Vaughan Company makes AMAZING SUPER DUPER Widgets. Management is now preparing detailed budgets for the third quarter, July through September, and has assembled the following information to assist in budget preparation:

1. Sales Budget

The marketing department has estimated sales as follows for the remainder of the year: (Actual sales in June were 6,000 units)

July	4,000		October	4,000
August	20,000		November	6,000
September	12,000		December	8,000

The selling price of a SUPER DUPER widget is $80 and all sales are on account.

Based on past experience, sales are collected in the following pattern:

• 20% in the month of sale
• 75% in month following the sale
• 5% are never collected (uncollectible)

Vaughan Company

Sales Budget

2. Production Budget

The company maintains a finished goods inventory equal to 10% of the following month's sales. The inventory of finished goods on July 1 is as it should be.

Vaughan Company
Production Budget				Total
3rd Quarter	July	August	September	3rd Quarter
Budgeted Sales in Units	4000	20000	12000	36000
Add: Desired Ending Inventory	2000	1200	400	400
Total Needs	6000	21200	12400	36400
Less: Beginning Inventory	-400	-2000	-1200	-400
Required Production	5600	19200	11200	36000

3. Raw Materials Purchasing Budget

Each unit of SUPER DUPER widget requires 0.6 pounds of WHAM compound. To prevent shortages, the company would like the inventory of WHAM compound on hand at the end of each month to equal 40% of the following month's production needs.

The inventory on July 1 is 1,344 pounds.

WHAM compound costs $12.00 per pound and Vaughan pays for 80% of its purchases in the month of purchase; the remainder is paid in the following month. $41,184 of WHAM compound was purchased in June and 80% was paid for in June.

Vaughan Company

RM Purchasing Budget

	3rd Quarter	July	August	September	3rd Quarter
	Required Production	5600	19200	11200	36000
	RM per Unit	0.6	0.6	0.6	0.6
	Production Needs	3360	11520	6720	21600
	Add: Desired Ending Inventory	4608	2688	1008	1008
	Total Needs	7968	14208	7728	22608
	Less: Beginning Inventory	-1344	-4608	-2688	-1344
	RM to be Purchased	6624	9600	5040	21264
	Cost of RM per pound	*12	*12	*12	*12
	Cost of RM to be Purchased	79488	115200	60480	255168
					3
	Cash Disbursements for RM
	June's RM Purchases	8237			8237
	July's RM Purchases	63590	15898		79488
	August's RM Purchases		92160	23040	115200
	September's RM Purchases			48384	48384
	Total Disbursements	71827	108058	71424	284256

4. The next Budget is the Direct Labor Budget. Let's assume that each unit takes 2 DLH to make and each DLH costs $15. Let's further assume that labor is paid in the month incurred.

Vaughan Company

DL Budget				Total
3rd Quarter	July	August	September	3rd Quarter
Budgeted Production in Units	5,600	19,200	11,200	36,000
DLH per Unit	2	2	2
Total DLH needed	11,200	38,400	22,400	72,000
Cost per DLH	15	15	15
Total Direct Labor Cost	$168,000	$576,000	$336,000	$1,080,000

5. Next we will prepare our FOH budget. FOH is applied based on DLH. Estimated variable FOH is expected to be $500,000 and estimated DLH are expected to be 250,000. Fixed FOH is estimated to be $7,200 per month with $5,000 of that amount being depreciation of factory equipment and building. Like DL, assume that FOH is paid in the month incurred.

Vaughan Company
FOH Budget				Total
3rd Quarter	July	August	September	3rd Quarter
Budgeted DLH	11,200	38,400	22,400	72,000
Variable FOH rate	$ 2	$ 2	$ 2	$ 2
Total Budgeted Variable FOH	22,400	76,800	44,800	144,000
Total Budgeted Fixed FOH	7,200	7,200	7,200	21,600
Total Budgeted FOH	$29,600	$84,000	$52,000	$165,600
Less: Depreciation	(5,000)	(5,000)	(5,000)	(15,000)
Cash Needed for FOH	$ 24,600	$ 79,000	$ 47,000	$ 150,600
				3
Total FOH per Budget				$ 165,600
Budgeted DLH this period				72,000
Predetermined FOH per DLH				$ 2.30

6. Now we need to prepare the Ending FG Inventory Budget.

Vaughan Company
Ending FG Inventory Budget
3rd Quarter	Quantity		Cost	Total
Cost Per Unit:
Direct Materials	0.6		$12.00	$7.20
Direct Labor	2		$15.00	$30.00
FOH	2		$2.38	$4.76
Unit Cost				$41.96
Ending Inventory in Units				400
Cost Per Unit				$41.96
Ending FG Inventory				$ 16,784

7. Now it is time for the Selling and Administrative Budget. It too will be divided into a variable portion and a fixed portion. Assume that variable S&A costs are $3 per unit plus bad debt expense. Further assume that monthly Fixed Costs are as follows: Advertising $4,000, Executive Salaries $20,000, Other $5,000, and Office depreciation is $3,000. S&A are paid in the month incurred.

Vaughan Company
S&A Budget				Total
3rd Quarter	July	August	September	3rd Quarter
Budgeted Sales	4,000	20,000	12,000	36,000
Variable S&A Expenses	3	3	3	3
Budgeted Variable S&A Exp.	12,000	60,000	36,000	108,000
Budgeted Fixed S&A Expenses:
Advertising	4,000	4,000	4,000	12,000
Executive Salaries	20,000	20,000	20,000	60,000
Other	5,000	5,000	5,000	15,000
Depreciation	3,000	3,000	3,000	9,000
Total Fixed S&A Expenses	32,000	32,000	32,000	96,000
Total Budgeted S&A Expenses	44,000	92,000	68,000	204,000
Less: Depreciation	(3,000)	(3,000)	(3,000)	(9,000)
Less: Bad Debt Expense	(5,000)	(5,000)	(5,000)	(15,000)
Budgeted Cash S&A Expenses	$ 36,000	$ 84,000	$ 60,000	$ 180,000

8. From here we go to the cash budget. We need to know cash receipts, cash disbursements, Cash flows/deficit, and the financing section. Vaughan's cash guidelines are as follows: They have a line of credit that can be accessed in $1,000 increments at an annual interest rate of 18%. Money will be borrowed on the last day of a given month and paid back on the last day of the month when it can be. Minimum cash balance required by Vaughan is $50,000. The beginning cash balance on July 1 is $50,000. Interest is paid when money is paid back.

Vaughan Company
Cash Budget
3rd Quarter	July	August	September
Beginning Cash Balance	$ 50,000	$ 169,573	$ (123,665)
Add:			3
Cash Receipts	424,000	560,000	1,392,000
Total Cash Available	474,000	729,573	1,268,338
Less: Disbursements
Direct Materials	71,827	108,058	73,267
Direct Labor	168,000	576,000	336,000
FOH	29,600	84,000	52,000
S&A Expenses	36,000	84,000	60,000
Total Disbursements	305,427	852,058	521,267
Cash Balance (Deficit)	168,573	(122,485)	747,071
Borrowings	1,000
RePayments		1,000
Interest		180
Ending Cash Balance	$ 169,573	$ (123,665)	$ 747,071

9. From here we move on to the Budgeted Income Statement.

Vaughan Company
Budgeted Income Statement				Total
3rd Quarter	July	August	September	3rd Quarter
Sales	$ 320,000	$ 1,600,000	$ 960,000	$ 2,880,000
Less: CGS	(167,840)	(839,200)	(503,520)	(1,510,560)
Gross Margin	152,160	760,800	456,480	1,369,440
Less: S&A Expenses	(44,000)	(92,000)	(68,000)	(204,000)
Net Operating Income	108,160	668,800	388,480	1,165,440
Less: Interest Expense		(180)		(180)
Net Income	$ 108,160	$ 668,620	$ 388,480	$ 1,165,260