Problem 9-51 Understanding Relationships, Master Budget, Comprehensive Review Optima Company is a high-technology organization that produces a mass-storage system. The design of Optima’s system is unique and represents a breakthrough in the industry. The units

Optima produces combine positive features of both compact and hard disks. The company is

completing its fifth year of operations and is preparing to build its master budget for the coming year (2014). The budget will detail each quarter’s activity and the activity for the year in total. The master budget will be based on the following information:

a.       Fourth-quarter sales for 2013 are 55,000 units.

b.       Unit sales by quarter (for 2014) are projected as follows:

 

 

 

 

                                                                                                                       

 

 

First quarter	65,000
Second quarter	70,000
Third quarter	75,000
Fourth quarter	90,000

The selling price is $400 per unit. All sales are credit sales. Optima collects 85% of all sales within the quarter in which they are realized; the other 15% is collected in the following quarter. There are no bad  debts.

c.        There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter:

First quarter                                 13,000 units

Second quarter                             15,000 units

Third quarter                                20,000 units

Fourth quarter                              10,000 units

 

d.       Each mass-storage unit uses five hours of direct labor and three units of direct materials. Laborers are paid $10 per hour, and one unit of direct materials costs $80.

e.        There are 65,700 units of direct materials in beginning inventory as of January 1, 2014. At the end of each quarter, Optima plans to have 30% of the direct materials needed for next quarter’s unit sales. Optima will end the year with the same amount of direct materials found in this year’s beginning inventory.

f.        Optima buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition, and the remaining half are paid for in the following quarter. Wages and sal- aries are paid on the 15th and 30th of each month.

g.        Fixed overhead totals $1 million each quarter. Of this total, $350,000 represents deprecia- tion. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year’s total fixed overhead by the year’s budgeted produc- tion in units.

h.       Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred.

i.         Fixed selling and administrative expenses total $250,000 per quarter, including $50,000 depreciation.

j.         Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.

k.       The balance sheet as of December 31, 2013, is as follows:

Assets

Cash	$     250,000	Â
Direct materials inventory	5,256,000	Â
Accounts receivable	3,300,000	Â
Plant and equipment, net	33,500,000	Â
Total assets	$42,306,000	Â

 

Liabilities and Stockholders’ Equity

Accounts payable	$  7,248,000*
Capital stock	27,000,000
Retained earnings	8,058,000
Total liabilities and stockholders’ equity	$42,306,000

 

* For purchase of direct materials  only.

 

l.         Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2 mil- lion of equipment will be purchased.

 

(Continued)

 

                                                                          

 

 

Required:

Prepare a master budget for Optima Company for each quarter of 2014 and for the year in total. The following component budgets must be included:

1.       Sales budget

2.       Production budget

3.       Direct materials purchases budget

4.       Direct labor budget

5.       Overhead budget

6.       Selling and administrative expenses budget

7.       Ending finished goods inventory budget

8.       Cost of goods sold budget (Note: Assume that there is no change in work-in-process inventories.)

9.       Cash budget

10.       Pro forma income statement (using absorption costing) (Note: Ignore income taxes.)

11.       Pro forma balance sheet (Note: Ignore income taxes.)