Operational information Part 2

The Penticton Region was so happy with the expertise that you provided to them last year that they have contacted you to assist them with their budgeting for the upcoming fiscal year.

Below is the information that they have provided respecting their sales forecast for the upcoming fiscal year:

	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Budgeted sales (units)	7,900	7,000	6,000	7,000
Budgeted sales revenue	$474,000	$420,000	$360,000	$420,000

• The region has $19,000 cash on hand at the beginning of the 1st quarter.
• A minimum cash balance of $10,000 is required. The region has an open line of credit to support operational needs. All borrowing is done at the beginning of a month, and all repayments are made at the end of a month, borrowings must be in multiples of $1,000. The annual interest rate is 12%. Interest is paid only at the time of repayment of principal.
• Accounts receivable at the beginning of the 1^st quarter is $32,000 all of which is from sales the previous month. The entire amount will be received in the 1^st quarter.
• Typically, sales are 40% for cash and 60% on credit. Seventy percent (70%) of credit sales are collecting in the quarter that the sale occurs, 30% is collected in the following quarter.
• The beginning finished goods inventory for the first quarter is expected to be 1,580 units. Management desires an ending finished goods inventory in each quarter equal to 20% of the next quarters budgeted sales. The desired ending finished goods inventory for the fourth quarter is 1,740 units.
• The beginning raw materials inventory for the first quarter is budgeted to be 3,520 kilograms.
• Each unit requires two kilograms of raw material that costs $8 per kilogram. Management desires to end each quarter with an inventory of raw materials equaling 20% of the following quarters production needs. The desired ending inventory for the fourth quarter is 3,180 kilograms.
• Management plans to pay for 65% of raw material purchases in the quarter acquired and 35% in the following quarter. The beginning accounts payable related to raw material purchases of $15,220 will be paid in the first quarter.
• Each unit requires 1.2 direct labour-hours. The hourly rate budgeted is $22 per hour.
• Variable manufacturing overhead rate is $1.40 per direct labour-hour.
• Fixed manufacturing overhead is $170,000 per quarter which includes depreciation of $54,000 per quarter.
• Dynamadics expects to purchase and pay for new equipment in the 1^st quarter at a price of $25,000. Management has also identified and plans to sell equipment that no longer supports operations in the 2^nd quarter for a price of $100,000. There are no depreciation considerations for this equipment.
• Monthly operating expenses incurred include:
  • Salaries $12,000
  • Due to timing of payroll for the first quarter, 2/3 of the 1^st quarter salary costs will be paid in the first quarter, the remaining 1/3 will paid the next quarter. There is no payable for salaries outstanding at the beginning of the first quarter.
  • Rent $4,000
  • Amortization of pre-paid insurance $1,200 o Depreciation office equipment $1,500

Requirement #2 (24 marks)

Prepare the following budgets for the upcoming fiscal year.

• production budget
• direct material budget
• schedule of cash disbursements for direct materials
• labour budget
• manufacturing overhead budget
• cash budget for the 1^st and 2^nd quarter (round results to the nearest dollar).

A template has been created in Excel for your use if desired. However some budget information is missing (coloured cells) be sure to input the missing information in the template. If you feel there is not enough or too many rows for your entries, adjust the template as necessary.