Understanding Relationships, Master Budget, Comprehensive Review

Optima Company is a high-technology organization that produces a mass-storage system. The design of Optima's system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (20X1). The budget will detail each quarter's activity and the activity for the year in total. The master budget will be based on the following information:

Fourth-quarter sales for 20X0 are 55,000 units.

Unit sales by quarter (for 20X1) are projected as follows:

First quarter	65,000
Second quarter	70,000
Third quarter	75,000
Fourth quarter	90,000

The selling price is $400 per unit. All sales are credit sales. Optima collects 85% of all sales within the quarter in which they are realized; the other 15% is collected in the following quarter. There are no bad debts.There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter:

First quarter	13,000 units
Second quarter	15,000 units
Third quarter	20,000 units
Fourth quarter	10,000 units

Each mass-storage unit uses 5 hours of direct labor and three units of direct materials. Laborers are paid $10 per hour, and one unit of direct materials costs $80.

There are 65,700 units of direct materials in beginning inventory as of January 1, 20X1. At the end of each quarter, Optima plans to have 30% of the direct materials needed for next quarter's unit sales. Optima will end the year with the same amount of direct materials found in this year's beginning inventory.

Optima buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition, and the remaining half are paid for in the following quarter. Wages and salaries are paid on the 15th and 30th of each month.

Fixed overhead totals $1 million each quarter. Of this total, $350,000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year's total fixed overhead by the year's budgeted production in units.

Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred.

Fixed selling and administrative expenses total $250,000 per quarter, including $50,000 depreciation.

Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.

The balance sheet as of December 31, 20X0, is as follows:

Assets
Cash			$ 250,000
Direct materials inventory			5,256,000
Accounts receivable			3,300,000
Plant and equipment, net			33,500,000
Total assets			$42,306,000

Liabilities and Stockholders Equity
Accounts payable			$ 7,248,000*
Capital stock			27,000,000
Retained earnings			8,058,000
Total liabilities and stockholders equity			$42,306,000
* For purchase of direct materials only.

Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2 million of equipment will be purchased.

REQUIRED

1) Direct Materials Purchases Budget (in thousands, except for per unit/hour data) If required, round answers to one decimal place.

qtr 1

qtr2

qtr 3

qtr 4

total

production

78

72

80

80

310

Materials/unit

3

3

3

3

3

Production needs

234

216

240

240

930

Desired ending inventory

Total needs

Less: Beginning inventory

Purchases

Cost per unit

80

80

80

80

80

Purchase cost

74,400

2) Cost of goods sold budget (Note: Assume that there is no change in work-in-process inventories.) Enter amounts in full, not in thousands. If an amount is zero, enter "0".

Optima Company Cost of Goods Sold Budget For the Year Ending December 31, 20X1

direct materials used
direct labor ussed	15,500,000
overhead	13,300,000
Budgeted manufacturing costs
Add: Beginning finished goods inventory	0
Cost of goods available for sale
Less: Ending finished goods inventory	3,329,000
Budgeted cost of goods sold

3)Cash Budget (in thousands)

qtr 1

qtr 2

qtr 3

qtr 4

total

Beginning cash bal.

250

250

Credit sales:
Currentquarter

prior quarter

cash available

Less disbursements:
Direct materials:
Current quarter

prior quarter

direct labor

overhead

selling and admin.

dividends

euipment

total cash needs

0

0

0

ending cash

4) Pro forma income statement (using absorption costing). Enter amounts in full, not in thousands.(Note: Ignore income taxes.)

sales	120,000,000
less: cost of goods sold
gross margin
less: selling and adm expenses	4,000,000
income before taxes

5). Pro forma balance sheet. Enter amounts in full, not in thousands. List all assets and liabilities in order of liquidity. (Note: Ignore income taxes.)

cash
accounts receivable	5,400,000
DIRECT MATERIALS INVENTORY	5,256,000
finished goods inventory
plant equipment	33,900,000
total assest
Liabilities and stockholders' equity Accounts payble
capital stock	27,000,000
retained earnings
Total liabilities and stockholders' equity