You have just been hired as a new management trainee by Terre Inc., a manufacturer of potato chips. In the past, the company did very little in the way of budgeting and at certain times of the year experienced a shortage of cash.

Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming quarter to show management the benefits that can be gained from an integrated budgeting program. To this end, you worked with accounting and other areas to gather the information assembled below.

The company sells a single type of potato chip with a budgeted selling price of $5 per packet. Actual and budgeted sales of potato chip are provided as below (in units):

2017
May (Actual)	30,000
June (Actual)	33,000
July (Budgeted)	38,000
August (Budgeted)	42,000
September (Budgeted)	50,000
October (Budgeted)	40,000
November (Budgeted)	38,000

From their experience, 30% of the sales are on cash with 10% discount. The remainder are on account. Collections for sales on account follow a stable pattern: 75% of a month's credit sales are collected in the month of sale, and 20% are collected in the month following sale, and the remaining 5% are uncollectible.

Due to the unstable sales, the company has been experienced the shortage of inventory. Hence, you plan to suggest a new inventory policy; the ending inventory for each month should be equal to 30% of the next month's sales in units. This requirement had been met at the end of June.

Each packet of potato chip requires 500g of potato. The company has a policy of maintaining the raw material at the end of each month equal to 20% of the next month's production needs. This requirement had been met at the end of June. Potatoes cost $1.2 per kg. 70% of a months purchases is paid for in the month of purchase; the remaining is paid in the following month. At the end of June, the accounts payable balance is $6,400.

Each packet of potato chip requires 0.1 direct labor-hours. Due to the recent increase in minimum wage, factory workers are paid $14 per direct labor-hour.

Terre bases its manufacturing overhead budget on budgeted direct labor-hours. The variable overhead rate is $5 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $40,000 per month. Fixed manufacturing overhead includes depreciation on factory equipment, which is $27,000 per month.

At Terre, the selling and administrative (SG&A) expense budget is divided into variable and fixed components. The variable SG&A expense is $0.8 per unit sold. The budgeted fixed selling and administrative expense is $30,000 per month. This expense includes depreciation on office equipment, which is $10,000 per month.

Due to the recent customer claims on the packaging defects, Terre Inc. has decided to purchase a new packing equipment in August 2017. The new equipment costs $30,000 and will be paid in cash. Terre has declared a cash dividend of $0.50 per share, which will be paid on July 31, 2017. The company has 100,000 common shares outstanding. To finance potential cash deficit, Terre Inc. plans to borrow a $40,000 loan from a local bank in the beginning of July 2017 and repay the loan plus accumulated interest at the end of September 2017. The annual interest rate on the loan is 12% (i.e., 1% per month). At the end of June, the cash balance is $30,000.

Required:

1. Prepare the master budget that includes sales, production, direct materials, direct labor, manufacturing overhead, and selling and administrative (SG&A) expenses, by each month and in total for the 3rd quarter of 2017. Also, prepare ending finished goods inventory budget (in dollars) for the 3rd quarter of 2017.

2. Prepare the schedule of expected cash collections from sales, the schedule of expected cash disbursements for materials, manufacturing overhead, and SG&A expenses by each month and in total for the 3rd quarter of 2017.

3. Prepare a cash budget, by each month and in total for the 3rd quarter of 2017. Use the simple interest rate (no compounding interest rate needed).

4. Assume the bad debt expenses can be ignored. Prepare a budgeted income statement, which shows sales, cost of goods sold, gross margin, SG&A expenses, operating income, interest expense, and net income, for the 3rd quarter of 2017.

5. Assume finished goods and direct materials inventories are insignificant and can be ignored. At the end of the 3rd quarter, the actual data is reported as follows:

Actual inputs for the 3rd quarter
Unit produced and sold	138,000 units
Direct materials purchased and used (kg)	70,380 kg
Direct materials purchased and used ($)	$87,975
Direct labor hours incurred (hours)	12,420 hours
Direct labor cost incurred($)	$186,300

Assuming no guaranteed labor hours, compute the following variances for the 3rd quarter of 2017 and specify whether it is a favorable or unfavorable variances:

i. Material price and quantity variances

ii. Labor rate and efficiency variances

Terre Inc Budgeted Selling price Unit sales May (Actual) June (Actual) July (Budgeted) August (Budgeted) 30,000 33,000 38,000 42,000 50,000 40,000 38,000 October (Budgeted) November (Budgeted) Collection on sales: Cash sales Cash sales discount Sales on account Credit sales collected in the current month of sale Credit sales collected in the month following sales Credit sales uncollectible 30% 10% 70% 75% 596 Production and direct materials: Desired ending inventories (% of next month's sales in units) 30% 0.50 Material needed per unit of product (kg) Cost of direct materials (per kg Desired ending inventories of direct materials (% of next month's production needs) $120 Purchases paid as follows: In month of purchase In following month Accounts Payable, 30 June 2017 70% $6,400 Direct labor: Direct labor hours needed per unit of product Direct labor rate (per hour) 0.1 $14 Manufacturing overhead (MOH) Variable MOH rate per direct labor hour Fixed MOH per month Depreciation included in MOH $40,000 527,000 Selling and Administrative expense: Variable selling & administrative expense per unit Fixed selling & administrative expense Depreciation included in selling & administrative expense 50.8 $30,000 510,000 Purchase of a new equipment, August Dividend per share, July Number of shares ourstanding, July Loan from bank, 1 July 2017 Interest rate per month Cash on hand as of 1 July, 2017 $30,000 50.5 100,000 $40,000 1% $30,000 Actual inputs for the 3rd quarter Unit produced and sold (units) Direct materials purchased and used (kg) Direct materials purchased and used Direct labor hours incurred (hours) Direct labor cost incurred 138,000 70,380 587,975 12,420 5186,300 Assume finished goods and direct materials inventories are insignificant and can be ignore