Borkenstick Makes a Very Popular Undyed

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Borkenstick makes a very popular undyed cloth sandal in one style, but in Regular and Deluxe. The Regular sandals have cloth soles and the Deluxe sandals have cloth covered wooden soles. Borkenstick is preparing its budget for June 2012, and has estimated sales based on past experience. Other information for the month of June follows:

Borkenstick uses a FIFO cost flow assumption for finished goods inventory. All the sandals are made in batches of 50 pairs of sandals. Borkenstick incurs manufacturing overhead costs, marketing and general administration, and shipping costs. Besides materials and labor, manufacturing costs include setup, processing, and inspection costs. Borkenstick ships 40 pairs of sandals per shipment. Borkenstick uses activity-based costing and has classified all overhead costs for the month of June as shown in the following chart:

Required 1. Prepare each of the following for June: a. Revenues budget b. Production budget in units c. Direct material usage budget and direct material purchases budget in both units and dollars; round to dollars d. Direct manufacturing labor cost budget e. Manufacturing overhead cost budgets for processing and setup activities f. Budgeted unit cost of ending finished goods inventory and ending inventories budget g. Cost of goods sold budget h. Marketing and general administration costs budget 2. Borkenstick’s balance sheet for May 31 follows. Use it and the following information to prepare a cash budget for Borkenstick for June. Round to dollars. All sales are on account; 60% are collected in the month of the sale, 38% are collected the following month, and 2% are never collected and written off as bad debts. All purchases of materials are on account. Borkenstick pays for 80% of purchases in the month of purchase and 20% in the following month. All other costs are paid in the month incurred, including the declaration and payment of a $10,000 cash dividend in June. Borkenstick is making monthly interest payments of 0.5% (6% per year) on a $100,000 long term loan. Borkenstick plans to pay the $7,200 of taxes owed as of May 31 in the month of June. Income tax expense for June is zero. 30% of processing and setup costs, and 10% of marketing and general administration costs are depreciation.

3. Prepare a budgeted income statement for June and a budgeted balance sheet for Borkenstick as of June 30. SOLUTION: 1a. Revenues Budget For the Month of June, 2012 Units Selling Price Total Revenues 2,000 $80 $160,000 3,000 130 390,000 $550,000

Regular Deluxe Total

b. Production Budget For the Month of June, 2012

Budgeted unit sales Add: target ending finished goods inventory Total required units Deduct: beginning finished goods inventory Units of finished goods to be produced

Product Regular Deluxe 2,000 3,000 400 600 2,400 3,600 250 650 2,150 2,950

c. Direct Material Usage Budget in Quantity and Dollars For the Month of June, 2012 Material Cloth Wood Physical Units Budget Direct materials required for Regular (2,150 units × 1.3 yd.; 0 bd-ft) 2,795 yds. 0 Deluxe (2,950 units × 1.5 yds.; 2 bd-ft) 4,425 yds. 5,900 Total quantity of direct materials to be used 7,220 yds. 5,900 Cost Budget Available from beginning direct materials inventory (under a FIFO cost-flow assumption) $ 2,146 $ 4,040 To be purchased this period Cloth: (7220 yd. – 610 yd.) × $3.50 per yd. 23,135 Wood: (5,900 – 800) × $5 per bd-ft _ ___ 25,500 Direct materials to be used this period $25,281 $29,540

Total

$54,821

Direct Materials Purchases Budget For the Month of June, 2012 Material Cloth Wood Physical Units Budget To be used in production Add: Target ending direct material inventory Total requirements Deduct: beginning direct material inventory Purchases to be made Cost Budget Cloth: (6,996 yds. × $3.50 per yd.) Wood: (5,395 ft × $5 per bd-ft) Total 7,220 yds. 386 yds. 7,606 yds. 610 yds. 6,996 yds. $24,486 ___ _ $24,486 5,900 ft 295 ft 6,195 ft 800 ft 5,395 ft $26,975 $26,975

Total...
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