Lisa Scott, NTI’s cost accountant, has thoroughly analyzed the company’s variable and fixed manufacturing costs. She is confident
that variable. manufacturing costs per unit will not increase during the first half of 2000. She also believes that fixed manufacturing overhead will hold steady at approximately’$ 15,OOOper quarter. Based on her analysis, she compiled the following manufacturing
Manufacturing Cost Budget (Schedule A4) Combining the production schedule estimates in Schedule A2 with the manufacturing cost figures in Schedule A3, the following manufacturing cost budget is developed:
Note that the budgeted manufacturing costs in the first quarter total $42.00 )’!r ‘unit, compared to $28.25 per unit in the second quarter. These amounts differ due to a decrease in fixed manufacturing costs per unit anticipated in the ‘second quarter.
During the first quarter, $15.000 in fixed manufacturing costs is allocated to 1,000 units produced (or $15.00 per unity. During the second quarter, however, $) 5,000 is allocated to 12.000 units produced (or $1.25 per unit).
Ending Finished Goods Inventory (Schedule A5) As mentioned, NT! recently adopted a policy stating that the number of units.in finished goods inventory at the end of each quarter should amount to 10% of the ur:it sales volume anticipated in the following quarter.
Thus applying this policy in conjunction with the unit cost figures shown in Schedule .44 ending inventory estimates are determined as follows:
Cost of Goods Sold Budget (Schedule A5) A manufacturing company’s cost of goods ~sold is equal to its beginning finished goods inventory, plus the cost of goods .manufacturcd ‘during the period, less its ending finished goods inventory. Thus the budget estimates for cost of goods sold in’ Schedule A6 are computed using the beginning finished goods inventory figure from the balance sheet on page 939 and infosmation from Schedules A4 and A5.
Operating Expense Budget (Schedule A1) NT!,s variable operating expenses amount to $7.50 per unit. Most of this cost applies to sales commissions. The company’s fixed operating expenses of $175,000 pertain primarily to the salaries of its officers. Based this information, the following operating expense budget is prepared:
BudQe.ted Income Statement
NT!’s budgeted income statements are based on estimates from Schedules “I through A7. In addition; they include budgeted amounts for interest expense and income tax expense. Interest expense and income taxes are also reported on Schedules 85 and BfJ discussed later in the chapter. The following discussion explains how these figures were determined. The $36.000 note payable reported in the January I, 2000, balance sheet is the load from NTI’s president, Nancy Conrad. The note is payable in four quarterly installments of $9,000, plus accrued interest on the outstanding balance at the end of each quarter. The note’s interest rate is 12% (01-3% quarterly). Thus interest due at the end of the first ‘quarter is $1,080 ($36,000 X 3%), whereas interest due-at the end of the second quarter is only $8 ($27,000 X 3%).
The $246,000 note payable is.the remaining principal owed on a loan that originated early in 1999. The note’s interest rate is 14% (or 3.5% quarterly). The entire $246,000, plus $8,610 in accrued interest ($246,000 x 3.5%), is due at the end of the first quarter of 2000. Thus total interest expense budgeted on notes payable for the first quarter is $9,690 ($I,080.plus $8,6 ).Income tax expense is budgeted at 40% of income before income taxes, Based on this information, we prepared the following budgeted income statements:
Financial Budget Estimates
The estimates and data necessary to prepare the cash budget and budgeted balance sheets are called financial budget estimates. To avoid confusing these figures with the operatillg budget estimates used to prepare the budgeted income statement, we will refer to them as Schedule B1 through Schedule 88. The amounts to be used in the preparation , of NTI’s cash budget are highlighted.
Budgeted Direct Materials Purchases and Inventory (Schedule B1) In Scheduled A4,
we estimated that’ $15.000 of direct materials would be used during thefirst quarter. However. In the preparation of a cash budget, we are concerned about the cost of direct materials to be purchased each quarter. To estimate the purchase of direct materials we must consider both the expected use of materials and the desired direct materials inventory at the end of each quarter. Let us assume that the production manager feels that the direct materials inventory
of $60,000 reported on NTI’s January I balance sheet is too high. Thus he recommends that it be reduced to $50,000 by the end of the first quarter. However, in anticipation of a strong third quarter, he estimates that the direct materials inventory will need to he increased to $80,000 by the end of the second quarter. Based on these estimates. the purchase of direct materials can be determined as follows: