Exam 3 Chap 20 Part 1: The Management Of Zigby Manufacturing

Exam 3 Chap 20 Part 1the Management Of Zigby Manufacturing Prepared Th

Prepare a comprehensive set of budgets and financial analyses for Zigby Manufacturing based on the provided estimated balance sheet, sales forecasts, and operational policies. The task involves creating budgets for sales, production, raw materials, direct labor, factory overhead, selling expenses, general and administrative expenses, and a detailed cash budget for the second calendar quarter, ensuring all calculations are rounded properly and all financial requirements are met as specified.

Paper For Above instruction

Zigby Manufacturing faces the critical task of preparing a detailed set of budgets to guide its financial planning for the second quarter of 2015. Using the initial estimated balance sheet and sales forecast, the company aims to ensure adequate resource allocation, control costs, and maintain sufficient cash flow. The following comprehensive analysis covers the sequential budgeting process essential for effective operational management and financial stability during this period.

Sales Budget

The sales forecast indicates that units sold in March were 21,000, with projected sales for April at 21,000 units, May at 15,800 units, June at 21,600 units, and July at 21,000 units. Considering the total forecasted units for the year is 256,000, and the selling price per unit is $25, the sales revenue for each month can be computed. For April, sales revenue equals 21,000 units multiplied by $25, resulting in $525,000. Similarly, May’s sales revenue is calculated as 15,800 units x $25 = $395,000, and June’s sales revenue as 21,600 units x $25 = $540,000. Revenue projections for July are also noted, but the focus remains on April through June for the current budgeting period.

Production Budget

The production budget determines the required units to meet sales and inventory policies. The policy stipulates ending finished goods inventory should be 80% of the next month’s sales forecast. For April, the desired ending inventory is 80% of May’s sales units (15,800), equaling 12,640 units. The beginning inventory for April is the ending inventory of March, which is 16,800 units. To fulfill sales and maintain inventories, production for April is calculated as projected sales (21,000) plus desired ending inventory (12,640) minus beginning inventory (16,800). Similar calculations are performed for May and June, ensuring inventory levels align with policy requirements, and the production units are determined accordingly.

Raw Materials Budget

The raw materials budget begins with determining raw material requirements for production. Each finished product requires 0.50 units of raw materials, costing $20 per unit. Beginning raw material inventory is specified as 4,210 units, complying with company policy. Raw materials needed for production are computed by multiplying the units to produce by 0.50 units per finished unit. For April, raw materials required are calculated as 21,000 units produced x 0.50 = 10,500 units, with a similar approach for subsequent months. To maintain optimal raw materials inventory, ending raw materials inventory must be 50% of the next month’s raw materials requirement, and purchases are adjusted to meet both production needs and inventory policies. Purchases for each month are then calculated as raw materials needed plus desired ending inventory minus beginning inventory. This ensures procurement aligns with production schedules and inventory policies.

Direct Labor Budget

Each finished unit requires 0.50 hours of direct labor at a rate of $12 per hour. Therefore, direct labor hours for each month are derived by multiplying units to be produced by 0.50. The direct labor cost for each month is then obtained by multiplying total hours by $12. For April, if 21,000 units are produced, direct labor hours are 10,500, resulting in a direct labor cost of $126,000. Similar calculations are made for May and June, facilitating accurate payroll budgeting and cost control.

Factory Overhead Budget

Overhead includes fixed and variable components. Variable overhead is allocated at $4.30 per direct labor hour, based on the direct labor hours calculated above. Fixed overhead, notably depreciation of $37,960 per month, remains constant irrespective of production volume. Total factory overhead for each month combines variable overhead (direct labor hours x $4.30) with fixed overhead. For example, April’s variable overhead equals 10,500 hours x $4.30 = $45,150. Fixed overhead is added to this figure to determine total factory overhead, which impacts overall cost management and inventory valuation.

Selling Expense Budget

Selling expenses primarily comprise sales representatives' commissions and the sales manager’s salary. Commissions are set at 7% of sales revenue, thus for April with revenue of $525,000, commissions equal $36,750. The sales manager’s salary of $4,600 is constant across months. These expenses are summed monthly to manage marketing and selling costs effectively and ensure profitability.

General and Administrative Expense Budget

Operating expenses include administrative salaries of $28,000 and interest expense on the long-term note payable, which is 0.5% of the payable amount each month. Given the long-term note of $516,000, interest for each month is $2,580 (0.005 x $516,000). These recurring expenses are incorporated into the G&A budget to estimate total administrative costs and support strategic planning and cost control initiatives.

Cash Budget

The cash budget consolidates all inflows and outflows, starting with the beginning cash balance of $56,000, ensuring it is sufficient to maintain the minimum required balance. Cash inflows include cash sales (35% of total sales) and collections of prior month’s credit sales (65%). Cash sales for each month are computed by multiplying total sales revenue by 35%. Collections of credit sales are based on the previous month’s credit sales. Cash outflows encompass raw materials purchases paid in the subsequent month, operating expenses (selling and G&A costs), dividends, interest payments, and equipment purchases scheduled for June. The company may need to borrow through short-term notes if cash balances fall below $56,000, with the interest of 1% assessed before repayment. Excess cash is used to repay outstanding short-term notes, ensuring liquidity and financial stability.

Conclusion

This comprehensive budgeting process integrates sales, production, costs, and cash flow to facilitate effective financial management for Zigby Manufacturing during the second quarter of 2015. By adhering to company policies and leveraging detailed calculations, management can ensure that operational needs are met, costs are controlled, and cash flow remains optimal. Accurate budgeting supports sound decision-making, enables proactive financial planning, and sustains company growth amidst fluctuating sales and expenses.

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