Master Budget Project 1 Vaughan Company makes AMAZING SUPER DUPER Widgets. Management is now preparing detailed budgets for the third quarter, July through September, and has assembled the following information to assist in budget preparation: Sales Budget The marketing department has estimated sales as follows for the remainder of the year: (Actual sales in June were 4,000 units) July 5,000 October 4,000 August 10,000 November 6,000 September 12,000 December 8,000 The selling price of a SUPER DUPER widget is $40 and all sales are on account. Based on past experience, sales are collected in the following pattern: 30% in the month of sale 65% in month following the sale 5% are never collected (uncollectible) Vaughan Company Sales Budget Total 3rd Quarter August September 3rd Quarter Sales in Units Selling Price per Unit Total Sales in $ July Cash Collections June's Cash Collections July's Cash Collections August's Cash Collections September's Cash Collections Total Cash Collections 2. Production Budget The company maintains a finished goods inventory equal to 20% of the following month's sales. The inventory of finished goods on July 1 is as it should be Vaughan Company Production Budget 3rd Quarter July August September Budgeted Sales in Units Add: Desired Ending Inventory Total Needs Less: Beginning Inventory Required Production Total 3rd Quarter Raw Materials Purchasing Budget Each unit of SUPER DUPER widget requires 1.5 pounds of WHAM compound. To prevent shortages, the company would like the inventory of WHAM compound on hand at the end of each month to equal 30% of the following month's production needs. The inventory on July 1 is 2,250 pounds. WHAM compound costs $2.00 per pound and Vaughan pays for 90% of its purchases in the month of purchase; the remainder is paid in the following month. $18,000 of WHAM compound was purchased in June and 90% was paid for in June, Vaughan Company RM Purchasing Budget Total 3rd Quarter July August September 3rd Quarter Required Production RM per Unit Production Needs Add: Desired Ending Inventory Total Needs Less: Beginning Inventory RM to be purchased Cost of RM per pound Cost of RM to be Purchased Cash Disbursements for RM June's RM Purchases July's RM Purchases August's RM Purchases September's RM Purchases Total Disbursements Thent n. The next Budget is the Direct Labor Budget. Let's assume that each widget takes 0.4 DLH to make and each DLH costs $12. Let's further assume that labor is paid in the month incurred. Vaughan Company DL Budget 3rd Quarter July August Total 3rd Quarter September Budgeted Production in Units DLH per Unit Total DLH needed Cost per DLH Total Direct Labor Cost 5. Next we will prepare our FOH budget. FOH is applied based on DLH. Estimated variable FOH is expected to be $300,000 and estimated DLH are expected to be 250,000. Fixed FOH is estimated to be $5,360 per month with $3,000 of that amount being depreciation of factory equipment and building. Like DL, assume that FOH is paid in the month incurred. Vaughan Company FOH Budget 3rd Quarter July August September Total 3rd Quarter Budgeted DLH Variable FOH rate Total Budgeted Variable FOH Total Budgeted Fixed FOH Total Budgeted FOH Less: Depreciation Cash Needed for FOH Total FOH per Budget Budgeted DLH this period Predetermined FOH per DLH 23 6. Now we need to prepare the Ending FG Inventory Budget. 24 25 26 Vaughan Company Ending FG Inventory Budget 3rd Quarter Quantity Cost Total 27 8 9 0 31 -2 Cost Per Unit: Direct Materials Direct Labor FOH Unit Cost 3 4 5 6 7 Ending Inventory in Units Cost Per Unit Ending FG Inventory 8 7. 0 1 2 Now it is time for the Selling and Administrative Budget. It too will be divided into a variable portion and a fixed portion. Assume that variable S&A costs are $3 per unit plus bad debt expense. Further assume that monthly Fixed Costs are as follows: Advertising $20,000. Executive Salaries $50,000, Other $25,000, and Office depreciation is $2,000. S&A are paid in the month incurred. Vaughan Company S&A Budget 3rd Quarter July August September Total 3rd Quarter 0 Budgeted Sales Variable S&A Expenses Budgeted Variable S&A Exp. Budgeted Fixed S&A Expenses: Advertising Executive Salaries Other Depreciation Total Fixed S&A Expenses Total Budgeted S&A Expenses Less: Depreciation Less: Bad Debt Expense Budgeted Cash S&A Expenses B 1 8. From here we go to the cash budget. We need to know cash receipts, cash disbursements, Cash flows/deficit and the financing section. Vaughan's cash guidelines are as follows: They have a line of credit that can be accessed in $1,000 increments at an annual interest rate of 6%. Money will be borrowed on the last day of a given month and paid back on the last day of the month when it can be. Minimum cash balance required by Vaughan is $40,000. The beginning cash balance on July 1 is $40,000. Interest is paid when money is paid back. July August September Vaughan Company Cash Budget 3rd Quarter Beginning Cash Balance Add: Cash Receipts Total Cash Available Less Disbursements Direct Materials Direct Labor FOH S&A Expenses Total Disbursements Cash Balance (Deficit) Borrowings RePayments Interest Ending Cash Balance 9. From here we move on to the Budgeted Income Statement. Vaughan Company Budgeted Income Statement 3rd Quarter July August September Total 3rd Quarter Sales Less: CGS Gross Margin Less: S&A Expenses Net Operating Income Less: Interest Expense Net Income 3. And last but not least, we have the budgeted Balance Sheet! We need to know what our balance sheet looked like on July 1, so here goes: Vaughan Company Balance Sheet 7/1/Year 2XXX Liabilities & SE: A/P (given) $ 1,800 Assets: Cash (given) A/R (given) RM Inventory (2,250 - $2.00) FG Inventory (1,000 * 8.88) Land Building&Equipment Less A/D Total Assets 40,000 104,000 4,500 8,880 25,000 230,000 (45,000) 367,380 Common Stock Retained Earnings Total Liab & SE: $ 250,000 115,580 367,380 Vaughan Company Budgeted Balance Sheet 9/30/Year 2XXX Liabilities & SE: A/P Assets Cash A/R RM Inventory FG Inventory Land Building&Equipment Less A/D Total Assets Common Stock Retained Earnings Total Liab & SE