Part A

TO Industries prepares monthly cash budgets. The following budget information is available for July and August 2017:

	July	August
Sales	$700,000	$800,000
Direct material purchases	220,000	240,000
Direct labor	200,000	230,000
Manufacturing overhead	120,000	150,000
Selling and administrative expenses	150,000	160,000

All sales are credit sales. The company expects to collect 70% from customers in the month of the sale and the remaining 30% in first month following the sale. The company purchases direct materials on account. The company pays for 50% of the purchases in the month of the purchases and the remaining 50% in the first month following the purchase. Direct labor, manufacturing overhead, and selling and administrative expenses are paid in cash in the month incurred.

Additional information:

June 2017 credit sales were $580,000

June 2017 purchases of direct materials were $180,000

The companys cash balance on July 1, 2017 is expected to be $100,000

The company wants to maintain a minimum cash balance of $80,000 and has a line of credit in the amount of 1,000,000 available to borrow if the budgeted cash balance falls below that level

Questions: (Please show calculations)

1. Prepare a schedule of cash collections from credit sales for July and August 2017.

2. Prepare a schedule of cash disbursements for direct material purchases for July and August 2017.

3. Prepare a cash budget for July and August 2017 in columnar format.

Part B

Watson, Inc. uses budgets in an effort to control costs. The June 2017 budget report for the companys manufacturing operations is as follows:

Watson, Inc.

Budget Report

Manufacturing Operations

For the Month Ended June 30, 2017

Manufacturing Costs	Budget	Actual	Difference	Favorable (F) Unfavorable (U)
Variable costs
Direct materials	$ 96,000	$ 94,000	$ 2,000	F
Direct labor	108,000	102,000	6,000	F
Indirect materials	48,000	49,000	1,000	U
Indirect labor	36,000	38,000	2,000	U
Repairs	12,000	13,000	1,000	U
Utilities	30,000	28,000	2,000	F
Total variable costs	330,000	324,000	6,000	F
Fixed costs
Rent	24,000	24,000	0
Supervisor salary	34,000	34,000	0
Depreciation	12,000	12,000	0
Total fixed costs	70,000	70,000	0
Total costs	400,000	394,000	6,000	F

The monthly budget was based on production of 120,000 units per month (1,440,000 units per year). The manufacturing manager is proud of the fact that the report reflected a favorable variance and expects that he will be rewarded for spending less than budget. The controller of the company was not happy with the June results because there were only 110,000 units produced.

Questions: (Please show calculations)

1. Prepare a performance report for June that includes a flexible budget.

2. What conclusions would you share with the controller and the manufacturing manager about the manufacturing operations for the month of June?