The Eastern Technology Company
Background and Assumptions for Preparation of 2016 Master Budget
Sales Revenue:
The Eastern Technology Company manufactures Weather Radios for sale to retailers such as Wal-Mart, Target, etc.
The 2016 quarterly unit sales estimates and projected sales prices per unit are as follows:
Quarter1 Quarter2 Quarter3 Quarter4
Sales Units 9,200 9,300 9,500 9,400
Price per Unit $92 $93 $94 $95
Also, note that that projected sales (and projected production) for Quarter 1 of 2017 is 10,000 units.
Product Cost Assumptions:
The company’s product requires two raw materials, resistors and switches. Cost parameters are as follows:
Number of Components/Unit
Switches @ $4/switch 3
Resistors @ $8/resistor 2
Number of minutes required to complete finished unit:
Direct labor minutes per unit 30
Machine minutes per unit 12
Hour rates used:
Direct labor rate = $10/hour
Manufacturing overhead rates (i.e., the PDOHRs to use to apply overhead):
Labor-related = $25/hour
Machine-related = $40/hour
Eastern applies manufacturing overhead using two cost drivers: direct-labor hours and machine hours.
Ending Inventories:
The desired ending inventories for each of the two direct materials is 10% of the next quarter’s respective amount of direct materials needed for production. The desired finished goods ending inventory is 5% of the next quarter’s budgeted sales units. Beginning inventory for direct materials and finished goods are assumed to be zero as of 1/1/2016.
Non-Product Cost Assumptions (i.e., Selling, General, and Administrative Expenses):
Sales are made by brokers who charge a sales commission. The sales commission rate is $0.50 per unit sold.
Shipping costs are $3 per unit sold.
The administrative office building historical cost was $500,000 and is being depreciated over 10 years on a straight line basis with no salvage value.
Eastern also has office equipment and computers that are leased with a quarterly operating lease payment of $40,000.
Other selling, general, and administrative expenses are fixed and are $225,000 for each quarter.
Cash Disbursements:
Direct materials are all purchased on account with no available discounts; 30% are paid for in the quarter of purchase and 70% are paid for in the following quarter. Also note that the direct materials purchased during the 4th quarter of 2015 (the prior year) are estimated at $220,000, of which 70% will be paid during the 1st quarter of 2015.
All direct labor and manufacturing overhead costs are paid in the quarter incurred.
All other non-product costs are paid in the quarter incurred.
Cash Collections:
Eastern makes all sales on account with no discounts available. Payments are received 50% in the quarter of sale, 47% in the following quarter, and the remaining 3% is never collected. Uncollectible accounts expense of 3% of sales is recognized in the quarter of sale. Also note that the sales on account during the 4th quarter of 2015 (the prior year) are estimated at $800,000, of which 47% will be paid during the 1st quarter of 2016.
Cash:
Assume beginning cash as of 1/1/2016 to be $50,000
The company wishes to maintain a minimum cash balance of $50,000 and has a line of credit with the bank which it can borrow upon. The interest rate is 10%. Assume all money borrowed is at the beginning of a quarter and is repaid at the end of a quarter.
Questions:
Using the assumptions presented use Excel to prepare the following schedules (showing quarterly and annual amounts where applicable):
Sales Budget
Production Budget.
Direct Materials Purchases Budget
Direct Labor Budget
Manufacturing Overhead Budget
Finished Goods Inventory
Budgeted Absorption Costing Income Statement
Cash Receipts Budget for Sales
Cash Disbursements Budget for Direct Material Purchases
Cash Budget
