Master Budget of Royal Company

Royal Company is preparing budgets for the second quarter ending June 30.

Budgeted sales of the companys only product for the next five months are:
April...............
May...............
June..............
July................
August...........

20,000 units
50,000 units
30,000 units
25,000 units
15,000 units

The selling price is $10 per unit.

SALES BUDGET
Budgeted sales (units)..........................
Selling price per unit.............................
Total sales............................................

April
20,000
$10
$200,000

May
50,000
$10
$500,000

June
30,000
$10
$300,000

Quarter
100,000
$10
$1,000,000

SCHEDULE OF EXPECTED CASH COLLECTIONS

Additional data:

All sales are on account.

The company collects 70% of these credit sales in the month of the sale; 25% are collected in the month following
sale; and the remaining 5% are uncollectible.

The accounts receivable balance on March 31 was $30,000. All of this balance was collectible.

Accounts receivable beginning balance.....

April sales
70% $200,000.....................................
25% $200,000.....................................
May sales
70% $500,000.....................................
25% $500,000.....................................
June sales
70% $300,000.....................................
Total cash collections.................................

April
$ 30,000

May

June

140,000

140,000
50,000

$ 50,000
350,000

$170,000

$400,000

Quarter
$ 30,000

$125,000

350,000
125,000

210,000
$335,000

210,000
$905,000

PRODUCTION BUDGET
Additional data:
The company desires to have inventory on hand at the end of each month equal to 20% of the following
months budgeted unit sales.
On March 31, 4,000 units were on hand.

Budgeted sales [TM 9-4].....................................

Add desired ending inventory..............................
Total needs..........................................................
Less beginning inventory.....................................
Required production............................................

April
20,000
10,000
30,000
4,000
26,000

May
50,000
6,000
56,000
10,000
46,000

* Budgeted sales in August = 15,000 units.

Desired ending inventory in July = 15,000 units 20% = 3,000 units.

June
30,000
5,000
35,000
6,000
29,000

July
25,000
3,000*
28,000
5,000
23,000

DIRECT MATERIALS BUDGET

Additional data:
5 pounds of material are required per unit of product.
Management desires to have materials on hand at the end of each month equal to 10% of the following
months production needs.
The beginning materials inventory was 13,000 pounds.
The material costs $0.40 per pound.

Required production in units

[TM 9-6]..............................................................
Raw materials per unit (pounds).............................
Production needs (pounds).....................................
Add desired ending inventory (pounds)*.................
Total needs (pounds)..............................................
Less beginning inventory (pounds).........................
Raw materials to be purchased (pounds)...............
Cost of raw materials to be purchased at $0.40
per pound............................................................

April

May

June

Quarter

26,000
5
130,000
23,000
153,000
13,000
140,000

46,000
5
230,000
14,500
244,500
23,000
221,500

29,000
5
145,000
11,500
156,500
14,500
142,000

101,000
5
505,000
11,500
516,500
13,000
503,500

$56,000

$88,600

$56,800

$201,400

* For June: 23,000 units produced in July [TM 9-6] 5 pounds per unit = 115,000 pounds; 115,000 pounds 10%
= 11,500 pounds
SCHEDULE OF EXPECTED CASH DISBURSEMENTS FOR MATERIAL
Additional data:

Half of a months purchases are paid for in the month of purchase; the other half is paid for in the following month.

No discounts are given for early payment.

The accounts payable balance on March 31 was $12,000.

Accounts payable beginning balance...........

April purchases:
50% $56,000.........................................
50% $56,000.........................................
May purchases:
50% $88,600.........................................
50% $88,600.........................................
June purchases:
50% $56,800.........................................
Total cash disbursements for materials.......

April
$12,000

May

June

Quarter
$ 12,000

28,000

28,000
28,000

$28,000
44,300

$40,000

$72,300

$44,300

44,300
44,300

28,400
$72,700

28,400
$185,000

DIRECT LABOR BUDGET

Additional data:

Each unit produced requires 0.05 hour of direct labor.

Each hour of direct labor costs the company $10.

Management fully adjusts the workforce to the workload each month.

April

Required production
[TM 9-6]..................................................
Direct labor-hours per unit..........................
Total direct laborhours needed.................
Direct labor cost per hour...........................
Total direct labor cost.................................

26,000
0.05
1,300
$10
$13,000

May
46,000
0.05
2,300
$10
$23,000

June
29,000
0.05
1,450
$10
$14,500

Quarter
101,000
0.05
5,050
$10
$50,500

Note: Many companies do not fully adjust their direct labor workforce every month and in such companies direct labor
behaves more like a fixed cost, with additional cost if overtime is necessary.

MANUFACTURING OVERHEAD BUDGET

Additional data:

Variable manufacturing overhead is $20 per direct labor-hour.

Fixed manufacturing overhead is $50,500 per month. This includes $20,500 in depreciation, which is not a cash
outflow.

Budgeted direct labor-hours [TM 9-9]..................

Variable manufacturing overhead rate................
Variable manufacturing overhead.......................
Fixed manufacturing overhead............................
Total manufacturing overhead.............................
Less depreciation................................................
Cash disbursements for manufacturing
overhead.........................................................

April
1,300
$20
$26,000
50,500
76,500
20,500

May
2,300
$20
$46,000
50,500
96,500
20,500

June
1,450
$20
$29,000
50,500
79,500
20,500

Quarter
5,050
$20
$101,000
151,500
252,500
61,500

$56,000

$76,000

$59,000

$191,000

ENDING FINISHED GOODS INVENTORY BUDGET

Additional data:

Royal Company uses absorption costing in its budgeted income statement and balance sheet.

Manufacturing overhead is applied to units of product on the basis of direct labor-hours.

The company has no work in process inventories.

Computation of absorption unit product cost:

Direct materials.....................................
Direct labor...........................................
Manufacturing overhead.......................
Unit product cost...................................
*

Quantity
5 pounds
0.05 hours
0.05 hours

Cost
$0.40 per pound
$10.00 per hour
$50.00 per hour*

Total
$2.00
0.50
2.50
$5.00

Predetermined = Total manufacturing overhead

overhead rate
Total direct labor hours
=

$252,500
= $50.00 per hour
5,050 hours

Budgeted ending finished goods inventory:

Ending finished goods inventory in units [TM 9-6]...............................................
Unit product cost [see above]..............................................................................
Ending finished goods inventory in dollars..........................................................

5,000
$5
$25,000

SELLING AND ADMINISTRATIVE EXPENSE BUDGET

Additional data:

Variable selling and administrative expenses are $0.50 per unit sold.

Fixed selling and administrative expenses are $70,000 per month and include $10,000 in depreciation.
April

Budgeted sales in units

[TM 9-4].....................................................
Variable selling and administrative expense
per unit.......................................................
Variable selling and administrative expense..
Fixed selling and administrative expense......
Total selling and administrative expense.......
Less depreciation...........................................
Cash disbursements for selling and
administrative expenses............................

May

June

Quarter

20,000

50,000

30,000

100,000

$0.50
$10,000
70,000
80,000
10,000

$0.50
$25,000
70,000
95,000
10,000

$0.50
$15,000
70,000
85,000
10,000

$0.50
$ 50,000
210,000
260,000
30,000

$70,000

$85,000

$75,000

$230,000

CASH BUDGET
Additional data:
1.

A line of credit is available at a local bank that allows the company to borrow up to $75,000.
a.

All borrowing occurs at the beginning of the month, and all repayments occur at the end of the month.

b.

The interest rate is 1% per month.

c.

The company does not have to make any payments until the end of the quarter.

2.

Royal Company desires a cash balance of at least $30,000 at the end of each month. The cash balance at the
beginning of April was $40,000.

3.

Cash dividends of $51,000 are to be paid to stockholders in April.

4.

Equipment purchases of $143,700 are scheduled for May and $48,800 for June. This equipment will be
installed and tested during the second quarter and will not become operational until July, when depreciation
charges will commence.

CASH BUDGET
Royal Company
Cash Budget
For the Quarter Ending June 30
Cash balance, beginning.................................
Add receipts:
Cash collections..........................................
Total cash available.........................................
Less disbursements:
Direct materials............................................
Direct labor..................................................
Manufacturing overhead
................................................................
Selling & administrative...............................
Equipment purchases..................................
Dividends.....................................................
Total disbursements........................................

April
$ 40,000

May
$ 30,000

June
$ 30,000

Quarter
$ 40,000

170,000
210,000

400,000
430,000

335,000
365,000

905,000
945,000

40,000
13,000

72,300
23,000

72,700
14,500

185,000
50,500

56,000
70,000
0
51,000
230,000

76,000
85,000
143,700
0
400,000

59,000
75,000
48,800
0
270,000

191,000
230,000
192,500
51,000
900,000

30,000

95,000

45,000

0
(50,000)
( 2,000)
(52,000)

50,000
(50,000)
( 2,000)
( 2,000)

Excess (deficiency) of cash available over

disbursements.............................................

(20,000)

Financing:
Borrowings...................................................
Repayments................................................
Interest*.......................................................
Total financing.................................................

50,000
0
0
50,000

0
0
0
0

Cash balance, ending......................................

$ 30,000

$ 30,000

$ 43,000

* $50,000 1% 3 = $2,000.
BUDGETED INCOME STATEMENT
Royal Company
Budgeted Income Statement
For the Quarter Ending June 30
Net sales [see below]...........................................................................................
Cost of goods sold [see below]............................................................................
Gross margin.......................................................................................................
Selling & administrative expenses [TM 9-12].......................................................
Net operating income...........................................................................................
Interest expense [TM 9-14]..................................................................................
Net income...........................................................................................................
Computation of net sales:
Sales..................................................................................
Less uncollectible amounts (5%).......................................
Net sales............................................................................

$1,000,000
50,000
$ 950,000

$950,000
500,000
450,000
260,000
190,000
2,000
$188,000

$ 43,000

Computation of cost of goods sold:

Budgeted sales (units).......................................................
Unit product cost................................................................
Cost of goods sold.............................................................

100,000
$5
$500,000

BEGINNING BALANCE SHEET

Royal Company
Balance Sheet
March 31
Current assets:
Cash....................................................................................
Accounts receivable............................................................
Raw materials inventory......................................................
Finished goods inventory....................................................
Plant and equipment:
Land....................................................................................
Buildings and equipment.....................................................
Accumulated depreciation...................................................
Total assets.............................................................................
Liabilities:
Accounts payable................................................................
Stockholders equity:
Common stock....................................................................
Retained earnings...............................................................
Total liabilities and stockholders equity..................................

$ 40,000
30,000
5,200
20,000

(a)
(b)
(c)
(d)

400,000 (e)
1,610,000 (f)
(750,000) (g)

$ 95,200

1,260,000
$1,355,200
$ 12,000 (h)

$ 200,000 (i)
1,143,200 (j)

1,343,200
$1,355,200

BUDGETED BALANCE SHEET

Royal Company
Budgeted Balance Sheet
June 30
Current assets:
Cash....................................................................................
Accounts receivable............................................................
Raw materials inventory......................................................
Finished goods inventory....................................................
Plant and equipment:
Land....................................................................................
Buildings and equipment.....................................................
Accumulated depreciation...................................................
Total assets.............................................................................
Liabilities:
Accounts payable................................................................
Stockholders equity:
Common stock....................................................................
Retained earnings...............................................................
Total liabilities and stockholders equity..................................
(a)
(b)
(c)
(d)
(e)

See TM 9-14
$300,000 sales 25%
11,500 pounds $0.40 per pound
See TM 9-11
See TM 9-16

(f)
(g)
(h)
(i)
(j)

$ 43,000
75,000
4,600
25,000

(a)
(b)
(c)
(d)

400,000 (e)
1,802,500 (f)
(841,500) (g)

$ 147,600

1,361,000
$1,508,600
$ 28,400 (h)

$ 200,000 (i)
1,280,200 (j)

$1,610,000+ $143,700+ $48,800

$750,000 + $61,500 + $30,000
$56,800 purchases 50%
See TM 9-16
$1,143,200 + $188,000 $51,000

1,480,200
$1,508,600