Prepare a Master Budget

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Electra Manufacturing, Inc., produces control valves used in the production of oil field equipment. The control valves are sold to various gas and oil engineering companies throughout the United States. Projected sales in units for the coming four months are as follows: January ………………20,000

February ……………..25,000
March ………………..30,000
April …………………30,000
The following data pertain to production policies and manufacturing specifications followed by Electra: a. Finished goods inventory on January 1 is 13,000 units. The desired ending inventory for each month is 70 percent of the next month’s sales. b. The data on materials used are as follows:

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Inventory policy dictates that sufficient materials be on hand at the beginning of the month to produce 50 percent of that month’s estimated sales. This is exactly the amount of material on hand on January 1. c. The direct labor used per unit of output is two hours. The average direct labor cost per hour is $15. d. Overhead each month is estimated using a flexible budget formula. (Activity is measured in direct labor hours.) [pic]

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e. Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. (Activity is measured in units sold.) [pic]
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f. The unit selling price of the control valve is $90.
g. In February, the company plans to purchase land for future expansion. The land costs $90,000. h. All sales and purchases are for cash. Cash balance on January 1 equals $162,900. If the firm develops a cash shortage by the end of the month, sufficient cash is borrowed to cover the shortage. Any cash borrowed is repaid one month later, as is the interest due. The interest rate is 12 percent per annum.

Required:
Prepare a monthly operating budget for the first quarter with the following schedules: 1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
5. Overhead budget
6. Selling and administrative expense budget
7. Ending finished goods inventory budget
8. Cost of goods sold budget
9. Budgeted income statement (ignore income taxes)
10. Cash budget

SOLUTION:

1.Schedule 1: Sales budget

JanuaryFebruaryMarchTotal
Units20,00025,00030,00075,000
Unit selling price× $90× $90× $90× $90
Sales$1,800,000$2,250,000$2,700,000$6,750,000

2.Schedule 2: Production budget

JanuaryFebruaryMarchTotal
Sales (Schedule 1)20,00025,00030,00075,000
Desired ending inventory17,50021,00021,00021,000
Total needs37,50046,00051,00096,000
Less: Beginning inventory13,00017,50021,00013,000
Units to be produced24,50028,50030,00083,000

3.Schedule 3: Direct materials purchases budget

JanuaryFebruary
Part 714Part 502Part 714Part 502
Units to be produced24,50024,50028,50028,500
Dir. mat. per unit× 5× 3×5× 3
Production needs122,50073,500142,50085,500
Desired EI 62,500 37,500 75,000 45,000
Total needs185,000111,000217,500130,500
Less: BI 50,000 30,000 62,500 37,500
Dir. mat. to purchase135,00081,000155,00093,000
Cost per unit× $4× $3×$4× $3
Total cost$540,000$243,000$620,000$279,000

MarchTotal
Part 714Part 502Part 714Part 502
Units to be produced30,00030,00083,00083,000
Dir. mat. per unit×5×3×5×3
Production needs150,00090,000415,000249,000
Desired EI75,00045,00075,00045,000
Total needs225,000135,000490,000294,000
Less: BI75,00045,00050,00030,000
Dir. mat. to purchase150,00090,000440,000264,000
Cost per unit×$4×$3×$4×$3
Total cost$600,000$270,000$1,760,000$792,000

4.Schedule 4: Direct labor budget

JanuaryFebruaryMarchTotal
Units to be produced
(Schedule 2)24,50028,50030,00083,000
Direct labor time per
unit...
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