LECTURE #7

LECTURE ILLUSTRATION EXAMPLE 1

Master International Company manufactures two types of cardboard boxes used in
shipping canned food, fruit and vegetables. The canned food box (Type C) and
the perishable food box (Type P) have the following material and labour
requirements.

C
Direct material required per 100 boxes:
Paperboard ($0.20 per pound)
Corrugating medium ($0.10 per pound)
Direct labour required per 100 boxes ($12.00
per hour)

Type of Box
P

30 pounds
20 pounds

70 pounds
30 pounds

0.25 hours

0.50 hours

The following manufacturing overhead costs are anticipated for 2014. The
budgeted overhead rate is based on a production volume of 500,000 units for each
type of box. Manufacturing overhead is allocated on the basis of direct labour
hours.
Indirect materials
Indirect labour
Utilities
Property taxes
Insurance
Depreciation

ACCT2112 Lecture#7 Examples-Questions Chp#6

$ 10,000
45,000
30,000
15,000
18,000
32,000
$150,000

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The following inventory information is available:

Inventory
January 1, 2014

Desired Ending
Inventory
December 31, 2014

Finished goods:
Box Type C
Box Type P

10,000 boxes
20,000 boxes

5,000 boxes
15,000 boxes

Direct materials:
Paperboard
Corrugating medium

15,000 pounds
5,000 pounds

5,000 pounds
10,000 pounds

ACCT2112 Lecture#7 Examples-Questions Chp#6

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LECTURE ILLUSTRATION EXAMPLE 1 [Cont.]

The sales forecast for 2014 is as follows:

Box Type C

Sales Volume
500,000 boxes

Box Type P

500,000 boxes

Sale Price
$90.00 per hundred
boxes
$130.00 per hundred
boxes

The following selling and administrative expenses are anticipated for 2014:
Salaries and fringe benefits of sales $ 60,000
personnel
Advertising
10,000
Management salaries and fringe benefits
100,000
Clerical wages and fringe benefits
35,000
Miscellaneous administrative expenses
5,000
$210,000

REQUIRED:
Prepare a master budget for Master International Company for 2014. Assume an
income tax rate of 40 percent. Include the following schedules:
1.
2.
3.
4.
5.
6.
7.

Sales budget
Production budget
Direct material budget
Direct labour budget
Manufacturing overhead budget
Selling and administrative expense budget
Budgeted income statement

[Adapted: Hilton, R. W. (1997). Managerial Accounting. Third Edition, McGraw-Hill]

ACCT2112 Lecture#7 Examples-Questions Chp#6

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SOLUTIONS TO LECTURE ILLUSTRATION EXAMPLE 1

1.

Sales Budget
BOX C

BOX P

BOX C

BOX P

TOTAL

Sales (in units)

Sale price per unit
Sales revenues

2.

Production Budget

Sales (in units)

Add: desired ending inventory
Total units needed
Less: Beginning inventory
Production requirements

3.

Direct Materials Budget: Paperboard

BOX C

BOX P

TOTAL

Production requirements (number of boxes)

Direct materials required per box (pound)
Direct materials required for production
(pound)
Add: desired ending direct materials
inventory
TOTAL DIRECT MATERIALS NEEDS
Less: Beginning direct materials inventory
Direct materials to be purchased
(per pound)
Price (per pound)
COST OF PURCHASES (Paperboard)

ACCT2112 Lecture#7 Examples-Questions Chp#6

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SOLUTIONS TO LECTURE ILLUSTRATION EXAMPLE 1 [Cont.]

Direct Materials Budget: Corrugating Medium
BOX C

BOX P

TOTAL

BOX C

BOX P

TOTAL

Production requirements (number of boxes)

Direct materials required per box (pound)
Direct materials required for production
(pound)
Add: desired ending direct materials
inventory
TOTAL DIRECT MATERIALS NEEDS
Less: Beginning direct materials inventory
Direct materials to be purchased (per
pound)
Price (per pound)
COST OF PURCHASES (Corrugating
Medium)

Total cost of direct material purchases:

Paperboard and Corrugating Medium

4.

Direct Labour Budget

Production requirements (number of boxes)

Direct labour required per box (hours)
Direct labour required for production
(hours)
Direct labour rate
TOTAL DIRECT LABOUR COST

ACCT2112 Lecture#7 Examples-Questions Chp#6

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SOLUTIONS TO LECTURE ILLUSTRATION EXAMPLE 1 [Cont.]

5.

Manufacturing Overhead Budget:

Indirect materials
Indirect labour
Utilities
Property taxes
Insurance
Depreciation
Total Manufacturing Overhead

6.

Selling and Administration Expenses Budget:

Salaries and FB of sales personnel

Advertising
Management salaries and FB
Clerical wages and FB
Miscellaneous admin expenses
Total Selling and Administration Expenses

ACCT2112 Lecture#7 Examples-Questions Chp#6

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SOLUTIONS TO LECTURE ILLUSTRATION EXAMPLE 1 [Cont.]

7.
Budgeted Income Statement:
Sales revenue [sales budget requirement (1)]
Less: Cost of goods sold*[see (a) and (b)]

Gross margin
Less: Selling and administration expenses
Income before taxes
Less: Income taxes (40%)
Net Income
*Cost of Goods Sold
(a) Computation of budgeted manufacturing overhead rate:
Budgeted manufacturing overhead rate = Budgeted MOH DLH
(b) Computation of manufacturing cost per unit:
Box C
Direct materials:
Paperboard

Box P

Corrugating Medium

Direct Labour

Allocated manufacturing overhead

Manufacturing cost per unit

ACCT2112 Lecture#7 Examples-Questions Chp#6

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LECTURE ILLUSTRATION EXAMPLE 2

Tom John, a family-own stereo store, began with $10,000 cash. Management
forecasts that collections from credit customers will be $90,000 in October and
$122,000 in November. The store is scheduled to receive $40,000 cash on a
business note receivable in November. Projected cash disbursements include
inventory purchases ($102,000 in October and $121,000 in November) and
operating expenses ($30,000 each month).
The stores bank requires a $7,500 minimum balance in the stores checking
account. At the end of any month when the account balance goes below $7,500,
the bank automatically extends credit to the store in multiple of $1,000. Tom John
borrows as little as possible and pays back these loans as rapidly as possible in
multiples of $1,000 plus 1.5% monthly interest on the entire unpaid principal. The
first payment occurs at the end of the month following the loan.

REQUIRED:
Prepare the stores cash budget for October and November. Compute the amount
owed to the bank on November 30.
[Adapted: Horngren, C. T. and Foster, G. (1997). Cost Accounting: A Managerial
Emphasis. Prentice-Hall]

ACCT2112 Lecture#7 Examples-Questions Chp#6

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SOLUTIONS TO LECTURE ILLUSTRATION EXAMPLE 2

October

November

Cash balance, beginning

Cash collection from customers
Collections of note receivable
(a) Total cash available for needs
Cash disbursements:
Inventory
Operating expenses
(b) Total disbursements
Minimum cash balance desired
(c) Total cash needed
Cash excess (deficiency) [(a) (c)]
Financial of cash deficiency:
Borrowing (at end of month)
Principal payments (at end of month)
Interest expense (at 1.5% monthly)
(d) Total effects of financing
Cash balance, ending [(a) (b) + (d)]

Interest expense (November):

Tom John owes the bank in November:

ACCT2112 Lecture#7 Examples-Questions Chp#6

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