The Eastern Technology Company
Background and Assumptions for Preparation of 2016 Master Budget
The Eastern Technology Company manufactures Weather Radios for sale to retailers such as Wal-Mart, Target, etc.
The 2016 quarterly unit sales estimates and projected sales prices per unit are as follows:
Quarter1 Quarter2 Quarter3 Quarter4
Sales Units 9,200 9,300 9,500 9,400
Price per Unit $92 $93 $94 $95
Also, note that that projected sales (and projected production) for Quarter 1 of 2017 is 10,000 units.
Product Cost Assumptions:
The company’s product requires two raw materials, resistors and switches. Cost parameters are as follows:
Number of Components/Unit
Switches @ $4/switch 3
Resistors @ $8/resistor 2
Number of minutes required to complete finished unit:
Direct labor minutes per unit 30
Machine minutes per unit 12
Hour rates used:
Direct labor rate = $10/hour
Manufacturing overhead rates (i.e., the PDOHRs to use to apply overhead):
Labor-related = $25/hour
Machine-related = $40/hour
Eastern applies manufacturing overhead using two cost drivers: direct-labor hours and machine hours.
The desired ending inventories for each of the two direct materials is 10% of the next quarter’s respective amount of direct materials needed for production. The desired finished goods ending inventory is 5% of the next quarter’s budgeted sales units. Beginning inventory for direct materials and finished goods are assumed to be zero as of 1/1/2016.
Non-Product Cost Assumptions (i.e., Selling, General, and Administrative Expenses):
Sales are made by brokers who charge a sales commission. The sales commission rate is $0.50 per unit sold.
Shipping costs are $3 per unit sold.
The administrative office building historical cost was $500,000 and is being depreciated over 10 years on a straight line basis with no salvage value.
Eastern also has office equipment and computers that are leased with a quarterly operating lease payment of $40,000.
Other selling, general, and administrative expenses are fixed and are $225,000 for each quarter.
Direct materials are all purchased on account with no available discounts; 30% are paid for in the quarter of purchase and 70% are paid for in the following quarter. Also note that the direct materials purchased during the 4th quarter of 2015 (the prior year) are estimated at $220,000, of which 70% will be paid during the 1st quarter of 2015.
All direct labor and manufacturing overhead costs are paid in the quarter incurred.
All other non-product costs are paid in the quarter incurred.
Eastern makes all sales on account with no discounts available. Payments are received 50% in the quarter of sale, 47% in the following quarter, and the remaining 3% is never collected. Uncollectible accounts expense of 3% of sales is recognized in the quarter of sale. Also note that the sales on account during the 4th quarter of 2015 (the prior year) are estimated at $800,000, of which 47% will be paid during the 1st quarter of 2016.
Assume beginning cash as of 1/1/2016 to be $50,000
The company wishes to maintain a minimum cash balance of $50,000 and has a line of credit with the bank which it can borrow upon. The interest rate is 10%. Assume all money borrowed is at the beginning of a quarter and is repaid at the end of a quarter.
Using the assumptions presented use Excel to prepare the following schedules (showing quarterly and annual amounts where applicable):
Direct Materials Purchases Budget
Direct Labor Budget
Manufacturing Overhead Budget
Finished Goods Inventory
Budgeted Absorption Costing Income Statement
Cash Receipts Budget for Sales
Cash Disbursements Budget for Direct Material Purchases
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