Problem 8.36 Operating Budget, Comprehensive Analysis Ponderosa, Inc., produces
ID: 2491013 • Letter: P
Question
Problem 8.36
Operating Budget, Comprehensive Analysis
Ponderosa, Inc., produces wiring harness assemblies used in the production of semi-trailer trucks. The wiring harness assemblies are sold to various truck manufacturers around the world. Projected sales in units for the coming five months are given below.
The following data pertain to production policies and manufacturing specifications followed by Ponderosa:
Finished goods inventory on January 1 is 900 units. The desired ending inventory for each month is 20 percent of the next month’s sales.
The data on materials used are as follows:
Inventory policy dictates that sufficient materials be on hand at the beginning of the month to satisfy 30 percent of the next month’s production needs. This is exactly the amount of material on hand on January 1.
The direct labor used per unit of output is one and one-half hours. The average direct labor cost per hour is $20.
Overhead each month is estimated using a flexible budget formula. (Activity is measured in direct labor hours.)
Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. (Activity is measured in units sold.)
The unit selling price of the wiring harness assembly is $110.
In February, the company plans to purchase land for future expansion. The land costs $68,000.
All sales and purchases are for cash. The cash balance on January 1 equals $62,900. The firm wants to have an ending cash balance of at least $25,000. If a cash shortage develops, sufficient cash is borrowed to cover the shortage and provide the desired ending balance. Any cash borrowed must be borrowed in $1,000 increments and is repaid the following month, 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
7. Ending finished goods inventory budget. Round intermediate calculations to the nearest cent. Round your answers to the nearest cent, if required.
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Solution
Unit cost computation: Direct materials: Part K298 $ Part C30 Direct labor Overhead: Variable Fixed Total unit cost $ Number of units Finished goods $Explanation / Answer
Finsished Goods Inventory Budget jan Feb Mar Total April Total Budgeted sales in units 10000 10500 13000 33500 16000 Add: Budgeted Closing Inventory 20% of next month sales 2100 2600 3200 3200 Total needs 12100 13100 16200 36700 Less: Beginning Inventory 900 2100 2600 900 Required Unit TO BE PRODUCED 11200 11000 13600 35800 Unit cost computation: Qtr Direct materials: Part K298 (2*4) 8 Part C30 (3*7) 21 Direct labor (20*1.5) 30 Overhead: Variable 3.9 Fixed (161800/35800*1.5 hours) 3.01 round off Total unit cost 65.91 Number of units 35800 Finished goods 2359687 Note Fixed Overhead=12500+14000+45000+4300+86000 161800