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:

 

 

January	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.

(Continued)

 

 

 

 

 

                                                                          

 

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 meas- ured in direct labor hours.)

 

Fixed-Cost Component ($)

Variable-Cost 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 Costs ($)

Variable Costs ($)

 

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

b.       Production budget

c.        Direct materials purchases budget

d.       Direct labor budget

e.        Overhead budget

f.        Selling and administrative expenses budget

g.        Ending finished goods inventory budget

h.       Cost of goods sold budget

i.         Budgeted income statement

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 con- troller 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 per- formance analysis. Write a summary of the interview.