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Horngren'S Financial And Managerial Accounting
Found in: Page 1254

Short Answer

Completing a comprehensive budgeting problem—manufacturing company The Gavin Tire Company manufactures racing tires for bicycles. Gavin sells tires for $70 each. Gavin is planning for the next year by developing a master budget by quarters. Gavin’s balance sheet for December31, 2018, follows:

Other data for Gavin Tire Company: a. Budgeted sales are 1,000 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 10% of total sales, with the remaining 90% of sales on account. b. Finished Goods Inventory on December 31, 2018, consists of 300 tires at $36 each.

c. Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2020 are expected to be 1,800 tires; FIFO inventory costing method is used. d. Raw Materials Inventory on December 31, 2018 consists of 750 pounds of rubber compound used to manufacture the tires. e. Direct materials requirements are 2.5 pounds of rubber compound per tire. The cost of the compound Is $4 per pound. f. Desired ending Raw Materials Inventory is 40% of the next quarter’s direct materials needed for production; desired ending inventory for December 31, 2019 is 750 pounds; indirect materials are insignificant and not considered for budgeting purposes. g. Each tire requires 0.30 hours of direct labor; direct labor costs average $20 per hour. h. Variable manufacturing overhead is $3 per tire. i. Fixed manufacturing overhead includes $6,000 per quarter in depreciation and $10,860 per quarter for other costs, such as utilities, insurance, and property taxes. j. Fixed selling and administrative expenses include $8,000 per quarter for salaries; $4,800 per quarter for rent; $1,950 per quarter for insurance; and $2,000 per quarter for depreciation. k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include $25,000 for new manufacturing equipment, to be purchased and paid in the first quarter. m. Cash receipts for sales on account are 70% in the quarter of the sale and 30% in the quarter following the sale; December 31, 2018, Accounts Receivable is received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes. n. Direct materials purchases are paid 50% in the quarter purchased and 50% in the following quarter; December 31, 2018, Accounts Payable is paid in the first quarter of 2019. o. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred. p. Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred. q. Gavin desires to maintain a minimum cash balance of $20,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 12% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

Requirements

1. Prepare Gavin’s operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours. Round all calculations to the nearest dollar.

2. Prepare Gavin’s annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.

Closing balance of cash is $363,570.

See the step by step solution

Step by Step Solution

Step 1: Preparation of sales budget

GERARD TYRE Company

Sales Budget

For the first quarter, 2019

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

Budgeted Tires to be sold

1,000

1,200

1,400

1,600

5,200

Sales price per unit

$70

$70

$70

$70

$70

Total budgeted sales

$70,000

$84,000

$98,000

$112,000

$364,000

Step 2: Preparation of production budget

GERARD TYRE Company

Production Budget

For the first quarter, 2019

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

Budgeted Tires to be sold

1,000

1,200

1,400

1,600

5,200

Plus: Desired Tires in ending inventory

480

560

640

720

2,400

Total Tires needed

1,480

1,760

2,040

2,320

7,600

Less: Tires in beginning inventory

300

480

560

640

1,980

Tires to be produced

1,180

1,280

1,480

1,680

5,620

Step 3: Preparation of direct materials budget

GERARD TYRE Company

Direct Materials Budget

For the first quarter, 2019

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

Budgeted Tires to be produced

1,180

1,280

1,480

1,680

5,620

Direct material required (Pounds) per Tires

2.5

2.5

2.5

2.5

2.5

Direct material needed for production

2,950

3,200

3,700

4,200

14,050

Plus: Desired direct materials in ending inventory (Pounds)

1,280

1,480

1,680

750

5,190

Total direct material needed

4,230

4,680

5,380

4,950

19,240

Less: Direct materials in the beginning inventory

750

1,280

1,480

1,680

5,190

Budgeted purchase of the raw material

3,480

3,400

3,900

3,270

14,050

Direct material cost per Pounds

$4

$4

$4

$4

$4

Budgeted cost of direct material purchases

$13,920

$13,600

$15,600

$13,080

$56,200

Step 4: Preparation of direct labor budget

GERARD TYRE Company

Direct Labor Budget

For the first quarter, 2019

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

Budgeted Tires to be produced

1,180

1,280

1,480

1,680

5,620

Direct labor hours needed for production

0.3

0.3

0.3

0.3

0.3

Direct labor hours needed for production

354

384

444

504

1,686

Direct labor cost per hour

$20

$20

$20

$20

$20

Budgeted direct labor cost

$7,080

$7,680

$8,880

$10,080

$33,720

Step 5: Preparation of manufacturing overhead budget 

GERARD TYRE Company

Direct Materials Budget

For the first quarter, 2019

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

Budgeted Tires to be produced

1,180

1,280

1,480

1,680

5,620

VOH per Tires

$3

$3

$3

$3

$3

Budgeted variable overhead

$3,540

$3,840

$4,440

$5,040

$16,860

Budgeted FOH Cost:

Depreciation

$6,000

$6,000

$6,000

$6,000

$24,000

Other FOH

$10,860

$10,860

$10,860

$10,860

$43,440

Budgeted manufacturing overhead cost

$20,400

$20,700

$21,300

$21,900

$84,300

Direct labor hours

1,686

Predetermined overhead allocation rate

($25,440/2,240)

$50

Step 6: Preparation of cost of goods sold budget

GERARD TYRE Company

Cost of goods sold Budget

For the first quarter, 2019

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

Beginning inventory

$10,800

$10,800

Tires produced and sold in 2019 @$74

$74,000

$88,800

$103,600

$118,400

$384,800

Total budgeted cost of goods sold

$84,800

$88,800

$103,600

$118,400

$395,600

Step 6: Preparation of selling and administrative budget

GERARD TYRET Company

Selling and administrative Budget

For the first quarter, 2019

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

Salaries

$8,000

$8,000

$8,000

$8,000

$32,000

Rent

$4,800

$4,800

$4,800

$4,800

$19,200

Insurance

$1,950

$1,950

$1,950

$1,950

$7,800

Depreciation

$2,000

$2,000

$2,000

$2,000

$8,000

Variable selling and administrative expenses

$1,400

$1,680

$1,960

$2,240

$7,280

Total

$18,150

$18,150

$18,150

$18,150

$72,600

Step 7: Preparation of schedule of cash receipts from customers

GERARD TYRE Company

Schedule of cash receipts from customers

For the first quarter, 2018

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

Total Sales

$70,000

$84,000

$98,000

$112,000

$364,000

Cash receipts from customers

$79,000

$79,800

$93,800

$107,800

$360,400

Total cash received from customers

$79,000

$79,800

$93,800

$107,800

$360,400

 Step 8: Preparation of schedule of cash payments

GERARD TYRE Company

Schedule of cash payments

For the first quarter, 2018

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

Total direct material purchases

$13,920

$13,600

$15,600

$13,080

$56,200

Cash payments:

Direct material purchased (60%)

$8,352

$8,160

$9,360

$7,848

$33,720

Accounts payable

$16,000

$5,568

$5,440

$5,232

$32,240

Direct labor cost

$7,080

$7,680

$8,880

$10,080

$33,720

manufacturing overhead

$20,400

$20,700

$21,300

$21,900

$84,300

Salaries

$8,000

$8,000

$8,000

$8,000

$32,000

Rent expense

$4,800

$4,800

$4,800

$4,800

$19,200

Insurance expense

$1,950

$1,950

$1,950

$1,950

$7,800

Depreciation

$2,000

$2,000

$2,000

$2,000

$8,000

Variable selling and administrative expenses

$1,400

$1,680

$1,960

$2,240

$7,280

Capital expenditure

$25,000

$25,000

Income tax expenses

$3,500

$3,500

$3,500

$3,500

$3,500

Total cash payments

$98,482

$64,038

$67,190

$67,550

$286,760

Step 9: Preparation of schedule of cash budget 

GERARD TYRE Company

Cash Budget

For the first quarter, 2018

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Total

Opening cash balance

$20,000

$20,518

$20,680

$42,140

$20,000

Cash receipts

$79,000

$79,800

$93,800

$107,800

$360,400

Total cash payments

$98,482

$64,038

$67,190

$67,550

$286,760

Ending cash balance

$518

$36,280

$47,290

$82,390

Finance:

Borrowings

$20,000

Interest payment

$600

$150

Principal repayment

$15,000

$5,000

Closing balance

$20,518

$20,680

$42,140

$82,390

Most popular questions for Business-studies Textbooks

Using Excel for to prepare an operating budeget (manufacturing company)

Download an Excel template for this problem online in MyAccountingLab or at http://www.pearsonhighered.com/Horngren.

Thunder Creek Company is preparing budgets for the first quarter of 2018. All relevant information is presented on the Excel template.

Requirements

1. Prepare a Sales Budget.

2. Prepare a Production Budget.

3. Prepare a Direct Materials Budget.

4. Prepare a Direct Labor Budget.

5. Prepare a Manufacturing Overhead Budget.

6. Prepare a Cost of Goods Sold Budget

7. Prepare a Selling and Administrative Expense Budget.

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