Unique Sinks Master Budget Unique Sinks is a family-owned manufacturing business specializing in sinks; it does not produce any of the faucets or plumbing needed for installation. The company focuses on the new housing market, which has been quite strong for over ten years. Unique Sinks core competencies include a relatively low- cost but high-quality manufacturing process for sinks. During the last several years, demand for large houses with three to four bathrooms was strong. And homebuyers were particularly interested in sinks that were distinctive yet utilitarian. Jordan Kovacik, the companys owner, is beginning to plan for the next year. First, he reviews past performance, reads industry publications, and discusses the new housing market with several contractors. Although some economists have warned of an impending decline in the housing market, Jordans customers believe that the boom in the new housing construction is far from over. Jordan concludes that high sales volumes are likely to continue. He also decides that no changes in vision or strategy will be needed for the next year. As in prior years, Jordan will submit budgeted financial statements to his bank as part of his annual line-of-credit loan application. He also plans to compare quarterly results to budgeted revenues and costs so that he can monitor whether operations are under control. Jordan provides the companys accountant, Ana Fernandez, with the following housing start estimates and asks her to begin developing a master budget for the next period. Quarter Housing Starts Average Sink Per House First 6,000 3.00 Second 24,000 2.90 Third 12,000 3.00 Fourth 4,000 3.10 Ana prepared the revenue budget first because she needs information from the volume of sink sales to develop the production and variable cost budgets. She calls several developers regarding the number of sinks they expect to install in each house. After speaking with several developers, she decides to budget 35% of the total estimated sink sales (units) for production, based on prior year contracts. She also decides to increase their selling price from $70 to $85 since they have not increased their price in 3 years.

From this years accounting records, Ana expects first quarter beginning inventory to consist of 600 units. She knows that the sales manager wants to end each quarter with inventory levels the 10% of the following quarters sales to provide a cushion for increases in demand. According to Jordan, material and labor requirements for next year should be about the same as in the past. From prior experience, Ana assumes that each sink will require about 40 pounds of material and 3 hours of direct labor. Ana expects that 20,000 pounds of material will be on hand at the beginning of the year. She knows that Jordan prefers to have 10% of the next quarters production on hand at the end of each quarter. Given the inventory and materials usage requirements, she estimates the quantity of direct materials that will be purchases each quarter. Ana calls the direct materials vendor, who tells her that the price should remain at $0.50 per pound over the next six months. She decides to budget $0.50 per pound for the entire year. She next examines payroll records and considers possible changes in labor rates. She expects to pay $12 per hour for labor throughout the next year. The accounting system includes four types of manufacturing overhead costs; indirect labor, supplies, depreciation, and other (everything else). Ana believes that cost behavior will remain the same as in past years. The only fixed overhead production cost is depreciation, which is calculated using the straight-line method. Because Jordan does not plan to purchase any new equipment next year, she estimates that depreciation will remain at $9,000 per quarter. Ana assumes that indirect labor, supplies, and other costs are strictly variable. The costs are as follows: Variable Manufacturing Cost Per Direct Labor Hour Indirect Labor $0.3000 Supplies 0.2667 Other 0.1000 Total $0.6667 Ana combines the variable and fixed costs to create the manufacturing overhead budget. Now that Ana has developed budgets for all of the production costs, she can complete a budget for the cost of goods manufactured and sold. Based on an examination of current year accounting records, she expects the beginning inventory of finished goods to consist of 600 units at a cost per unit of $50.4167, or $30,250. The company usually has no work in process at the end of each quarter. The first- in, first-out inventory cost flow assumption is used for financial reporting, so ending inventory is valued at the current years production cost per unit.

Ana reviews past records for selling and administration and considers possible changes in those costs. She estimates that depreciation should be $2,400 per quarter, salaries will be $40,000 per quarter and commissions will remain at 10% of revenues. Based on prior experience, she estimates bad debt expense at 2% of revenues. Other miscellaneous costs will be budgeted at amounts similar to the last year, with a small increment for inflation. Other Miscellaneous Costs First Quarter $8,300 Second Quarter $7,400 Third Quarter $9,200 Fourth Quarter $7,300 Based on past experience, Ana expects Unique Sinks to be short of cash during some quarters. More houses are started in the spring and summer, so demand is high in the second and third quarters and is much lower in the first and fourth quarters. She develops a cash receipts and disbursements budget to plan for the companys borrowing needs. After reviewing the current years cash collection patterns, Ana estimates that 66% of each quarters sales will be received in cash during the quarter and 32% will be received during the following quarter. She also estimates that $110,622 ($118,000 less allowance for uncollectible accounts of $7,378) of the current years sales will be collected during the first quarter. She uses this information combined with amounts from the revenue budget to estimate the cash collections during each quarter. Employees are paid on the 15th and last day of each month, so cash is required for labor costs incurred during each quarter. The companys materials vendor requires payment within 30 days, so Ana estimates that one-third of each quarters purchases is paid during the following quarter. She also estimates that $72,370 of the prior year purchases will be paid during the first quarter. All other costs are paid during the quarter incurred except for income taxes. The companys tax accountant told Ana that a final payment on prior year taxes of approximately $7,000 will be due during the first quarter, and the company should make estimated payments of $40,000 each during the 4th, 6th, 9th and 12th months of the year. According the Jordan, the company will probably pay a dividend of about $370,000 during the fourth quarter. Ana combines the preceding information with the planned direct material and labor cost information, manufacturing overhead, and selling and administration date to develop the cash receipts and disbursements budget. Ana estimates that the company will begin next year with a cash balance of $45,820, which will not be sufficient to cover the excess of budgeted disbursements over receipts during the first part of the year. In addition, Jordan wants to maintain a cash balance of at least $30,000 at the end of each quarter.

Thus, Ana calculates the amounts of borrowing needed during the first part of the year, expected repayments during the latter part of the year, and interest costs. Ana believes that the annual interest rate will be 8%, or 2% per quarter. To be conservative, Ana does not budget any earnings on cash balances, even though Jordan sometimes invests excess cash in short-term securities. Ana summarizes this information in the short term financing budget. Ana uses the previous budget for revenue, cost of goods sold, selling and administration costs, interest expense on short-term financing, and an estimated income tax rate of 30% to prepare the budgeted income statement. In addition, she combines estimated beginning retained earnings of $165,322 with budgeted net income and the expected dividend payment to estimate ending retained earnings. To prepare the budgeted balance sheet, Ana begins with an estimated beginning balance sheet for next year based on the most recent information for current period. She then estimated next years ending balance sheet amounts based on the assumed transactions in the preceding budgets. Once Ana completes the master budget, she prints the various budgets for Jordans review and approval. He is pleased that the company should have no debt at the end of the year, be able to pay a $370,000 dividend, and still have a healthy cash balance of over $50,000. Ana has worked for him for many years, so he is confident that her estimates reflect current business conditions. Given these strong results, Jordan wonder whether he should reduce the dividend and use the extra cash to invest in some new manufacturing equipment that could reduce spoilage rates and labor costs. He asks Ana to develop an analysis of the costs and benefits of the potential purchase before he makes a final decision. Otherwise, he tells Ana that he approves the budget.

Ana has provided the balance sheet for 2018 to use for reference as follows: Unique Sinks Balance Sheet 31-Dec-18 Liabilities Accounts Payable $ 72,370 Income Taxes Payable 7,000 Total Liabilities Stockholders Equity $196,692 Common Stock $ 750,000 Retained Earnings 165,322 Total Equity $994,692 Total Liabilites and Equity Assets Cash $ 45,820 Raw Materials Inventory 10,000 Finished Goods Inventroy 30,250 Account Receivables, net 110,622 Total Current Assets Land, Building and Equipment $912,000 Accumulated Dep. (114,000) Total Assets $ 79,370 $915,322 $994,692 1. Develop the Revenue Budget