TUTORIAL 6 QUESTIONS Page 1 of 7 Question 1 Mynor Corporation manufactures and sells a seasonal…

TUTORIAL 6
QUESTIONS

Page 1 of 7

Question
1

Mynor
Corporation manufactures and sells a seasonal product that has peak sales in
the third quarter. The following information concerns operation for Year 2-the
coming year-and for the first two quarters of Year 3:

The
company’s single product sells for $8 per unit. Budgeted sales in units
for the next six quarters are as follows (all sales are on credit):

Year 2

Year 3

Q1

Q2

Q3

Q4

Q1

Q2

Budgeted
Sales

40,000

60,000

100,000

50,000

70,000

80,000

(Units)

Sales
are collected in the following pattern: 75% in the quarter the sales are
made, and the remaining 25% in the following quarter. On January 1, Year
2, the company’s balance sheet showed $65,000 in accounts receivable, all
of which will be collected in the first quarter of the year. Bad debts are
negligible and can be ignored.

The
company desires an ending inventory finished goods inventory at the end of
each quarter equal to 30% of the budgeted sales in units for the next
quarter. On December 31, Year 1, the company had 12,000 units on hand.

Five
pounds of raw materials are required to complete one unit of product. The
company requires ending raw materials inventory at the end of each quarter
equal to

10% of the following
quarter’s production needs. On December 31, Year 1, the company had 23,000
pounds of raw materials on hand.

The
raw material costs $0.80 per pound. Raw material purchases are paid for in
the following pattern: 60% paid in the quarter the purchases are made, and
the remaining 40% paid in the following quarter. On January 1, Year 2, the
company’s balance sheet showed $81,500 in accounts payable for raw
material purchases, all of which will be paid for in the first quarter of
the year.

Required:

Prepare
the following budgets for the year, showing both quarterly and total figures:

A sales
budget and a cash receipts budget for expected cash collections.

A
production budget.

A
direct material budget in pounds and a cash payment budget for purchases
of materials.

TUTORIAL 6
QUESTIONS

Page 2 of 7

Question
2

Powerpac
Products Limited of Shenzhen, China, manufactures and distributes toys
throughout South East Asia. Three cubic centimeters (cc) of solvent Hi300 are
required to manufacture each unit of Superman, one of the company’s products.
The company is now planning raw materials needs for the third quarter and
September is the month in which peak sales of Superman occur. To keep
production and sales moving smoothly, the company has the following inventory
requirements:

The
finished goods inventory on hand at the end of each month must be equal to

3,000 units of Superman
plus 20% of the next month’s sales. The finished goods inventory on June 30 is
budgeted to be 10,000 units.

The
raw materials inventory on hand at the end of each month must be equal to
one-half of the following month’s production needs for raw materials. The
raw materials inventory on June 30 is budgeted to be 54,000 cc of solvent
of Hi300.

The company
maintains no work in process inventories.

A sales
budget for Superman for the last six months of the year follows.

Month

Budgeted sales
in units

July

35,000

August

40,000

September

50,000

October

30,000

November

20,000

December

10,000

Required:

Prepare a
production budget for Superman for the months of July to October.

Examine
the production budget and comment why the company produce more units than
it sells in July and August and fewer units than it sells in September and
October.

Prepare
a direct material budget showing the quantity of solvent Hi300 to be
purchased for July, August and September and for the third quarter.

TUTORIAL 6
QUESTIONS

Page 3 of 7

Question
3

Willison Company
produces stuffed toy animals, one of these is Betty Rabbit. Each rabbit takes
0.2 yards of fabric and six ounces of polyfiberfill. Fabric costs $3.50 per
yard and polyfiberfill is $0.05 per ounce. Willison has budgeted production of
stuffed rabbits for the next four months as follows:
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October 20,000

November 40,000

December 25,000

January 30,000

Inventory policy
require that sufficient fabric be in ending monthly inventory to satisfy 15% of
the following month’s production needs and sufficient polyfiberfill be in
inventory to satisfy 30% of the following month’s production needs. Inventory
of fabric and polyfiberfill at the beginning of October equals exactly the
amount needed to satisfy the inventory policy.

Each rabbit produced
requires on average 0.10 direct labour hour and the average cost of direct
labour is $15.50 per hour.

Required:

Prepare
a direct material budget of fabric for the last quarter of the year,
showing purchases in units and in dollars for each month and for the
quarter in total.

Prepare
a direct materials budget of polyfiberfill for the last quarter of the
year, showing purchases in units and in dollars for each month and for the
quarter in total.

Prepare
a direct labour budget for the last quarter of the year, showing the hours
needed and the direct labour cost for each month and for the quarter in
total.

TUTORIAL 6
QUESTIONS

Page 4 of 7

Question
4

Allison Manufacturing
produces a subassembly used in the production of jet aircraft engines. The
assembly is sold to engine manufacturers and aircraft maintenance facilities.
Projected sales in units for the coming five months follow:

January

40,000

February

50,000

March

60,000

April

60,000

May

62,000

The
following data pertains to production policies and manufacturing specifications
followed by Allison Manufacturing:

a.

The finished
goods inventory on January 1 is 32,000 units, each costing $166.06. The

desired ending
inventory for each month is 80% of the next month’s sales.

b.

The data on
materials used are as follows:

Direct
material

Usage

Per-Unit

of

Cost
of direct material

Production

Metal

10
lbs

$8/lbs

Components

6
units

$5/unit

Inventory
policy dictates that sufficient materials be on hand at the end of the month

to produce 50%
of the next month’s production needs. This is exactly the amount of

material on
hand on December 31 of the prior year.

c.

The direct
labour used per unit of output is three hours. The average direct labour cost

per hour is
$14.25.

d.

Manufacturing
overhead each month is budgeted using direct labour hours.

Manufacturing
overhead

Fixed-Cost

Variable-Cost

Component

Component

($)

($/direct
labour hour)

Supplies

1.00

Power

0.50

Maintenance

30,000

0.40

Supervision

16,000

Depreciation

200,000

Taxes

12,000

Others

80,000

0.50

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TUTORIAL 6
QUESTIONS

Page 5 of 7

e. Monthly variable selling and administrative
expenses are budgeted using units sold.

Fixed-Cost

Variable-Cost

Component

Component

($)

($/unit sold)

Salaries

50,000

Commissions

2.00

Depreciation

40,000

Shipping

1.00

Other

20,000

0.60

The unit
selling price of the subassembly is $205.

All
sales and purchases are for cash in the same month. All expenses including
direct labour, overhead and selling and administrative except for
depreciation, are paid in the same month. The cash balance on January 1
equals $400,000. The firm requires a minimum ending balance of $50,000. If
the firm develops cash shortage by the end of the month, sufficient cash
is borrowed to cover the shortage. Any cash borrowed is repaid at the end
of the quarter, as is the interest due (cash borrowed at the end of the
quarter is repaid at the end of the following quarter). The interest rate
is 12 percent per annum. No money is owed at the beginning of January.

Required:

Prepare the following budgets for the
first quarter showing both the monthly and total figures. Note: Assume that the
company does not maintain any work in progress inventories.

Sales
budget

Production
budget

Direct
material cost budget

Direct
labour cost budget

Overhead
budget

Selling and
administrative expenses budget

Budgeted
income statement (Hint: The finished goods inventory unit cost is given in
part a of the question)

Cash budget

TUTORIAL 6 QUESTIONS

Page 6 of 7

QUESTION 5

TTC
Manufacturing produces a subassembly used in the production of microchip
testing machines. The subassembly is sold to manufacturers and chip testing
facilities. Projected sales for the coming four months in 2012 follow:

January

45,000

February

55,000

March

65,000

April

65,000

The
following data pertains to production policies and manufacturing specifications
followed by TTC Manufacturing:

a)

Finished goods
inventory on 1st January is
32,000 units. The desired ending finished

goods
inventory for each month is 80% of the next month’s sales.

b)

The data on materials
used are as follows:

Direct
Material

Per-Unit
Usage

Cost
per Kg ($)

A

10
kg

8

B

6
kg

2

Inventory
policy dictates that sufficient materials be held on hand at the beginning of

the month to
produce 50% of that month’s estimated sales. This is exactly the amount

of material on
hand on 1st January.

c)

The
direct labour used per unit of output is 5 hours for January. There is labour

efficiency
improvement due to training and learning curve such that the direct labour

hours used per
unit would decrease by 10% from 1st
February. The average direct

labour
cost per hour is $9 for January. Due to organizational-wide salary review,
the

average direct
labour cost per hour would increase by 5% with effect from 1st

February.

d)

Manufacturing
overhead each month is estimated using the below formula. Activity is

measured in
direct labour hours.

Manufacturing
overhead

Fixed-cost
component ($)

Variable-cost
component

per direct
labour hour ($)

Miscellaneous
Supplies

2.00

Utilities

0.60

Repairs

300,000

0.50

Supervisory
salary

160,000

Depreciation

200,000

Taxes

12,000

Others

80,000

1.50

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e) The unit selling price of the subassembly is
$180.

TUTORIAL 6
QUESTIONS

Page 7 of 7

Required:

Prepare
the following budgets by month for the first quarter:

Sales
budget (in dollars).
Production
budget (in units).
Direct
material budget (in dollars).
Direct
labour budget (in dollars).
Manufacturing-overhead
budget (in dollars).

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