Manny Fold owns a factory that specializes in making titanium valves for high performance engines on a just in time basis. Thus, Manny produces what he sells in a particular month. There are no inventories of finished goods or work in process. However, Manny does require that an inventory of                direct raw materials equal to 20% of next month’s production requirement be available at the end of each month. To build his business and gain new customers Manny has extended generous credit terms to his customers. While Manny is confident about the fundamentals of his business, he is concerned about the possible income and cash flow implications.

The variable costs of producing a valve are budgeted at $7.20 per valve for direct materials (3/4 pound of titanium alloy costing $9.60 per pound), $2.80 per valve for direct labor, and $5.50 per valve for variable manufacturing overhead. Fixed manufacturing overhead is budgeted at $74,700 per month during the 2nd quarter. The detailed components of variable and fixed overhead are as listed below.

For variable overhead, electric power is budgeted at $2.30 per unit, indirect labor is budgeted at $2.50 per unit, and supplies are budgeted at $.70 per unit. For fixed overhead depreciation is budgeted at

$10,000 per month, Supervision and other factory salaries are budgeted at $40,000 per month, property tax and insurance combined are budgeted at $8,000 per month (which have been paid in advance through June 15 – see below), maintenance is budgeted at $7,000 per month, licensing fees and permits to use proprietary technology are budgeted at $3,400 per month, and other miscellaneous fixed overhead expenses are budgeted at $6,300 per month.

Manny’s customers drive a hard bargain because they can easily switch suppliers. They all do pay eventually, but many of them take their time about doing so and Manny is reluctant to get tough with them for fear they will take their business elsewhere. He tells you that all his sales are on credit (no cash sales). He typically collects only 10% of sales in the month of the sale, 30% of sales in the month after the sale and 60% of sales two months later (for example 10% of June sales would be collected in June, 30% in July and 60% in August). On the other hand, he must pay for 70% of his materials purchases in the same month of the purchase and 30% in the month after. Cash costs of labor and overhead other than depreciation, property taxes and insurance are paid in the same month they are incurred. Property taxes and insurance are paid in advance through June 15. The amount due for the next 6 months (starting June 16) must be paid in early June.

All of the selling and administrative expenses are fixed. Monthly fixed selling and administrative costs, other than interest, amount to $43,600, of which $6,000 is depreciation. These operating costs, excepting depreciation, are paid in cash in the month incurred. Manny has large tax loss carry forwards from a previous unsuccessful business venture. Therefore, he does not expect to pay any income taxes this year. (In other words you may ignore income taxes).

Manny plans to buy new equipment costing $80,000 during the month of June. This equipment will be ready for use starting in July.

The budgeted selling price of valves for April, May, and June is $23 per valve. Because of market competition there is not much flexibility to adjust the price and the price is expected to be stable during the 2^nd quarter. Manny budgeted sales in units for April at 17,000 units. For May he expects to sell only 18,500 units. He has projected sales of 20,000 units for June and 18,000 units for July.

Manny requires a minimum cash balance of $10,000 at the end of each month. If the budgeted month end cash balance will fall below this level Manny plans to borrow enough cash at the beginning of that same month to keep his ending balance up to the minimum level. Manny’s bank charges him interest at the rate of ½ % per month on the balance outstanding during that month. Manny’s bank charges him interest at the rate of ½ % per month on the balance outstanding during that month. Manny pays the interest at the beginning of the following month and plans to repay as much as he can at the beginning of that month without letting his budgeted cash balance go below $10,000 at month end. (On the budgeted income statement round interest expense to the nearest dollar)

The company’s managerial accountant has resigned unexpectedly before the 2nd quarter budget could be completed. You have been contracted to complete the master budget for June and for the 2nd quarter (including some missing numbers from May). Balances as of March 31 for all relevant accounts have already been calculated by this accountant together with some of the amounts for April and May. You may assume that these balances and amounts shown in the tables below are correct.

REQUIREMENTS:

1)                      Construct Manny’s budgeted income statement for June and the total for the 2nd quarter. April and May have already been provided. Complete the template provided below. Show any necessary calculations. (7 points)

2)                      Using the same forecast as in requirement 1 construct Manny’s budget for raw materials purchases in June and the total for the 2nd quarter (You will also have to complete the budget for May) Complete the template provided which already has information for April and May. (2 points)

3)                      Using the same forecast as you used in requirement 1 construct Manny’s cash budgets for June and the total for the 2nd quarter (You will also have to provide the missing number for May payments for purchases). Complete the templates provided below which already have information for April and May. Show any necessary calculations. (3 points)

4)                      Using the same forecast as you used in requirement 1 construct Manny’s budgeted balance sheet at the end of June. Complete the template provided which already has the March 31 balances. (3 points)

5)                      During March Manny actually produced and sold 16,500 valves. Actual sales revenues were $381,950. Actual costs and the original March budget based on 16,000 valves were as detailed in the table below. Complete the table by constructing a flexible budget based on 16,500 valves and determining the variances for the performance report. Use the template provided below for your answer. (7 points)

6)                      Write a brief report explaining some possible reasons why Manny’s profits were different from the amount projected in the master budget for March (2 points).

REQUIREMENT 1

Budgeted Income Statement

	April	May	June	2nd Quarter
SALES REVENUES	$391,000	$425,500
DIRECT MATERIALS USED	($122,400)	($133,200)
DIRECT LABOR	($47,600)	($51,800)
VARIABLE OVERHEAD	($93,500)	($101,750)
CONTRIBUTION MARGIN	$127,500
FIXED OVERHEAD	($74,700)	($74,700)
FIXED OPERATING EXPENSES	($43,600)	($43,600)
OPERATING INCOME	$ 9,200
INTEREST EXPENSE	$0
NET INCOME	$9,200

REQUIREMENT #2   BUDGETED PURCHASES OF TITANIUM ALLOY (direct material)

	April	May	June	2nd Quarter
Valves to be produced	17,000	18,500	20,000
X Pounds per unit	0.75	0.75
Titanium to be used	12,750	13,875
Desired ending inventory (20%)	2,775
Pounds of Titanium Needed	15,525
Less: Beginning Inventory	2,550	2,775
Pounds to be purchased	12,975
Cost per pound	$9.60
Cost of Purchases	$124,560

REQUIREMENT #3

COMPUTATION OF CASH COLLECTIONS (Use this to calculate March & Feb sales)

	April	May	June	2nd Quarter
Sales Made 2 Months Ago	$213,900	$220,800
Sales Made 1 Month Ago	$110,400	$117,300
Sales Made this Month	$39,100	$42,550
Total Cash Collections	$363,400	$380,650

COMPUTATION OF CASH PAYMENTS

	April	May	June	2nd Quarter
Payments for purchases of materials	$122,184 (used to calculate March purchases)
Payments for direct Labor	$47,600	$51,800
Payments for Variable Overhead	$93,500	$101,750
Payments for Fixed Overhead	$56,700	$56,700
Payments for Property Taxes and Insurance	$0	$0
Payments for other operating expenses	$37,600	$37,600
Capital Expenditures	$0	$0
Total Cash Payments	$357,584

	April	May	June	2nd Quarter
Beginning Balance of Cash	$10,324	$16,140
Cash Collections	$363,400	$380,650
Total cash available	$373,724	$396,790
Less: Cash Payments	$357,584
Ending Cash Balance Before Financing:	$16,140
Borrowings	$0
Repayments	$0
Interest Payments	$0
End Cash Balance	$16,140

REQUIREMENT #4: BUDGETED BALANCE SHEET FOR JUNE 30

	March 31	June 30
ASSETS:Current Assets
Cash	$10,324
Accounts Receivable	$545,100
Inventory (raw materials)	$24,480
Prepaid Insurance and Property Taxes	$20,000
Total Current Assets		$599,904
Equipment and Furniture	$880,000
Accumulated Depreciation	($540,000)
Equipment & Furniture (net)		$340,000
Total Assets		$939,904
LIABILITIES AND EQUITY
Liabilities (all current)
Accounts Payable	$34,992
Interest Payable	0
Bank Loans Payable	0
Total Liabilities		$34,992
Owner’s Equity(Net income increases this)		$904,912
Total Liabilities and Equity		$939,904

Actual Costs and Template for Requirement #5 Use this page to answer this requirement.

Performance Report for March

Cost Item	Actual results	Flexible Budget Variance	Flexible Budget for 16,500 units	Sales Volume Variance	Static Master Budget for 16,000 units
Sales Revenues	$381,950				$368,000
Direct Materials used	$118,720				$115,200
Direct Labor	$45,600				$44,800
Electric Power	$38,454				$36,800
Indirect Labor	$49,360				$40,000
Supplies	$16,686				$11,200
Supervision and other salaries	$37,858				$40,000
Maintenance	$8,925				$7,000
Insurance and property tax	$8,000				$8,000
Permits and license fees	$3,400				$3,400
Factory depreciation	$10,000				$10,000
Other Overhead expenses	$8,650				$6,300
Total Production Expenses	?				$322,700
Total Selling & Administrative Expenses	$39,867				$43,600
Total Expenses	?				$366,300
Operating Income	?				$1,700

QUESTION 1

Required:

#1.

Prepare journal entries to record the December transactions in the General Journal Tab in the excel template file “Accounting Cycle Excel Template.xlsx”. Use the following accounts as appropriate: Cash, Accounts Receivable, Supplies, Prepaid Insurance, Equipment, Accumulated Depreciation, Accounts Payable, Wages Payable, Common Stock, Retained Earnings, Dividends, Service Revenue, Depreciation Expense, Wages Expense, Supplies Expense, Rent Expense, and Insurance Expense.

1-Dec

Began business by depositing $6000 in a bank account in the name of the company in exchange for

600 shares of $10 per share common stock.

1-Dec

Paid the rent for the current month, $500 .

1-Dec

Paid the premium on a one-year insurance policy, $480 .

1-Dec

Purchased Equipment for $3600 cash.

5-Dec

Purchased office supplies from XYZ Company on account, $300 .

15-Dec

Provided services to customers for $5400 cash.

16-Dec

Provided service to customers ABC Inc. on account, $2500 .

21-Dec

Received $1500 cash from ABC Inc., customer on account.

23-Dec

Paid $170 to XYZ company for supplies purchased on account on December 5 .

28-Dec

Paid wages for the period December 1 through December 28, $4200 .

30-Dec

Declared and paid dividend to stockholders $200 .

#2.

Post all of the December transactions from the “General Journal” tab to the T-accounts under the “T-Accounts” tab in the excel template file “Accounting Cycle Excel Template.xlsx”. Assume there are no beginning balances in any of the accounts.

#3.

Compute the balance for each T-account after all of the entries have been posted. These are the unadjusted balance as of December 31.

#4.

Prepare the unadjusted trial balance under the “Unadjusted Trial Balance” tab in the excel template file “Accounting Cycle Excel Template.xlsx” .

Provide the total of the credit column from the Unadjusted Trial Balance

#5.

Record the following four transactions as adjusting entries under the “General Journal” tab.

31-Dec

One month’s insurance has been used by the company $40.

31-Dec

The remaining inventory of unused office supplies is $90.

31-Dec

The estimated depreciation on equipment is $60.

31-Dec

Wages incurred from December 29 to December 31 but not yet paid or recorded total $450.

#6.

Post all of the adjusting entries to the T-accounts under the “T-Accounts” tab. Compute the balance for each T-account after all of the adjusting entries have been posted. These are the adjusted balance as of December 31.

#7.

Prepare the adjusted trial balance under the “Adjusted Trial Balance” tab as of December 31 in the excel template file “Accounting Cycle Excel Template.xlsx” .

Provide the following accounts balances from the Adjusted Trial Balance:

Cash

Accounts Receivable

Supplies

Prepaid Insurance

Equipment

Accumulated Depreciation

Accounts Payable

Wages Payable

Common Stock

Retained Earnings

#8.

Prepare Income Statement, Statement of Stockholder’s Equity, and Classified Balance Sheet under the “Financial Statements” tab for the month ended December 31, 20XX in the excel template file “Accounting Cycle Excel Template.xlsx”.

Provide the following amount from the Income Statement:

Service Revenue

Depreciation Expense

Wages Expense

Supplies Expense

Rent Expense

Insurance Expense

Net Income

Provide the following account balance from the Statement of Stockholders’ Equity:

Dividends

Provide the following account balances from the Balance Sheet:

Current Assets

Long-Term Assets

Total Liabilities

Total Stockholder’s Equity

Cash

#9.

Record the closing entries under the “General Journal” tab.

#10.

Post all of the closing entries to the T-accounts under the “T-Accounts” tab. Compute the balance for each T-account after all of the closing entries have been posted.

Provide the ending balance of Cash at December 31 from the T-account

Provide the balance of the Retained Earnings T-account after closing entries have been posted.

Does the ending balance of the Retained Earnings T-account agree with the balance of Retained Earnings on the Balance Sheet?

Check Point: Total Assets

$   8,820.00