Problem 3: Budgets

Millar Company manufactures and sells a product that has seasonal variations in demand, with peak sales coming in the third quarter. The following information concerns operations for Year 2- the coming year- and for the first two quarters of Year 3.

a. The companys single product sells for $8 per unit. Budgeted sales in units for the next six quarters are as follows:

	Year 2 (Quarter)	Year 3 (Quarter)
	1	2	3	4	1	2
Budgeted sales in units	40,000	60,000	100,000	50,000	70,000	80,000

b.Sales are collected in the following pattern: 75% in the quarter the sales are made, and the remaining 25% in the following quarter. On January 1, Year 2, the companys balance sheet showed $65,000 in accounts receivable, all of which will be collected in the first quarter of the year. Bad debts are negligible and can be ignored.

c.The company desires an ending inventory of finished units on hand at the end of each quarter equal to 30% of the budgeted sales for the next quarter. On December 31, Year 1, the company had 12,000 units on hand.

d.Five pounds of raw materials are required to complete one unit of product. The company requires ending inventory of raw materials on hand at the end of each quarter equal to 10% of the production needs of the following quarter. On December 31, Year 1, the company had 23,000 pounds of raw materials on hand.

e.The raw material costs $.80 per pound. Purchases of raw materials are paid for in the following pattern: 60% paid in the quarter the purchases are made, and the remaining 40% paid in the following quarter. On January 1, Year 2, the companys balance sheet showed $81,500 in accounts payable for raw material purchases, all of which Hill be paid for in the first quarter of the year.

Required: Prepare the following budgets and schedules for the year:

Schedule 1: Sales budget

	Year 2	Year
	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
Units
Unit price
Total Sales

Schedule 2: Expected cash collections

	Year 2	Year
	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
AR, beginning balance
First quarter sales
Second quarter sales
Third quarter sales
Fourth quarter sales
Total cash collections

Schedule 3: Production budget

	Year 2	Year
	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
Budgeted sales (units)
Desired Ending inventory
Total Needs
Less: Beginning Inventory
Required Production

Schedule 4: Direct materials budget

	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
Required Production (units)
Material needed per unit (pound)
Production needs (pounds)
Desired ending inventory
Total needs (pounds)
Less: Beginning inventory
Purchases (pounds)

Schedule 5: Expected cash payments:

	Year 2	Year
	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Year
Cost of raw materials to be purchased at $.80 per pound
AP, beginning balance
First quarter:
Second quarter:
Third quarter:
Fourth quarter:
Total cash disbursements