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PREPARATION OF OPERATING AND FINANCIAL BUDGETS Donahue Company is preparing budgets for the third quarter ending Sept 30, 2019. Budgeted sales for the next five months are: July 20,159 units Aug 50,144 units Sept 30,141 units @ Oct 25,166 units Nov 15,000 units The selling price is $15 per unit. All sales are on account. Donahue's collection pattern is 60% collected in the month of sale and remaining amount in the month following sale. The June 30 Accounts Receivable balance of $50,000 will be collected in full. The management at Donahue Company wants ending Finished Goods Inventory to be equal to 25% of the following month's budgeted sales in units. At Donahue Company, five pounds of material are required per unit of product. Management wants materials on hand at the end of each month equal to 15% of the following month's production. Material cost is $0.50 per pound 30% of a month's purchases is paid for in the month of purchase and the remainder is paid in the following month. The June 30 Accounts Payable balance is $20,000. At Donahue, each unit of product requires 0.06 hours (3.6 minutes) of direct labor. The company has a "no layoff" policy and in exchange for the "no layoff" policy, workers agree to a wage rate of $15 per hour regardless of the hours worked (no overtime pay). For the next three months, the direct labor workforce will be paid for a minimum of 2,000 hours per month. At Donahue, manufacturing overhead is applied to units of product on the basis of direct labor hours. The variable manufacturing overhead rate is $25 per direct labor hour. Fixed manufacturing overhead is $40,000 per month and includes $10,000 of non-cash costs. At Donahue, the selling and administrative expenses budget is divided into variable and fixed components. The variable selling and administrative expenses are $0.55 per unit sold. Fixed selling and administrative expenses are $60,000 per month. The fixed selling and administrative expenses include $15,000 in costs that are not cash outflows of the current month. The company: Has a July 1 cash balance of $55,000 Maintains a minimum cash balance of $35,000 Borrows on the first day of the month and repays loans on the last day of the quarter Maintains a 12% open line of credit for $95,000 Pays a cash dividend of $45,000 in Aug Cash purchases of equipment, $155,200 in July and $54,800 in Sept, respectively Donahue reported the following account balances prior to preparing its budgeted financial statements: Land - $65,000 Equipment - $180,000 Ordinary shares - $195,000 Retained earnings - $X *This Retained earnings figure will be the amount needed to balance off your balance sheet on June 30th i.e. the closing balances on June 30th before you step into the third quarter. With the information provided, assist Donahue Company in setting up their 'Master Budget'. To do this, you will need to prepare the following budgets for the third quarter of the year: 1. Sales Budget 2. Expected Cash Collections 3. Production Budget 4. Direct Materials Budget 5. Expected Cash Disbursements for Materials 6. Direct Labour Budget 7. Manufacturing Overhead Budget 8. Ending Finished Goods Inventory Budget 9. Selling & Administration Expenses Budget 10. Cash Budget 11. Budgeted Income Statement 12. Budgeted Balance Sheet *For the balance sheet as at Sept 30th, there will be a difference between the final totals. This is due to calculations based on rounded off units. To balance the totals, simply close off this difference to the Retained Earnings account
