Mando Paints (MAPS)) manufactures a paint additive that has been very successful in the metallic paint line of automotive paints. The company prides itself in making the paints that car owners buy, better. MAPS is in the process of preparing its 2015 fiscal year master budget and has presented you with the following information. The company has a December 31st fiscal year-end.
1. The budgeted December 31, 2014 balance sheet for the company is shown below.
MAPS Limited
Budgeted Balance Sheet
December 31, 2014
Assets Liabilities & Stockholders' Equity
Cash $ 5,080 Accounts payable $ 2,148
Accounts receivable (net) 26,500 Dividends payable 30,000
Raw materials inventory 800 Notes payable (Due Feb. 28, 2015) 35,000
Finished goods inventory 2,104
Prepaid insurance 1,200 Total liabilities $ 67,148
Factory Building & Equipment $300,000 Common stock $100,000
Accumulated Retained earnings 148,536 248,536
depreciation (20,000) 280,000
Total Liabilities &
Total assets $315,684 Stockholders' Equity $315,684
2. The Accounts Receivable balance at 12/31/14 represents the remaining balances of November and December credit sales, net of any allowance for doubtful accounts. Sales were (would be) $70,000 and $65,000, respectively, in those two months.
3. Estimated sales in units for January through May 2015 are shown below.
January 10,000
February 12,000
March 13,000
April 12,000
May 8,000
Currently, each unit sells for $12. The company expects the selling price to increase to $13 per unit from March 1, 2015.
4. The collection pattern for accounts receivable is as follows: 68% in the month of sale; 20% in the first month after the month of sale; 10% in the second month after the month of sale. The remaining 2% of credit sales are never collected. The company expects to achieve a 70-20-8 collection pattern starting with the March 2015 sales.
5. Each unit of additive has the following standard quantities and costs for direct materials and direct labor:
1.2 pounds of direct materials at $.80 per pound
15 minutes of direct labour at $12 per hour
Direct material costs and direct labor costs are expected to increase by 15% as from March 1, 2015. Variable overhead is applied to the product on a machine hour basis. It takes 12 minutes of machine time to process one unit of finished additive. The variable overhead rate is $1.5 per machine hour. The rate will increase to $2.25 per machine hour from March 1, 2015. Total annual fixed overhead is budgeted at $120,000; it is applied to the production of the month at $1.00 per unit based on an expected annual production of 120,000 units. Budgeted fixed overhead per year is made up of the following costs:
Salaries $ 72,000
Utilities 20,400
Insurance - factory 2,400
Depreciation- factory building & equipment 25,200
Total $120,000
Actual fixed overhead is incurred evenly throughout the year and payments for fixed overhead are also made evenly throughout the year, if necessary. For periodic financial statements, any under-applied overhead is added to expenses and any over-applied overhead is deducted from expenses.
6. There is no beginning inventory of Work in Process. All work in process is completed in the period in which it is started. Direct materials inventory at the beginning of 2015 will consist of 1,000 pounds at a standard cost of $.80 per pound. There will be 400 units of additive in finished goods inventory at the beginning of 2015 carried at a standard cost of $5.26 per unit: Direct Materials, $.96; Direct Labor, $3.00; Variable Overhead, $.30; and Fixed Overhead, $1.00.
7. Accounts Payable relates solely to direct materials purchases. All direct material purchases are initially on account. Accounts payable are paid 60% in the month of purchase and 40% in the month after purchase. No discounts are received for prompt payment. Starting with its March 2015 purchases, the company will be making payments on accounts payable at 50% in the month of purchase and 50% in the month after purchase.
8. Any outstanding dividends payable will be paid at the end of January 2015.
9. A new piece of equipment costing $50,000 will be purchased on March 31, 2015. Payment for 80% of the cost will be made in March and 20% in May. The equipment will have a ten-year useful life and no residual value.
10. The note payable has an 8% interest rate; interest is paid at the end of each month.
MAPS continued
11. MAPS's management has set a minimum cash balance at $5,000. Borrowing (repayments) can be made in even $1000 amounts from (to) the Cedi Bank at an interest rate of 6% per year. Borrowing (if necessary in the month) will be at the beginning of the month while repayment (when the company is in a position to do so) will be at the end of the month. Interest on any borrowing must be paid monthly at the end of the month.
12. The ending inventory of finished goods should be 10% of the next month's sales requirements. The ending inventory of raw materials should be 10% of the raw materials required for the next month's production. These requirements may not be met on January 1, 2015, but must be met during the budgeting period.
13. Fixed selling and administrative expenses per month are as follows: salaries, $15,000; rent, $9,000; and utilities, $1,500. These costs are paid in cash in the month in which they are incurred.
Required:
Prepare an appropriate report to MAPS’s management detailing the company’s budgeted activities for the first quarter of 2015. Budgeted information should be provided for each month, and the quarter as a whole, in columnar form. The following component budgets must be included (and submitted):
a. Sales budget
b. Production budget
c. Direct materials purchases budget
d. Direct labor budget
e. Manufacturing Overhead budget
f. Cost of Goods manufactured budget
g. Finished goods budget
h. Cost of goods sold budget
i. Selling and administrative expenses budget
j. Budgeted Income Statement
k. Cash budget
Also to be provided is a Budgeted Balance Sheet. Unlike the other requirements above, the Budgeted Balance Sheet submitted should be ONLY the one at the end of the first quarter of the 2015 fiscal year.
All hand-in materials must be computer generated (spreadsheets for your budgets and word processors for other write-ups).
In the presentation of your work to management, be sure to draw management’s attention to any significant parts of your report.