COMPREHENSIVE BUDGETING EXAMPLE

Royal Company is preparing budgets for the second quarter

ending June 30.

BEGINNING BALANCE SHEET

Royal Company
Balance Sheet
March 31
Current assets:
Cash............................................ $ 40,000
Accounts receivable.................... 30,000
Raw materials inventory............. 5,200
$ 95,20
Finished goods inventory............ 20,000 0
Plant and equipment:
Land............................................ 400,000
Buildings and equipment............ 1,610,000
(750,000 1,260,00
Accumulated depreciation.......... ) 0
$1,355,20
Total assets................................... 0
Liabilities:
$ 12,00
Accounts payable........................ 0
Stockholders’ equity:
$ 200,00
Common stock............................ 0
1,143,20 1,343,20
Retained earnings....................... 0 0
Total liabilities and stockholders’ $1,355,20
equity.......................................... 0

Budgeted sales of the company’s only product for the next five
months are:
 20,000
April..... units
50,000
May...... units
30,000
June...... units
25,000
July....... units
15,000
August. units
The selling price is $10 per unit. All sales are on account. The
company collects 70% of these credit sales in the month of
the sale; 25% are collected in the month following sale; and
the remaining 5% are uncollectible.
The accounts receivable balance on March 31 was $30,000.
All of this balance was collectible.
The company desires to have inventory on hand at the end of
each month equal to 20% of the following month’s budgeted
unit sales. On March 31, 4,000 units were on hand.
5 pounds of material are required per unit of product.
Management desires to have materials on hand at the end of
each month equal to 10% of the following month’s
production needs. The beginning materials inventory was
13,000 pounds. The material costs $0.40 per pound.
Half of a month’s purchases are paid for in the month of
purchase; the other half is paid for in the following month.
No discounts are given for early payment. The accounts
payable balance on March 31 was $12,000.
Each unit produced requires 0.05 hour of direct labor. Each
hour of direct labor costs the company $10. Management
fully adjusts the workforce to the workload each month.
Note: Many companies do not fully adjust their direct labor work
force every month and in such companies direct labor behaves
more like a fixed cost, with additional cost if overtime is
necessary.
Variable manufacturing overhead is $20 per direct labor-hour.
Fixed manufacturing overhead is $50,500 per month. This
includes $20,500 in depreciation, which is not a cash
outflow.
Royal Company uses absorption costing in its budgeted
income statement and balance sheet. Manufacturing
overhead is applied to units of product on the basis of direct
labor-hours. The company has no work in process
inventories.

Variable selling and administrative expenses are $0.50 per

unit sold. Fixed selling and administrative expenses are
$70,000 per month and include $10,000 in depreciation.
A line of credit is available at a local bank that allows the
company to borrow up to $75,000. All borrowing occurs at
the beginning of the month, and all repayments occur at the
end of the month. Any interest incurred during the second
quarter will be paid at the end of the quarter. The interest
rate is 16% per year.
Royal Company desires a cash balance of at least $30,000 at
the end of each month. The cash balance at the beginning of
April was $40,000. Cash dividends of $51,000 are to be paid
to stockholders in April.
Equipment purchases of $143,700 are scheduled for May and
$48,800 for June. This equipment will be installed and tested
during the second quarter and will not become operational
until July, when depreciation charges will commence.
 Solution

CASH BUDGET
Royal Company
Cash Budget
For the Quarter Ending June 30
April May June Quarter
$ 40,00 $ 30,00 $ 30,00 $ 40,00
Cash balance, beginning. . 0 0 0 0
Add receipts:
170,00 400,00 335,00 905,00
Cash collections [TM 9-5]. 0 0 0 0
210,00 430,00 365,00 945,00
Total cash available......... 0 0 0 0
Less disbursements:
185,00
Direct materials [TM 9-8]. 40,000 72,300 72,700 0
Direct labor [TM 9-9]......... 13,000 23,000 14,500 50,500
Manufacturing overhead
191,00
[TM 9-10]........................... 56,000 76,000 59,000 0
Selling & administrative 230,00
[TM 9-12]........................... 70,000 85,000 75,000 0
Equipment purchases.... 0 143,70 48,800 192,50
 0 0
51,00 51,00
Dividends....................... 0 0 0 0
230,00 400,00 270,00 900,00
Total disbursements......... 0 0 0 0
Excess (deficiency) of
cash available over (20,000 30,00 95,00 45,00
disbursements............... ) 0 0 0
Financing:
Borrowings..................... 50,000 0 0 50,000
Repayments................... 0 0 (50,000) (50,000)

Interest*......................... 0 0 ( 2,000) ( 2,000)

50,00 (52,000
Total financing................. 0 0 ) ( 2,000)
$ 30,00 $ 30,00 $ $ 43,00
Cash balance, ending....... 0 0 43,000 0
* $50,000 × 16% × (3 months/12 months) = $2,000.
BUDGETED INCOME STATEMENT

Royal Company
Budgeted Income Statement
For the Quarter Ending June 30
Net sales [see below].................................... $950,000
Less cost of goods sold [see below].............. 500,000
Gross margin................................................. 450,000
Less selling & administrative expenses [TM
9-12] 260,000
Net operating income.................................... 190,000
Less interest expense [TM 9-14]...................... 2,000
Net income.................................................... $188,000

Computation of net sales:

$1,000,00
Sales........................................... 0
50,00
Less uncollectible amounts (5%) 0
$ 950,00
Net sales..................................... 0

Computation of cost of goods sold:

Budgeted sales (units)................ 100,000
Unit product cost........................ × $5
Cost of goods sold...................... $500,000

(a) See TM 9-13 (f) Given

(g
(b) See TM 9-5 ) Given
(h
(c) Given ) See TM 9-8
(d) Given (i) Given
(e) Given (j) Given
BUDGETED BALANCE SHEET

Royal Company
Budgeted Balance Sheet
June 30
Current assets:
$ 43,00
Cash............................................ 0 (a)
Accounts receivable.................... 75,000 (b)
Raw materials inventory............. 4,600 (c)
$ 147,60
Finished goods inventory............ 25,000 (d) 0
Plant and equipment:
Land............................................ 400,000 (e)
Buildings and equipment............ 1,802,500 (f)
(841,500 1,361,00
Accumulated depreciation.......... ) (g) 0
$1,508,60
Total assets................................... 0
Liabilities:
$ 28,40
Accounts payable........................ 0 (h)
Stockholders’ equity:
$ 200,00
Common stock............................ 0 (i)
1,280,20 1,480,20
Retained earnings....................... 0 (j) 0
Total liabilities and stockholders’ $1,508,60
equity.......................................... 0

$1,610,000+ $143,700+
(a) See TM 9-14 (f) $48,800
(g $750,000 + $61,500 +
(b) $300,000 sales × 25% ) $30,000
(c) 11,500 pounds × $0.40 (h $56,800 purchases × 50%
per pound )
(d) See TM 9-11 (i) See TM 9-16
(e) See TM 9-16 (j) $1,143,200 + $188,000 –
$51,000