nnovate Company is a highly-progressive organization that produces Netbook computers.The design of Innovate's system is unique and represents the latest breakthrough in touch-screen portable computers.The company is preparing to build its master budget for the coming year (20XX).The annual budget is segmented into detail for each quarter's activity and for the year in total.The master budget will be based on the following information:

a.Fourth quarter sales from the prior year are 5,500 units.

b.Unit sales by quarter (for 20XX) are projected as follows:

First quarter6,000

Second quarter8,000

Third quarter8,000

Fourth quarter9,000

The selling price is $650 per unit.All sales are on credit.Innovate collects 85 percent of all sales within the quarter in which they are realized; the other 15 percent are collected in the following quarter.Innovate will start recording bad debt expense this year.The company estimates that 1 percent of the balance of accounts receivable will be uncollectedand will make an adjustment entry at the end of the year (it will not affect the cash account for the current year, but it will affect certain income statement and balance sheet accounts).

c. There is no beginning inventory of finished goods.Innovate is planning the following ending finished goods inventories for the quarter:

First quarter1,300 units

Second quarter1,500 units

Third quarter2,000 units

Fourth quarter1,000 units

d.Innovate leases machines used in production.Per terms of the capital lease, the company has the right to use the machines, but must pay maintenance on the machines.At current capacity, Innovate's expense due to leasing will be $650,000 per quarter.The fixed utility cost is $50,000 per quarter and the salaries of factory supervisors and staff will be $300,000 per quarter.

e.Variable overhead consists primarily of machine maintenance and the costs incurred to run the machines.From past experience, Innovate estimates machine maintenance expense to be $1 per direct labor hour (DLH) and the cost of utilities and labor to run the machines is $5 per DLH.Overhead is allocated based on direct labor hours used in production.All overhead expenses are paid for in the quarter incurred.

f.The selling and administrative staff is based in a separate building from where the Netbook computers are produced.Rent expense for the administrative building is $40,000 per month, the fixed portions of telephone and utility expenses averages $20,000 per month, and the fixed fee for technical support is $20,000 every three months.Depreciation expense is $50,000 per quarter.

g.Variable selling and administration expenses consist of billing expenses of $1 per unit sold, sales commissions $7 per unit, and the variable portion of telephone and utility expenses is $2 per unit sold.All selling and administrative expenses are paid for in the quarter incurred.

h.Each Netbook computer unit assembly require five hours of direct labor and three items of direct materials.Workers are paid $10 per hour, and although the items of direct materials are different (case, motherboard, and peripheral package), each item of materials average cost is $80.

i.There are 6,570 items of direct materials in beginning inventory as of January 1, 20XX.At the end of each quarter, Innovate plans to have 20 percent of the direct materials needed for next quarter'sunit sales.Innovate will end the year with the same level of direct materials found in this year's beginning inventory.

j.Innovate buys direct materials on account.One-half of the purchases are paid for in the quarter of acquisition, and the remaining half is paid for in the following quarter.Direct labor wages are paid on the fifteenth and thirtieth of each month.

k.The trial-balance as of December 31, of the prior year is as follows:

_____________________Assets_____________________

Cash$607,000

Inventory525,600

Accounts receivable536,250

Plant and equipment 27,310,950

Total Assets $28,979,800

____________Liabilities and Equity_____________________

Accounts payable$724,800

Capital stock20,197,000

Retained earnings 8,058,000

Total liabilities and equity $28,979,800

Innovate will pay dividends of $50,000 in the first and third quarter.At the end of the fourth quarter, $2 million of equipment will be purchased.

REQUIRED:master budget for Innovate Company for each quarter of 20XX and for the year in total.The following component budgets must be included:

a.Sales budget

b.Production budget

c.Direct materials purchases budget

d.Direct labor budget

e.Overhead budget

f.Selling and administration expense budget

g.Ending finished goods inventory budget

h.Costs of goods sold budget

i.Cash budget

j.Pro forma income statement (using absorption costing)

k.Pro forma balance sheet

Innovate Company

Schedule 1:Sales Budget

For Year Ended December 31, 20XX

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year

Sales in Units

x Unit Price

Total Sales Revenue

Innovate Company

Schedule 2:Production Budget

For Year Ended December 31, 20XX

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year

Sales (in units)

Add: Desired ending inventory

Total needs

Less:Beginning inventory

Required Production (in units)

Innovate Company

Schedule 3:Direct Materials Budget

For Year Ended December 31, 20XX

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year

Production (in units)

x Materials/unit

Production needs

Add: Desired ending inventory

Total needs

Less: Beginning inventory

Required Purchases

x Cost per unit

Cost of Purchases

Innovate Company

Schedule 4:Direct Labor Budget

For Year Ended December 31, 20XX

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year

Production (in units)

x Hours per unit

Hours needed

x Cost per hour

Total Direct Labor Cost

Innovate Company

Schedule 5:Overhead Budget

For Year Ended December 31, 20XX

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year

Budgeted hours

x Variable OH Rate

Total Budgeted Variable OH Cost

Budgeted Fixed OH Cost:

Lease Expense

Utility Expense

Salaries Expense

Total Budgeted Fixed OH Cost

Total OH Cost

Innovate Company

Schedule 6:Selling & Administration Expense Budget

For Year Ended December 31, 20XX

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year

Sales (in units)

x Variable Selling & Admin. Rate

Total Variable S. & A. Expense

Total Fixed S. & A. Expense

Total Selling & Admin.Expense

Innovate Company

Schedule 7:Ending Finished Goods Inventory Budget

For Year Ended December 31, 20XX

Unit cost comparison

Direct materials (3 units @ $80)

Direct labor (5 hours @ $10)

Overhead:

Variable (5 DLH @ $6/DLH)

Fixed (5 DLH @ ?/DLH)

Total unit cost

UnitsCost per unitTotal Amount

Finished Goods:

Innovate Company

Schedule 8:Cost of Goods Sold Budget

For Year Ended December 31, 20XX

Direct materials used (Sch 3)

Direct labor used (Sch 4)

Overhead (Sch 5)

Budgeted manufacturing cost

Add:

Beginning finished goods

Goods available for sale

Less:

Ending finished goods (Sch 7)

Budgeted cost of goods sold

Innovate Company

Cash Budget

For Year Ended December 31, 20XX

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year

Beginning cash bal.

Add Collections:

Credit Sales:

Current quarter

Prior quarter

Total cash available

Less Disbursements:

Direct Materials:

Current quarter

Prior quarter

Direct labor

Overhead

Selling and admin.

Dividends

Equipment

Total cash needs

Ending cash balance

Innovate Company

Pro Forma Income Statement

For Year Ended December 31, 20XX

Sales (Sch 1)

Less:Cost of Goods Sold (Sch 8)

Gross Margin

Less:Selling & Admin expenses (Sch 6)

Bad Debt Expense

Operating income before taxes

Innovate Company

Pro Forma Balance Sheet

At Year Ended December 31, 20XX

Assets:

Cash

Accounts Receivable

Less:Allowance for Doubtful Accounts

Inventory:

Direct Materials

Finished Goods

Plant and equipment

Total Assets

Liabilities and Equity:

Current Liabilities:Accounts Payable

Stockholder's Equity:

Capital Stock

Retained Earnings

Total Liabilities and Equity

Calculations:

Beginning P&E

Add:New Equipment

Less:Depreciation Expense

Ending P&E

Beginning RE

Add:Net Income

Less:Dividends Paid

Ending RE