5-35 Comprehensive Cash Budget (CMA adapted) (LO 4) Grow Master Products,a rapidly growing distributor of home gardening equipment, is formulating its plans for the coming year. Carol Jones, the firm’s marketing director, has completed the following sales forecast.
Month Sales Month Sales
January $ 900,000 July $1,500,000
February $1,000,000 August $1,500,000
March $ 900,000 September $1,600,000
April $1,150,000 October $1,600,000
May $1,250,000 November $1,500,000
June $1,400,000 December $1,700,000
Phillip Smith, an accountant in the Planning and Budgeting Department, is responsible for preparing the cash flow projection. He has gathered the following information.
- All sales are made on credit.
- Grow Master’s excellent record in accounts receivable collection is expected to continue,with 60 percent of billings collected in the month after sale and the remaining 40 percent collected two months after the sale.
- Cost of goods sold, Grow Master’s largest expense, is estimated to equal 40 percent of sales dollars. Seventy percent of inventory is purchased one month prior to sale and 30 percent during the month of sale. For example, in April, 30 percent of April cost of goods sold is purchased and 70 percent of May cost of goods sold is purchased.
- All purchases are made on account. Historically, 75 percent of accounts payable have been paid during the month of purchase, and the remaining 25 percent in the month following purchase.
- Hourly wages and fringe benefits, estimated at 30 percent of the current month’s sales, are paid in the month incurred.
- General and administrative expenses are projected to be $1,550,000 for the year. A breakdown of the expenses follows. All expenditures are paid monthly throughout the year, with the exception of property taxes, which are paid in four equal installments at the end of each quarter.
Salaries and fringe benefits $ 324,000
Property taxes 136,000
- Operating income for the first quarter of the coming year is projected to be $320,000. Grow Master is subject to a 40 percent tax rate. The company pays 100 percent of its estimated taxes in the month following the end of each quarter.
- Grow Master maintains a minimum cash balance of $50,000. If the cash balance is less than $50,000 at the end of the month, the company borrows against its 12 percent line of credit in order to maintain the balance. All borrowings are made at the beginning of the month,and all repayments are made at the end of the month (in increments of $1,000). Accrued interest is paid in full with each principal repayment. The projected cash balance on April 1 is $50,000.
- Prepare the cash receipts budget for the second quarter.
- Prepare the purchases budget for the second quarter.
- Prepare the cash payments budget for the second quarter.
- Prepare the cash budget for the second quarter.
6-30 Comprehensive flexible budgets and variance analysis (LO 1, 2, 3, 4, 5,6, 7, 8) Lexi Belcher picked up the monthly report that Irvin Santamaria left on her desk.
She smiled as her eyes went straight to the bottom line of the report and saw the favorable variance for operating income, confirming her decision to push the workers to get those last250 cases off the production line before the end of the month.
But as she glanced over the rest of numbers, Lexi couldn’t help but wonder if there were errors in some of the line items. She was puzzled how most of the operating expenses could be higher than the budget since she had worked hard to manage the production line to improve efficiency and reduce costs. Yet the report, shown below, showed a different story.
Actual Budget Variance
Cases produced and sold 10,250 10,000 250 F
Sales revenue $1,947,500 $1,870,000 $77,500 F
Less variable expenses
Direct material 561,000 550,000 11,000 U
Direct labor 267,650 260,000 7,650 U
Variable manufacturing overhead 285,012 280,000 5,012 U
Variable selling expenses 93,130 90,000 3,130 U
Variable administrative expenses 41,740 40,000 1,740 U
Total variable expenses 1,248,532 1,220,000 28,532 U
Contribution margin 698,968 650,000 48,968 F
Less fixed expenses
Fixed manufacturing overhead 111,000 110,000 1,000 U
Fixed selling expenses 69,500 70,000 (500 F)
Fixed administrative expenses 129,800 130,000 (200 F)
Total fixed expenses 310,300 310,000 300 U
Operating income $ 388,668 $ 340,000 $48,668 F
Lexi picked up the phone and called Irvin. “Irvin, I don’t get it. We beat the budgeted operating income for the month, but look at all the unfavorable variances on the operating costs. Can you
help me understand what’s going on?” “Let me look into it and I’ll get back to you,” Irvin replied.
Irvin gathered the following additional information about the month’s performance.
- Direct materials purchased: 102,000 pounds at a total of $561,000
- Direct materials used: 102,000 pounds
- Direct labor hours worked: 26,500 at a total cost of $267,650
- Machine hours used: 40,950
Irvin also found the standard cost card for a case of product.
Standard Price Standard Quantity Standard Cost
Direct materials $5.50 per pound 10 pounds $ 55
Direct labor $10.00 per DLH 2.6 DLH 26
Variable overhead $7.00 per MH 4 MH 28
Fixed overhead $2.75 per MH 4 MH 11
Total standard cost per case $120
- Calculate the direct materials price variance for the month.
- Calculate the direct materials quantity variance for the month.
- Calculate the direct labor rate variance for the month.
- Calculate the direct labor efficiency variance for the month.
- Calculate the variable overhead spending variance for the month.
- Calculate the variable overhead efficiency variance for the month.
- Calculate the fixed overhead spending variance for the month.
- Prepare a performance report that will assist Lexi in evaluating her efforts to control production costs.
- Based on your review of the performance report you prepared, do you think Lexi did a good job of controlling production expenses during the month? Why or why not?