P9 57a Comprehensive Budgeting Problem Learning Objectives 2

P9 57a Comprehensive Budgeting Problemlearning Objectives 2 3marti

Prepare a comprehensive set of financial budgets covering sales, production, direct materials, cash collections, and other key financial components based on specified operational data for Martin Manufacturing. The task includes creating schedules for cash collections, production, direct materials purchasing, and detailed cash payments, as well as calculating budgeted manufacturing costs and preparing a budgeted income statement for the upcoming quarter. The process involves meticulous calculation and use of formulas, with attention to rounding and formatting details. All schedules will be used to analyze cash flow, costs, and profitability, providing a comprehensive financial planning tool for the company's upcoming quarter.

Paper For Above instruction

Effective budget preparation is crucial for managing the financial health and operational planning of any manufacturing firm. Martin Manufacturing’s comprehensive budgeting process for the first quarter of the upcoming year serves as an exemplary case for understanding how various financial schedules interconnect to facilitate strategic decision-making. This detailed approach encompasses sales forecasts, production planning, direct materials procurement, labor and overhead costs, and cash flow management, culminating in a projected income statement that illustrates expected profitability.

Sales Budget and Cash Collections

The process begins with developing a sales budget based on prior month’s actual sales and anticipated sales volume for the upcoming quarter. Since actual sales in December were $70,000 at a stable price of $10 per unit, the projected sales for the first five months are aligned with strategic targets. Recognizing that 30% of sales are collected in cash while 70% are credit sales collected the following month emphasizes the importance of timing in cash flow planning. For instance, January’s cash collections will comprise 30% of January sales plus 70% of December’s credit sales. The precise computation of these collections ensures robustness in cash flow forecasting.

Production Budget

Next, the production budget hinges on sales forecasts and inventory policies. Maintaining ending finished goods inventory at 25% of the next month's sales in units influences production volumes. This policy helps prevent stockouts and excess inventory, balancing operational efficiency. Calculating monthly production needs involves adjusting projected sales for beginning and ending inventories, thus establishing an accurate production schedule that aligns with sales forecasts.

Direct Materials Budget

Building on production estimates, the direct materials budget determines the amount and cost of raw materials required. Direct materials are needed at a rate of two pounds per unit at $2 per pound. Taking into account ending inventory policies—10% of the following month’s production needs—and the timing of payments (20% paid in the purchase month, remainder in the following month) ensures proper cash planning. These calculations help in establishing weekly purchasing schedules and preparing a foreseen cash disbursement plan for raw materials.

Cash Payments and Operating Expenses

Cash payments for direct materials are derived from the purchases schedule obtained above, including payments for prior month’s purchases. The budget also accounts for direct labor costs, with 0.01 hours per unit at $12 per hour, paid monthly. Manufacturing overhead includes fixed costs like rent and variable costs such as overhead per unit, totaling monthly fixed and variable expenses to be paid accordingly. Operating expenses, structured as $1 per unit plus fixed operating costs of $1,000, must be matched with projected sales volume, thus providing clarity on monthly cash payout requirements.

Comprehensive Cash Budget and Financing

The overall cash budget synthesizes all collections and disbursements, starting with beginning cash balances, adding collections, and subtracting payments. Given the policy of maintaining at least $4,000 in cash, the budget includes borrowing strategies—loans in $1,000 increments at 1% interest—contrasted with the ability to pay down excess cash at quarter-end. The borrowings and repayments, alongside interest calculations, ensure liquidity management while respecting credit limits and interest costs.

Manufacturing Costs and Income Statement

Calculating the manufacturing cost per unit incorporates direct materials, direct labor, and manufacturing overhead (fixed and variable). The budgeted income statement projects sales revenue, cost of goods sold, gross profit, operational expenses, interest expenses, taxes, and net income for the quarter, providing insight into profitability. The inclusion of depreciation and other non-cash expenses underscores the importance of cash versus accounting profitability.

In summary, this comprehensive budgeting exercise synthesizes operational data, cost assumptions, and financial policies to produce an integrated financial plan. It exemplifies best practices in manufacturing budgeting—emphasizing accuracy, consistency, and strategic insights—ultimately guiding management decisions, cash flow management, and profitability analysis.

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