Automotive Parts Productions (APP) is a manufacturer of motor parts for family cars based in Bendigo, Australia. These motor parts are sold directly to car manufacturers in Australia for use in making motors. The accountant of APP has compiled information regarding Part-1, one of the parts produced and sold by the company. The forecasted monthly sales units for part of 2018 are presented as follows:
| June | 30,000 |
| July | 40,000 |
| August | 50,000 |
| September | 54,000 |
| October | 60,000 |
| November | 64,000 |
The following part presents data obtained from the budgeting documents of the company:
- Inventory balances and the related desired ending inventory policies are stated as follows:
| Description | July 1 balances | Desired ending inventory policy (monthly) | |||
| Finished Goods | 28,000 | 70% of next month’s sales quantity | |||
| Raw Materials: | |||||
| Mat-AA | To be computed | 60% of next month’s production needs | |||
| Mat-BB | To be computed | 50% of next month’s production needs | |||
- Data on raw material standards:
| Raw Materials: | Standard quantity per unit | Standard cost per unit | ||
| Part-AA | 4 Kilograms @$40 each | $ | 160 | |
| Part-BB | 3 Kilograms @$30 each | $ | 90 | |
- The standard quantity of direct labour hours required to produce one unit of Part-1 is five. The standard rate of pay per hour is $18.
- Manufacturing overhead cost is estimated using flexible budget formula and the selected cost driver is direct labour hours. Monthly fixed overhead costs are estimated to be $150,000 and the variable component is budgeted at $3 per hour.
- Monthly fixed selling and administrative expenses are estimated to be $70,000 while the variable portion is estimated to cost $2 per unit sold during each month.
- The sales price per unit of Part-1 is $550.
- Sales of each month are estimated to be 40% on cash and the remaining balance on account. The company collects total monthly credit sales in the first month following sales. Half of monthly purchases are paid in cash within five days of purchases and the remaining balance is on credit that is always paid in full in the month following sales. The credit term agreed for with suppliers is 2/10, n/60. The company has benefited discounts for the monthly cash purchases that are paid within the discount period.
- The cash balance on the 1st of July 2018 is estimated to be $850,000. Desired monthly ending cash balance is required to be 10% of next month’s sales revenue.
Required:
| I. | Prepare monthly budgets as well as the total quarterly estimates for the third quarter of 2018 for each of the following items: | ||
| A. | Sales budget | 4 marks | |
| B. | Production budget | 4 marks | |
| C. | Direct materials purchases budget (for each component and in total) | 4 marks | |
| D. | Monthly direct materials usage budget | 4 marks | |
| E. | Direct labour budget | 2 marks | |
| F. | Overhead budget | 4 marks | |
| G. | Selling and administrative expenses | 2 marks | |
| II. | Prepare cash budget for the month of July 2018. | 3 marks | |
| III. | Prepare budgeted income statement for the month of July 2018. | 3 marks | |
| 2 marks are awarded for the format of presentation. | |||
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