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SB Self-Study Problem (Algo)

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Hansell Companys management wants to prepare budgets for one of its products, Duraflex, for July 2022. The firm sells the product for $83 per unit and has the following expected sales (in units) for these months in 2022:

April	May	June	July	August	September
4,700	5,700	5,800	6,600	7,600	7,400

The production process requires 4 pounds of Dura-1000 and 2 pounds of Flexplas. The firms policy is to maintain an ending inventory each month equal to 10% of the following months budgeted sales, but in no case less than 500 units. All materials inventories are to be maintained at 5% of the production needs for the next month, but not to exceed 1,000 pounds. The firm expects all inventories at the end of June to be within the guidelines. The purchases department expects the materials to cost $1.25 per pound and $5.00 per pound for Dura-1000 and Flexplas, respectively.

The production process requires direct labor at two skill levels. The rate for labor at the K102 level is $50 per hour and $20 per hour for the K175 level. The K102 level can process one batch of duraflex per hour; each batch consists of 100 units. The manufacturing of Duraflex also requires one-tenth of an hour of K175 workers time for each unit manufactured.

Self-Study Problem 10-2 (Algo) Cash Budget and Budgeted Income Statement

Hansell Company expects its trial balance on June 30 to be as follows:

HANSELL COMPANY
Budgeted Trial Balance
June 30, 2022
	Debit	Credit
Cash	$ 48,000
Accounts receivable	96,000
Allowance for bad debts		$ 4,200
Inventory	30,100
Plant, property, and equipment	782,600
Accumulated depreciation		385,300
Accounts payable		114,400
Wages and salaries payable		29,000
Note payable		241,700
Stockholders equity		182,100
Total	$ 956,700	$ 956,700

Typically, cash sales for Hansell represent 20% of sales while credit sales represent 80%. Credit sales terms by the company are 2/10, n/30. Hansell bills customers on the first day of the month following the month of sale. Experience has shown that 60% of the company's billings will be collected within the discount period, 25% by the end of the month after sales, 10% by the end of the second month after the sale, and 5% will ultimately be uncollectible. The company writes off uncollectible accounts after 12 months.

The purchase terms for materials are 2/15, n/60. Hansell makes all payments within the discount period. Experience has shown that 80% of the purchases are paid in the month of the purchase and the remainder are paid in the month immediately following. In June 2022, the firm budgeted purchases of $30,100 for Dura-1000 and $26,400 for Flexplas.

Variable manufacturing overhead is budgeted at $1,400 per batch (of 100 units) plus $80 per direct labor hour. In addition to variable overhead, the firm has a monthly fixed factory overhead of $60,200, of which $30,200 is depreciation expense. The firm pays all manufacturing labor and factory overhead when incurred.

Total budgeted marketing, distribution, customer service, and administrative costs for 2022 are $2,555,000. Of this amount, $1,450,000 is considered fixed and includes depreciation expense of $145,000. The remainder varies with sales. The budgeted total sales for 2022 are $4 million. All marketing and administrative costs are paid in the month incurred.

Management desires to maintain an end-of-month minimum cash balance of $48,000. The firm has an agreement with a local bank to borrow its short-term needs in multiples of $1,000 up to $100,000 at an annual interest rate of 12%. Borrowings are assumed to occur at the end of the month. Bank borrowing at July 1 is $0.

Required:

Using the information presented above:

1. Prepare the cash budget for July 2022.

2. Prepare the budgeted income statement for July 2022. (Assume that the company uses a LIFO cost-flow assumption.)