6. The standard labor allowed for one bag of rocks is 15 minutes. The current direct labor rate is $10 per hour — Klandon Company manufactures decorative aquariums Kim preparing
Klandon Company manufactures decorative rocks for aquariums. Kim Klandon is preparing the budget for the quarter ended June 30. She has gathered the following information.
1. Klandon’s sales manager reported that the company sold 12,000 bags of rocks in March. He has developed the following sales forecast. The expected sales price is $10 per bag.
April ……………………… .20,000 bags
May ……………………… 50,000 bags
June……………………… 30,000 bags
July ……………………… 25,000 bags
August ……………………… 15,000 bags
2. Sales personnel receive a 5 percent commission on every bag of rocks sold. The following monthly fixed selling and administrative expenses are planned for the quarter. However, these amounts do not include the depreciation increase resulting from the budgeted equipment purchase in June.
.:.
3. After experiencing difficulty in supplying customers in a timely fashion due to inventory shortages, the company established a policy requiring the ending Finished Goods Inventory to equal 20 percent of the following month's budgeted sales, in units. On March 31, 4,000 bags were on hand.
4. Five pounds of raw materials are required to fi ll each bag of finished rocks. The company wants to have raw materials on hand at the end of each month equal to 10 percent of the following month's production needs. On March 31, 13,000 pounds of materials were on hand.
5. The raw materials used in production cost $0.40 per pound. Half of the month's purchases is paid for in the month of purchase; the other half, in the following month.
No discount is available.
6. The standard labor allowed for one bag of rocks is 15 minutes. The current direct labor rate is $10 per hour.
7. On June 1, the company plans to spend $48,000 to upgrade its office equipment that is fully depreciated. The new equipment is expected to have a five-year life, with no residual value.
8. The budgeted monthly variable and fixed overhead amounts are as follows. Variable overhead is based on the number of units produced. The fixed overhead budget is based on an annual production of 400,000 bags.
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9. All sales are made on account. Historically, the company has collected 70 percent of its sales in the month of sale and 25 percent in the month following the sale. The remaining
5 percent of sales is uncollectible.
10. Klandon must maintain a minimum cash balance of $30,000. An open line of credit at a local bank allows the company to borrow up to $175,000 per quarter in $1,000 increments.
11. All borrowing is done at the beginning of the month, and all repayments are made at the end of a month in $1,000 increments. Accrued interest is paid only when principal is repaid. The interest rate is 12 percent per year.
12. A quarterly dividend of $49,000 will be declared and paid in April.
13. Income taxes payable for the first quarter will be paid on April 15. Klandon’s tax rate
is 30 percent.
14. The March 31 balance sheet is as follows:
March 31
Cash ……………………………………….. $ 40,000
Accounts receivable………………………… 30,000
Finished goods inventory …………………… 26,000
Raw materials inventory …………………… 5,200
Plant & equipment ………………………… 200,000
Accumulated depreciation ………………… (50,000)
Total assets ………………………………… $ 251,200
Accounts payable…………………………… $ 12,000
Income taxes payable ……………………… 50,000
Common stock……………………………… 52,000
Retained earnings …………………………… 137,200
Total liabilities and equities ………………… $ 251,200
Required
a. Prepare all components of Klandon’s master budget for the second quarter.
b. Prepare a pro-forma income statement for the second quarter.
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c. Prepare a pro-forma balance sheet as of June 30.
SOLUTION:
a. Sales Budget
April
May
June
Quarter
Budgeted units sold
20,000
50,000
30,000
100,000
Budgeted sales price
× $ 10
× $ 10
× $ 10
× $ 10
Budgeted sales revenue
$200,000
$500,000
$300,000
$1,000,000
Selling and Administrative Expense Budget
April
May
June
Quarter
Depreciationa
$10,000
$10,000
$10,800
$30,800
Sales personnel compensationb
35,000
50,000
40,000
125,000
Advertising
1,000
1,000
1,000
3,000
Management salaries
10,000
10,000
10,000
30,000
Miscellaneous
500
500
500
1,500
Bad debtsc
10,000
25,000
15,000
50,000
Total budgeted expenses
$66,500
$96,500
$77,300
$240,300
Less non-cash expenses
Depreciation
$10,000
$10,000
$10,800
$30,800
Bad debts
10,000
25,000
15,000
50,000
Total cash costs
$46,500
$61,500
$51,500
$159,500
a $10,000 per month for April and May. Add $800 for June
b $25,000 + (.05 × sales revenue)
c $0.50 × units sold
Production Budget
April
May
June
Quarter
July
Budgeted unit sales
20,000
50,000
30,000
100,000
25,000
+
Budgeted ending inventorya
10,000
6,000
5,000
5,000
3,000
=
Total units required
30,000
56,000
35,000
105,000
28,000
-
Beginning inventory
4,000
10,000
6,000
4,000
5,000
=
Budgeted production
26,000
46,000
29,000
101,000
23,000
a
Budgeted ending inventory is equal to 20% of the following month’s unit sales
10,000 = 50,000 × 20%
6,000 = 30,000 × 20%
5,000 = 25,000 × 20%
3,000 = 15,000 × 20%
Materials Purchases Budget
April
May
June
Quarter
July
Budgeted production
26,000
46,000
29,000
101,000
23,000
×
Standard pounds per unit
5
5
5
5
5
=
Production needs
130,000
230,000
145,000
505,000
115,000
+
Budgeted ending inventory (pounds)a
23,000
14,500
11,500
11,500
=
Total pounds required
153,000
244,500
156,500
516,500
-
Beginning inventory
13,000
23,000
14,500
13,000
=
Budgeted purchases (pounds)
140,000
221,500
142,000
503,500
×
Standard price per pound
$0.40
$0.40
$0.40
$0.40
=
Budgeted purchases cost
$56,000
$88,600
$56,800
$201,400
a Budgeted ending inventory is equal to 10% of the following month’s production needs
23,000 = 230,000 × 10%
14,500 = 145,000 × 10%
11,500 = 115,000 × 10%
Direct Labor Budget
April
May
June
Quarter
Budgeted production
26,000
46,000
29,000
101,000
×
Standard DLH per unit
0.25
0.25
0.25
0.25
=
Total direct labor hours required
6,500
11,500
7,250
25,250
×
Standard wage rate
$10
$10
$10
$10
=
Budgeted direct labor cost
$65,000
$115,000
$72,500
$252,500
Manufacturing Overhead Budget
April
May
June
Quarter
Budgeted production
26,000
46,000
29,000
101,000
×
Variable overhead per unit
0.50
0.50
0.50
0.50
=
Total variable overhead
13,000
23,000
14,500
50,500
+
Fixed overhead
50,000
50,000
50,000
150,000
Total budgeted manufacturing overhead
63,000
73,000
64,500
200,500
Less: Non-cash items
Depreciation
8,000
8,000
8,000
24,000
=
Total cash costs
$55,000
$65,000
$56,500
$176,500
Ending Inventory and Cost of Goods Sold Budget
Raw Materials
Beginning balance
$5,200
Purchases of raw materials (from materials purchases budget)
201,400
Less: Ending raw materials inventory (11,500 lbs. $0.40)
4,600
Raw materials used
$202,000
Finished Goods
Unit costs:
Direct materials ($0.40/lb. × 5 lbs.)
$2.00
Direct labor ($10/DLH × .25 DLH)
2.50
Overhead
2.00
Total standard unit cost
6.50
× Ending inventory units
5,000
Ending finished goods inventory
$32,500
Cost of Goods Sold
Beginning work in process inventory
$ 0
Direct materials used
202,000
Direct labor
252,500
Manufacturing overhead
200,500
Total manufacturing costs
655,000
Less: Ending work in process inventory
0
Cost of goods manufactured
655,000
Add: Beginning finished goods inventory
26,000
Less: Ending finished goods inventory
32,500
Cost of goods sold
$648,500
Cash Receipts Budget
April
May
June
Total Cash Receipts
Bad Debts
Accounts Receivable
March salesa
$120,000 × 25%
$30,000
$30,000
April sales
$200,000 × 70%
140,000
140,000
$200,000 × 25%
$50,000
50,000
$200,000 × 5%
$10,000
May sales
$500,000 × 70%
350,000
350,000
$500,000 × 25%
$125,000
125,000
$500,000 × 5%
25,000
June sales
$300,000 × 70%
210,000
210,000
$300,000 × 5%
15,000
$300,000 × 25%
$75,000
Totals
$170,000
$400,000
$335,000
$905,000
$50,000
$75,000
a
April collections of March sales: 3/31 Accounts Receivable balance (= $30,000)