SUBDOMAIN 308.

1 - COST/MANAGERIAL ACCOUNTING
Competency 308.1.7: Developing Budgets - The student can develop various
forms of operating budgets, including a flexible budget system.
Objectives:
308.1.7-01:
308.1.7-03:
308.1.7-04:
308.1.7-05:
308.1.7-06:
308.1.7-07:

Develop
Develop
Develop
Develop
Develop
Develop

a
a
a
a
a
a

sales budget.
direct materials budget.
purchases budget.
manufacturing overhead budget.
direct labor budget.
production budget.

Given:
Note: This is the first of two budgeting tasks that must be completed in order. You
must complete this task before you begin task 308.1.7-02, 08, 09.
Company A is a high-end ceiling fan manufacturer established six years ago. It has
one luxury fan model that is unique and has wide market acceptance.
Sales Data
Actual Sales Data Year 10 (last 2 months)
Projected Sales Data Year 11 (first 5 months)
Month
November, X6
December, X6
January, X7
February, X7
March, X7
April, X7
May, X7

Units Sold
3,000
2,400
3,500
4,000
3,500
3,400
4,000

Selling price is $100 per unit.

All sales are on credit.
Ending Inventory
Raw materials: Outlined in direct materials below
Work in process: No work in process inventory; all work completed on last day of
quarter
Finished goods: 20% of next months sales projection
Average unit cost in Year 10: $64
Inventory method used: FIFO
Direct Cost Data
Direct Materials:
Motors are purchased ready to use from an outside supplier at a cost of $14
each. Company As management desires to maintain a motor inventory based on
20% of the next months projected production.

Blades are produced in the plant. Each fan requires 10 blades. The material is
purchased in 4 ft. x 8 ft. sheets at $24 per sheet. Fifteen blades can be cut out of
each sheet. Experience has shown that, on average, the number of defective
blades produced by the cutting process is equal to 6% of the number of good
blades. Defective blades must be discarded. In case of machine breakdowns,
management desires an ending inventory of finished blades each month equal to
10% of the next months total projected blade production.
Direct Labor:
Total payroll expense including benefits is $63 per hour for the production
workers required to operate the blade-cutting machine, and $63 per hour for the
workers required to staff the assembly/packing workstation. The standard labor
allowance is 0.2 hours per fan on the blade-cutting machine and 0.2 hours per
fan at the assembly/packing workstation.
Overhead:
Variable manufacturing overhead and fixed overhead items are presented below.
Accounts Receivable
All sales are made on credit. Historically, 26% of receivables have been collected
during the month of sale, 50% collected in the month following the sale, and 20%
collected two months after the sale. The company has experienced 4% bad debt on
its credit sales.
Accounts Payable
All materials are purchased on credit. Normally, one half of the purchases are paid
during the month in which they were purchased and one half paid the following
month. The accounts payable balance shown on the Year 10 balance sheet
represents one half of the December purchases. The company does not receive any
purchase discounts from its suppliers.
Indirect Labor Costs
Company Sales
Representatives
Sales Manager
Production Supervisor
Administrative Expenses
(salaries)
Other Expenses
Yearly Insurance
Premiums
Factory Utilities

Advertising Expenses
Factory Building
Mortgage
(20 years at 8%)
Travel Expenses
Factory Maintenance

3% commission on sales each month

$5,000/mo. plus 50% override on sales commissions
$4,000/mo.
$8,000/mo.

$36,000 on October 1; 80% related to factory operations

January $15,000; February $17,000; March
$15,200
Usage estimated at 90% factory and 10% administrative
7% of monthly sales
Building purchased four years ago for $430,000 (total
cost)
Down payment of $190,000
Mortgage paid at the end of each quarter
4% of monthly sales
10% of monthly blade material costs

Factory Janitor Services

$3,000/mo.

Cash Control
The cash on hand at the beginning of each month must be maintained at $60,000 for
any contingencies that might arise. If the operations do not provide this balance, the
company will use its preapproved line of credit at 8% and borrow sufficient funds to
meet the minimum required cash balance. When there is a credit line balance due, it
will be paid in the next month that generates a projected cash balance over the
$60,000 minimum.
Depreciable Assets
The factory building was purchased on January 1, Year 3. It is being depreciated
using straight line depreciation for 20 years. Salvage value of the building is
estimated at $70,000.
The blade-cutting machine was purchased on December 31, Year 10, for $240,000
cash. It is being depreciated over eight years using the double declining balance
method. Depreciation is recognized on long-term assets at the end of each quarter.
Dividend Policy
The company declares $58,000 annual dividend to its shareholders in the first month
of the quarter. Dividends are paid in the second month of the quarter.
Task:
A. Using the attached Budgeting Template and the information provided in the
given, create the budgets listed below for the first three months of Year 11.
1. Sales budget
2. Production budget
3. Direct materials budget
4. Direct labor budget
5. Manufacturing overhead budget
Note: Please save word-processing documents as *.rtf (Rich Text Format) or *.pdf
(Portable Document Format) files.
Note: For definitions of terms commonly used in the rubric, see the attached Rubric
Terms.
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