ACCOUNTING-Storm Tools has formed a new business unit to produce battery-powered drills

QUESTION

Storm Tools has formed a new business unit to produce
battery-powered drills. The business
unit was formed by the transfer of selected assets and obligations from the
parent company. The unit’s initial
balance sheet on January 1 contained cash ($500,000), plant and equipment
($2,500,000), notes payable to the parent ($1,000,000), and residual equity
($2,000,000).

The business unit is expected to repay the note at $50,000 per
month, plus all accrued interest at 1/2% per month. Payments are made on the last day of each
month.

The unit is scheduled to produce 25,000 drills during January,
with an increase of 2,500 units per month for the next three months. Each drill requires $40 of raw
materials. Raw materials are purchased
on account, and paid in the month following the month of purchase. The plant manager has established a goal to
end each month with raw materials on hand, sufficient to meet 25% of the
following month’s planned production.

The unit expects to sell 20,000 drills in January; 25,000 in
February, 25,000 in March, and 30,000 per month thereafter. The selling price is $100 per drill. Half of the drills will be sold for cash
through a website. The others will be sold to retailers on account, who pay
40% in the month of purchase, and 60% in the following month. Uncollectible accounts are not material.

Each
drill requires 20 minutes of direct labor to assemble. Labor rates are $24 per hour. Variable factory overhead is applied at $9
per direct labor hour. The fixed
factory overhead is $25,000 per month; 60% of this amount is related to
depreciation of plant and equipment.
With the exception of depreciation, all overhead is funded as
incurred.

Selling, general, and administrative costs are funded in cash as
incurred, and consist of fixed components (salaries, $100,000; office,
$40,000; and advertising, $75,000) and variable components (15% of sales).

Prepare a monthly comprehensive budget plan for Storm’s new
business unit for January through March.
The plan should include the (a) sales and cash collections budget, (b)
production budget, (c) direct materials purchases and payments budget, (d)
direct labor budget, (e) factory overhead budget, (f) ending finished goods
budget (assume total factory overhead is applied to production at the rate of
$11.73 per direct labor hour), (g) SG&A budget, and (h) cash budget.

STORM
TOOLS

Sales Budget

For
the Three Months January to March

January
February
March

Expected Cash
Collections From Sales

STORM
TOOLS

Production Budget

For
the Three Months January to March

January
February
March

STORM
TOOLS

Direct Materials Budget

For
the Three Months January to March

January
February
March

Expected Cash
Payments for Materials Purchases

STORM
TOOLS

Direct Labor Budget

For
the Three Months January to March

January
February
March

STORM
TOOLS

Factory Overhead Budget

For
the Three Months January to March

January
February
March

STORM
TOOLS

Ending Finished Goods Inventory

31-Mar

Units
Per Unit Cost
Per Unit Total

STORM
TOOLS

Selling, General, and Administrative Budget

For
the Three Months January to March

January
February
March

STORM
TOOLS

Cash Budget

For
the Three Months January to March

January
February
March

Beginning
cash balance

Plus:
Customer receipts

Available
cash

Less
disbursements:

Direct materials

Direct labor

Factory overhead

SG&A

Total
disbursements

Cash
surplus/(deficit)

Financing:

Planned repayment

Interest on note (1/2% of unpaid
balance)

Ending
cash balance

ANSWER:

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