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Accounting 2 Pages

Production Budgets

Question

The Grilton Tire Company manufactures racing tires for bicycles. Grilton sells tires for $50 each. Grilton is planning for next year by developing a master budget by quarters. Grilton’s balance sheet for December 31, 2016 follows:

GRILTON TIRE COMPANY

Balance Sheet

December 31, 2016

Assets

Current Assets:

Cash $ 39,000

Accounts Receivable 40,000

Raw Materials Inventory 2,400

Finished Goods Inventory 8,700

Total Current Assets $ 90,100

Property, Plant and Equipment:

Equipment 177,000

Less: Accumulated Depreciation (42,000) 135,000

Total Assets
$225,100

Liabilities

Current Liabilities:

Accounts Payable $ 8,000

Stockholder’s Equity

Common Stock, no par $ 130,000

Retained Earnings 87,100

Total Stockholder’s Equity 217,100

Total Liabilities and Stockholder’s Equity $225,100

Other data for Grilton Tire Company:

a. Budgeted Sales are 1,500 for the first quarter and expected to
increase by 200 tires per quarter. Cash Sales are expected to be 30% of
total sales, with the remaining 70% of sales on account.

b. Finished Goods Inventory on December 31, 2016 consists of 300 tires at $29 each.

c. Desired ending Finished Goods Inventory is 40% of the next quarter’s
sales; first quarter sales for 2018 are expected to be 2,300 tires and
second quarter sales for 2018 are expected to be 2,500. FIFO inventory
costing method is used.

d. Direct Materials cost is $8 per tire.

e. Desired ending Raw Materials Inventory is 30% of the next quarter’s direct materials needed for production.

f. Each tire requires 0.40 hours of direct labor; direct labor costs average $16 per hour.

g. Variable manufacturing overhead is $2 per tire produced.

h. Fixed manufacturing overhead includes $4,500 per quarter in
depreciation and $26,780 per quarter for other costs, such as utilities,
insurance, and property taxes.

i. Fixed selling and administrative expenses include $8,000 per quarter
for salaries; $1,800 per quarter for rent; $1,200 per quarter for
insurance; and $500 per quarter for depreciation.

j. Variable selling and administrative expenses include supplies at 2% of sales.

k. Capital expenditures include $45,000 for new manufacturing equipment, to be purchased and paid in the first quarter.

l. Cash receipts for sales on account are 60% in the quarter of sale and
40% in the quarter following the sale; December 31, 2016, Accounts
Receivable is received in the first quarter of 2017.

m. Direct materials purchases are paid 70% in the quarter purchased and
30% in the following quarter; December 31, 2016, Accounts Payable is
paid in the first quarter of 2017.

n. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.

o. Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred.

p. Grilton desires to maintain a minimum cash balance of $35,000 and
borrows from the local bank as needed in increments of $1,000 at the
beginning of the quarter; principal repayments are made at the beginning
of the quarter when excess funds are available and in increments of
$1,000; interest is 6% per year and paid at the beginning of the quarter
based on the amount outstanding from the previous quarter.

REQUIREMENTS:

1. Prepare a sales budget in units and dollars for each quarter and in total for the year 2017. 

2. Prepare a schedule of expected cash collections for each quarter and in total for the year 2017. 

3. Prepare a production budget for each quarter and in total for the year 2017. 

4. Prepare a direct materials budget for each quarter and in total for the year 2017. 

5. Prepare a schedule of expected cash disbursements for purchases of
materials for each quarter and in total of the year 2017.

6. Prepare a budgeted Schedule of Cost of Goods Manufactured for the year of 2017. 

7. Prepare a budgeted Income Statement for the year of 2017.

8. Prepare a cash budget for the year of 2017. 

9. Essay: What types of information do your budgets yield? Is cash flow
adequate? Do sales need to be increased, costs reduced?

Solution

Title: Production Budgets
Length: 2 pages (728 Words)
Style: APA

Preview

Production budgets are overall quantification of the company’s plans in terms of manufacturing. The budgets are prepared by combining budgets of the various departments in an entity to prepare one major budget for the whole company. The company combines different budgets such as sales budget, finished goods budget, direct material budgets, direct labor budget, cash budgets, and manufacturing overhead budgets, to prepare a master budget with both production and non-production budgets. The following are types of information the prepared budget for Grilton Tire Company yields.

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