labor cost $ Manufacturing Overhead Budget April Budgeted production * Variable OH/unit = Total variable overhead + Fixed overhead Total budgeted Manufacturing OH Less: Non-cash items Depreciation = Total cash costs $ Ending Inventory and Costs of Goods Sold Budget Raw Materials Beginning Balance Purchases of raw materials Less: Ending rawy materials inventory Raw materials used Finished Goods $ May June Quarter