MINNESOTA CHAIRS, INC.- OPERATING BUDGET

Minnesota Chairs Inc., produces chairs. Unit sales last year, ending December 31, were:

1st Quarter		6,000
2nd Quarter		10,000
3rd Quarter		12,000
4th Quarter		8,000

• Unit sales are expected to increase 30% this coming year over the same quarter last year.
• Average sales price per chair will remain at $300.
• Assume finished goods inventory is maintained at a level equal to 10 percent of the next quarter's sales.
• Finished goods inventory at the end of the fourth quarter budget period is estimated to be 1,900 units.

1. Prepare and calculate a sales budget, (Hint: be sure to increase last year's unit sales by 30 percent.)

1. Prepare and calculate a production budget

NOW ASSUME that the company expects to produce 8,320 units in Q1, 13,260 units in Q2, 15,080 units in Q3, and 11,260 units in Q4.

Manufacturing standards for one chair are 8 yards of material (wood), at a cost of $4 per yard.

Management prefers to maintain ending raw materials inventory equal to 15% of next quarter's materials needed in production. Raw materials inventory at the end of Q4 budget period is estimated to be 14,000 yards.

With regards to direct labor, each unit of product requires 3 labor hours at a cost of $16 per hour.

1. Prepare and calculate a direct materials purchases budget for the company.
2. Prepare and calculate a direct labor budget for the company.

NOW ASSUME the same budgeted production as above (8,320 units in Q1, 13,260 units in Q2, 15,080 units in Q3, and 11,260 units in Q4).

1. Variable overhead is budgeted at $7.10 per unit as follows: Indirect materials, $ .20/unit; Indirect labor, $ 4.20/unit; Other, $ 2.70/unit.

Fixed overhead is planned to consist salaries, rent & depreciation of $100,000, $30,000 and $44,908 respectively per quarter.

Calculate and Prepare a manufacturing overhead budget for the company.

NOW ASSUME that variable selling expenses amount to $10 per unit sold. Fixed selling expenses are budgeted at $100,000 per quarter.Administrative expenses are all fixed and are budgeted at $25,000 per quarter

1. Calculate and Prepare a Selling & Administrative Budget.

EXTRA QUESTIONS:

1. In the overhead budget, why do you think we subtracted depreciation?

1. According to Generally Accepted Accounting Principles, what is the "unit cost"?

1. ASSUME that the company's budgeted sales for the year is 47,920 units. What is the budgeted "Cost of Goods Sold" for the year?

1. What is the "gross margin" for the year?

1. NOW ASSUME that the budgeted selling expenses for the year were $879,200 and budgeted administrative expenses were $100,000. What is the "operating income" for the year?

1. Why did we use the term "expenses" in #11 and NOT "costs".