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 August September 10,000 7,000 15,000 October November December 5,000 6,000 8,000 The selling price of a SUPER DUPER widget is $50 and all sales are on account. Based on past experience, sales are collected in the following pattern: 60% in the month of sale 32% in month following the sale 8% are never collected (uncollectible) Vaughan Company Sales Budget 3rd Quarter Total 3rd Quarter July August September Sales in Units Selling Price per Unit Total Sales in $ 10,000 50 500,000 7,000 50 350,000 15,000 50 750,000 32,000 50 1,600,000 Cash Collections June's Cash Collections July's Cash Collections August's Cash Collections September's Cash Collections Total Cash Collections 96,000 30,000 160,000 210,000 112,000 450,000 $ 396,000$ 370,000 $ 562,000 $ 96,000 460,000 322,000 450,000 13,280,000 2. Production Budget The company maintains a finished goods inventory equal to 20% of the following month's sales. The inventory of finished goods on July 1 is as it should be. Vaughan Company Production Budget 3rd Quarter Total 3rd Quarter July August September Budgeted Sales in Units Add: Desired Ending Inventory Total Needs Less: Beginning Inventory Required Production 10,000 1,400 11,400 2,000 9,400 7,000 3,000 10,000 1,400 8,600 15,000 1,000 16,000 3,000 13,000 32,000 5,400 37,400 6,400 31,000 3. Raw Materials Purchasing Budget Each unit of SUPER DUPER widget requires 5 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 30% of the following month's production needs. The inventory on July 1 is 14,100 pounds. WHAM compound costs $0.70 per pound and Vaughan pays for 40% of its purchases in the month of purchase; the remainder is paid in the following month. $38,080 of WHAM compound was purchased in June and 40% was paid for in June. Vaughan Company RM Purchasing Budget Total 3rd Quarter August September 3rd Quarter July 9,400 5 13,000 5 157,000 5 Required Production RM per Unit Production Needs Add: Desired Ending Inventory Total Needs Less: Beginning Inventory RM to be Purchased Cost of RM per pound Cost of RM to be purchased 47,000 12,900 59,900 14,100 45,800 1 32,060 $ 8,600 5 43,000 19,500 62,500 12,900 49,600 1 34,720 $ 65,000 7,800 72,800 19,500 53,300 1 37,310 $ 155,000 7,800 162,800 14,100 148,700 1 104,090 $ Cash Disbursements for RM 22,848 12,824 June's RM Purchases July's RM Purchases August's RM Purchases September's RM Purchases Total Disbursements 19,236 13,888 20,832 14,924 35,756 $ 22,828 32,060 34,720 14,924 104,552 $ 35,672 $ 33,124 $ $ $ D 104,552 4. Total Disbursements 35,672 33,124 35,756 $ The next Budget is the Direct Labor Budget. Let's assume that each unit takes 1.4 DLH to make and each DLH costs $16. Let's further assume that labor is paid in the month incurred. Vaughan Company DL Budget 3rd Quarter Total July August September 3rd Quarter 9,400 1 8,600 1 13,000 1 31,000 1 Budgeted Production in Units DLH per Unit Total DLH needed Cost per DLH Total Direct Labor Cost 13,160 16 12,040 16 18,200 16 43,400 16 210,560 192,640 291,200 691,200 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 400,000. Fixed FOH is estimated to be $10,850 per month with $4,000 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 3rd Quarter Total 3rd Quarter July August September 13,160 1 12,040 1 $ $ $ Budgeted DLH Variable FOH rate Total Budgeted Variable FOH Total Budgeted Fixed FOH Total Budgeted FOH Less: Depreciation Cash Needed for FOH 18,424 10,850 29,274 4,000 25,274 $ 16,856 10,850 27,706 4,000 23,706 $ 18,200 1 $ 25,480 10,850 36,330 4,000 32,330 $ 43,400 1 60,760 10,850 93,310 4,000 81,310 $ Total FOH per Budget Budgeted DLH this period Predetermined FOH per DLH 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 Direct Labor FOH Unit Cost Ending Inventory in Units Cost Per Unit Ending FG Inventory 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 $2 per unit plus bad debt expense. Further assume that monthly Fixed Costs are as follows: Advertising $28,000, Executive Salaries $70,000, Other $10,000, and Office depreciation is $3,000. S&A are paid in the month incurred. Vaughan Company S&A Budget 3rd Quarter Total July August September 3rd Quarter Budgeted Sales Variable S&A Expenses Budgeted Variable S&A Exp. Budgeted Fixed S&A Expenses: Advertising Executive Salaries Other Depreciation Total Fixed S&A Expenses Total Budgeted S&A Expenses Less: Depreciation Less: Bad Debt Expense |Budgeted Cash S&A Expenses 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 15%. 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. a Vaughan Company Cash Budget 3rd Quarter July August September Beginning Cash Balance Add: Cash Receipts Total Cash Available Less: Disbursements Direct Materials Direct Labor FOH S&A Expenses Total Disbursements Cash Balance (Deficit) Borrowings RePayments Interest Ending Cash Balance 9. From here we move on to the Budgeted Income Statement. Vaughan Company Budgeted Income Statement 3rd Quarter Total 3rd Quarter July August September Sales Less: CGS Gross Margin Less: S&A Expenses Net Operating Income (Loss) Less: Interest Expense Net Income 10. And last but not least, we have the budgeted Balance Sheet! We need to know what our balance sheet looked like on July 1, so here goes: Vaughan Company Balance Sheet 7/1/Year 2021 Liabilities & SE: A/P (given) $ 22,848 Assets: Cash (given) A/R (given) RM Inventory (14,100 * $0.70) FG Inventory (2,000 * 28.70) Land Building&Equipment Less A/D Total Assets $ 50,000 96,000 9,870 57,400 19,000 260,000 (60,000) $ 432,270 Common Stock Retained Earnings Total Liab & SE: $ 200,000 209,422 432,270 Vaughan Company Budgeted Balance Sheet 9/30/Year 2021 Liabilities & SE: A/P Assets: Cash A/R RM Inventory FG Inventory Land Building&Equipment Less A/D Total Assets Common Stock Retained Earnings Total Liab & SE