Comprehensive budgeting problem; activity based costing, operating and financial budgets. Borkenstick makes a very popular undyed cloth sandal in one style, but in Regular and Deluxe. The Regular sandals have cloth soles and the Deluxe sandals have cloth covered wooden soles. Borkenstick is preparing its budget for June 2012, and has estimated sales based on past experience.
Other information for the month of June follows:
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Input Prices |
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Direct materials |
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Cloth |
$3.50 per yard |
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Wood |
$5.00 per board foot |
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Direct manufacturing labor |
$10 per direct manufacturing labor hour |
Input Quantities per Unit of Output (per pair of sandals)
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Regular |
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Direct materials |
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Cloth |
1.3 yards |
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Wood |
0 |
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Direct manufacturing labor hours (DMLH) |
5 hours |
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Setup hours per batch |
2 hours |
Inventory Information, Direct Materials
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Cloth |
Wood |
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Beginning inventory |
610 yards |
800 b.f. |
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Target ending inventory |
386 yards |
295 b.f. |
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Cost of beginning inventory |
$2,146 |
$4,040 |
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Borkenstick accounts for direct materials using a FIFO cost flow assumption. |
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Sales and Inventory Information, Finished Goods |
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Regular |
Deluxe |
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Expected sales in units (pairs of sandals) |
2,000 |
3,000 |
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Selling price |
$ 80 |
$ 130 |
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Target ending inventory in units |
400 |
600 |
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Beginning inventory in units |
250 |
650 |
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Beginning inventory in dollars |
$15,500 |
$61,750 |
Borkenstick uses a FIFO cost flow assumption for finished goods inventory.
All the sandals are made in batches of 50 pairs of sandals. Borkenstick incurs manufacturing overhead costs, marketing and general administration, and shipping costs. Besides materials and labor, manufacturing costs include setup, processing, and inspection costs. Borkenstick ships 40 pairs of sandals per shipment.
Borkenstick uses activity based costing and has classified all overhead costs for the month of June as shown in the following chart:
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Cost type |
Denominator Activity |
Rate |
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Manufacturing: |
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Setup |
Setup hours |
$12 per setup hour |
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Processing |
Direct manufacturing labor hours |
$1.20 per DMLH |
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Inspection |
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Nonmanufacturing: |
Number of pairs of sandals |
$0.90 per pair |
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Marketing and general administration |
Sales revenue |
8% |
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Shipping |
Number of shipments |
$10 per shipment |
1. Prepare each of the following for June:
a. Revenues budget
b. Production budget in units
c. Direct material usage budget and direct material purchases budget in both units and dollars; round to dollars
d. Direct manufacturing labor cost budget
e. Manufacturing overhead cost budgets for processing and setup activities
f. Budgeted unit cost of ending finished goods inventory and ending inventories budget
g. Cost of goods sold budget
h. Marketing and general administration costs budget
2. Borkenstick’s balance sheet for May 31 follows. Use it and the following information to prepare a cash budget for Borkenstick for June. Round to dollars All sales are on account; 60% are collected in the month of the sale, 38% are collected the following month, and 2% are never collected and written off as bad debts. All purchases of materials are on account. Borkenstick pays for 80% of purchases in the month of purchase and 20% in the following month. All other costs are paid in the month incurred, including the declaration and payment of a $10,000 cash dividend in June. Borkenstick is making monthly interest payments of 0.5% (6% per year) on a $100,000 long term loan. Borkenstick plans to pay the $7,200 of taxes owed as of May 31 in the month of June. Income tax expense for June is zero. 30% of processing and setup costs, and 10% of marketing and general administration costs are depreciation.
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Borkenstick Balance Sheetas of May 31 |
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Assets |
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Cash |
$ 6,290 |
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Accounts receivable |
$216,000 |
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Less: Allowance for bad debts |
10,800 |
205,200 |
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Inventories |
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Direct materials |
6,186 |
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Finished goods |
77,250 |
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Fixed assets |
$580,000 |
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Less: Accumulated depreciation |
90,890 |
489,110 |
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Total assets |
$784,036 |
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Liabilities and Equity |
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Accounts payable |
$ 10,400 |
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Taxes payable |
7,200 |
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Interest payable |
500 |
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Long term debt |
100,000 |
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Common stock |
200,000 |
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Retained earnings |
465,936 |
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Total liabilities and equity |
$784,036 |
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3. Prepare a budgeted income statement for June and a budgeted balance sheet for Borkenstick as of
June 30.