Problem 9-47 Operating Budget, Comprehensive Analysis

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:
juJanuar
y 40,000
February 50,000
March 60,000
April 60,000
May 62,000

The following data pertain to production policies and manufacturing specifications followed by
Allison Manufacturing:
a. 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 Per-Unit Usage Unit Cost ($)

Metal 10 lbs. 8
Components 6 5

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 labor used per unit of output is three hours. The average direct labor cost per hour is
$14.25.
d. Overhead each month is estimated using a flexible budget formula. (Note: Activity is measured in
direct labor hours.)

Fixed-Cost Variable-Cost
Component ($) Component ($)

Supplies - 1.00
Power - 0.50
Maintenance 30,000 0.40
Supervision 16,000 -
Depreciation 200,000 -
Taxes 12,000 -
Other 80,000 0.50

e. Monthly selling and administrative expenses are also estimated using a flexible budgeting
formula. (Note: Activity is measured in units sold.)

Fixed-Cost Variable-Cost
Component ($) Component ($)

Salaries 50,000 -
Commissions - 2.00
 Depreciation 40,000 -
Shipping - 1.00
Other 20,000 0.60

f. The unit selling price of the subassembly is $205.

g. All sales and purchases are for cash. The cash balance on January 1 equals $400,000. The firm
requires a minimum ending balance of $50,000. If the firm develops a 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% per annum.
No money is owed at the beginning of January.

Required:
1. Prepare a monthly operating budget for the first quarter with the following schedules. (Note:
Assume that there is no change in work-in-process inventories.)
a. Sales budget f. Selling and administrative expenses budget
b. Production budget g. Ending finished goods inventory budget
c. Direct materials purchases budget h. Cost of goods sold budget
d. Direct labor budget i. Budgeted income statement
e. Overhead budget j. Cash budget

2. CONCEPTUAL CONNECTION Form a group with two or three other students. Locate a
manufacturing plant in your community that has headquarters elsewhere. Interview the controller
for the plant regarding the master budgeting process. Ask when the process starts each year, what
schedules and budgets are prepared at the plant level, how the controller forecasts the amounts,
and how those schedules and budgets fit in with the overall corporate budget. Is the budgetary
process participative? Also, find out how budgets are used for performance analysis. Write a
summary of the interview.

Answers:

1.

Allison Manufacturing
● For the First Quarter Ended March 31, 20xx

Schedule 1: Sales Budget

January February March Total
Units 40,000 50,000 60,000 150,000
Selling price x $205 x $205 x $205 x $205
Sales $8,200,000 $10,250,000 $12,300,000 $30,750,000

Schedule 2: Production Budget

January February March Total
Sales (schedule 1) 40,000 50,000 60,000 150,000
Desired Ending inventory 40,000 48,000 48,000 136,000
Total Needs 80,000 98,000 108,000 286,000
 Less: Beginning
Inventory 32000 40,000 48,000 120,000
Units to be produced 48,000 58,000 60,000 166,000

Schedule 3: Direct Material Purchase Budget

January February
Metal Components Metal Components
Units to be produced (schedule 2) 48,000 48,000 58,000 58,000
Direct materials per unit (lbs) x10 x6 x10 x6
Production needs 480,000 288,000 580,000 348,000
Desired ending inventory 290,000 174,000 300,000 180,000
Total needs 770,000 462,000 880,000 528,000
Less: Beginning inventory 240,000 144,000 290,000 174,000
Direct materials to be purchased 530,000 318,000 590,000 354,000
Cost per pound x8 x5 x8 x5
Total cost $4,240,000 $1,590,000 $4,720,000 $1,770,000

March Total
Metal Components Metal Components
Units to be produced (schedule 2) 60,000 60,000 166,000 166,000
Direct materials per unit (lbs) x10 x6 x10 x6
Production needs 600,000 360,000 1,660,000 996,000
Desired ending inventory 308,000 184,800 308,000 184,800
Total needs 908,000 544,800 1,968,000 1,180,000
Less: Beginning inventory 300,000 180,000 240,000 144,000
Direct materials to be purchased 608,000 364,800 1,728,000 1,036,8000
Cost per pound x8 x5 x8 x5
Total cost $4,864,000 $1,824,000 $13,824,000 $5,184,000

Schedule 4: Direct Labor Budget

January February March Total
Units to be produced (schedule 2) 48,000 58,000 60,000 166,000
Direct Labor time per unit (hours) x3 x3 x3 x3
Total hours needed 144,000 174,000 180,000 498,000
Cost per hour 14.25 14.25 14.25 14.25
Total Cost $2,052,000 $2,479,500 $2,565,000 $7,096,500

Schedule 5: Overhead Budget

January February March Total
Budgeted direct labor hours
144,000 174,000 180,000 498,000
(Schedule 4)
Variable overhead rate 2.40 2.40 2.40 2.40
Budgeted Variable overhead 345,600 417,600 432,000 1,195,200
Budgeted Fixed overhead 338,000 338,000 338,000 1,014,000
Total Overhead 683,600 755,600 770,000 2,209,200

Schedule 6: Selling and Administrative Expenses Budget

January February March Total
Planned sales (schedule 1) 40,000 50,000 60,000 150,000
Variable S&A expense per unit 3.60 3.60 3.60 3.60
Total Variable expenses 144,000 180,000 216,000 540,000
Fixed S&A expense
Salaries 50,000 50,000 50,000 150,000
Depreciation 40,000 40,000 40,000 120,000
Others 20,000 20,000 20,000 60,000
Total Fixed expenses 110,000 110,000 110,000 330,000
Total S&A expenses 254,000 290,000 326,000 870,000

Schedule 7: Ending Finished Goods Inventory Budget

Unit cost computation
Direct Materials
Metals (10lbs x $8) 80.00
Components (6 x $5) 30.00 110.00
Direct Labor (3 x $14.25) 42.75
Overhead
Variable (3 x $2.40) 7.20
Fixed (3 x (1,014,000/498,000)) 6.11 13.31
Total Unit Cost 166.06

Finished Goods Inventory = Units x unit cost

Finished Goods Inventory = 48,000 x 166.06
Finished Goods Inventory = $7,970,880

Schedule 8: Cost of Goods Sold Budget

Direct Materials used (schedule 3)
Metals (1,660,000 x $8) 13,280,000
Components (996,000 x $5) 4,980,000 $18,260,000
 Direct Labor (schedule 4) 7,096,500
Overhead (schedule 5)
Variable 1,195,200
Fixed 1,014,000 2,209,200
Budgeted Manufacturing Cost $27,565,700
Add: Finished Goods Beg (32,000 x $166.06) 5,313,920
Goods Available for Sale $32,879,620
Less: Finished Goods, End 7,970,880
Cost of Goods Sold $ 24,908,740

Schedule 9: Budgeted Income Statement

Sales (schedule 1) 30,750,000
Less: Cost of Goods Sold (schedule 8) 24,908,740
Gross Margin 5,841,260
Less: Selling & Admin expense (Schedule 6) 870,000
Net Income before tax 4,971,260

Schedule 10: Cash Budget

January February March Total
Beginning balance 400,000 50,000 495,004 400,000
Cash Receipts (schedule 1) 8,200,000 10,250,000 12,300,000 30,750,000
Cash Available 8,600,000 10,300,000 12,795,004 31,150,000
Less: Cash Disbursement
Purchases (schedule 3) 5,830,000 6,490,000 6,688,000 19,008,000
Direct Labor (schedule 4) 2,052,000 2,479,500 2,565,000 7,096,500
Overhead (schedule 5) 483,600 555,600 570,000 1,609,200
Selling & Admin (schedule 6) 214,000 250,000 286,000 750,000
Total 8,579,600 9,775,100 10,109,000 28,463,700
Tentative Ending Balance 20,400 524,900 2,686,004 2,686,300
Borrowing (repaid) 29,600 (29,600)
Interest paid - (296) - (296)
Ending Cash Balance 50,000 495,004 2,686,004 2,686,004

Interest:
29,600 x 12% x 1/12 = 296

2. The controller prepares many type of budget depending the needs for each segment. The
forecasts of cash inflows and outflows depend on the economic conditions, the reputation of
the payment patterns of the customers, and the prices charged both for the jobs obtained as
well as for the supplies used. Information from the past year can be used as a baseline;
however, changing economic conditions will affect future amounts. Budgets are often used to
judge the performance of managers. Bonuses, salary increases, and promotions are all affected
by a manager’s ability to achieve or beat budgeted goals. Since a manager’s financial status
and career can be affected, budgets can have a significant behavioral effect. Whether that
effect is positive or negative depends in large part on how budgets are used. Budgeted
objectives are used to gauge performance. Accordingly, they should be based on realistic
conditions and expectations