Lockey Company produces control valves used in the production of oil field equipment. The control valves are sold to various gas and oil engineering companies throughout the country. Projected sales units for the coming four months are as follows: January February 20 000 25 000 March April 30 000 30 000 The following data pertain to production policies and manufacturing specifications followed by Lockey: a. Finished goods inventory on 1 January is 13 000. The desired ending inventory for each month is 70% of the next month's sales. b. The data on materials used are as follows: Direct material Per unit usage Unit cost Part 220 5 R40 Part 440 3 R30 C. d. Inventory policy dictates that sufficient materials be on hand at the beginning of the month to produce 50% of that month's estimated sales. This is exactly the amount of material on hand on 1 January. The direct labour used per unit of output is three hours. The average direct labour cost is R45 per hour. Overhead for each month is estimated using a flexible budget formula. The activity is measured in direct labour hours. Fixed cost Variable cost component component Indirect material R10 Power R2 Maintenance R280 000 R11 Supervision R140 000 Depreciation R1 000 000 Taxes R70 000 Other R560 000 R16 e. Salaries Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. The activity is measured in units sold. Fixed costs R300 000 Variable costs Commissions R7.50 Depreciation R50 000 Shipping R26 Other R100 000 R4 f. The unit selling price of the control valve is R900. g. h. In February, the company plans to purchase land for future expansion. The land costs R900 000. All sales and purchases are for cash. Cash balance on 1 January equals R1 629 000. If the firm develops a cash shortage by the end of the month, sufficient cash in multiples of R1 000 is borrowed to cover the shortage. Any cash borrowed is repaid one month later, as is the interest due. The interest rate is 12% per annum. Required: Prepare monthly operating budget for the first quarter with the following schedules: Sales budget Production budget Direct labour budget Overhead budget 1.1 1.2 1.3 Direct materials purchases budget 1.4 1.5 1.6 1.7 1.8 1.9 1.10 Selling and administrative budget Ending finished goods inventory budget Cost of goods sold budget Budgeted income statement (ignore income taxes) Cash budget