Preparation Of A Master Budget For Zigby Manufacturing ✓ Solved

Preparation of a Master Budget for Zigby Manufacturing for Q2 2015

The management of Zigby Manufacturing prepared the following estimated balance sheet for March 31, 2015, along with forecasted sales, inventory policies, and expenses to develop a comprehensive master budget for the second quarter of 2015 (April, May, and June). The budget will include sales projections, production, raw materials purchases, direct labor, manufacturing overhead, selling and administrative expenses, cash receipts and disbursements, borrowing activities, dividends, and capital expenditures.

Introduction

Creating an effective master budget requires integrating multiple financial components, based on sales forecasts, inventory policies, production needs, and expense estimates. The goal is to ensure sufficient cash flows to meet operational needs, maintain minimal cash balances, and plan for investments and financing activities, including borrowing and repayments.

Forecasted Sales and Revenue

Sales for March 2015 totaled 22,200 units, with forecasted sales of 22,200 units in April, 16,000 units in May, and 19,800 units in June. Based on a selling price of $26.00 per unit, the total revenue for each month can be calculated accordingly. Recognizing that 25% of sales will be cash sales and 75% credit sales collected in the subsequent month, we can project cash inflows accordingly. The yearly forecasted sales are 243,000 units, aligning with the forecasted monthly sales proportions.

Cost and Production Planning

Cost of goods sold (COGS) per unit is $21.80, with direct materials required at 0.50 units per finished product, costing $20 per raw material unit. The company policy aims for ending raw materials inventory of 50% of the next month’s Raw materials requirement, which will inform procurement schedules. The Finished goods inventory policy stipulates ending inventory equal to 80% of the next month’s expected sales units. Production budgets will specify the number of units to manufacture each month, considering beginning inventory and desired ending inventory levels.

Direct Labor and Manufacturing Overhead Budgets

Each finished unit requires 0.50 hours of direct labor, paid at $18 per hour, leading to direct labor cost calculations for each month. Overhead is allocated based on direct labor hours, with a variable overhead rate of $3.00 per labor hour, plus fixed depreciation overhead of $25,134 per month. Overhead is included in the cost of production and affects the total manufacturing expenses.

Selling and Administrative Expenses

Selling expenses include sales commissions at 9% of sales revenue, paid in the month of sale, and a monthly sales manager salary of $3,300. General and administrative expenses include fixed administrative salaries totaling $15,000 and interest expense calculated at 0.6% of the long-term note payable balance, which accrues monthly.

Cash Collections and Payments

The collection policy specifies that credit sales are collected in full in the following month, with cash sales collected in the month of sale. Raw materials are purchased on credit, with payments made the following month. Cash disbursements also include selling and administrative expenses, interest payments, and dividends declared in May. All payments are planned to ensure a minimum cash balance of $50,000, with borrowing activities scheduled when necessary and repayments to reduce excess cash.

Capital Expenditures and Financing

Equipment purchases of $133,000 are scheduled for June 30. Borrowing occurs whenever cash resources fall below the minimum threshold, with short-term notes incurring 1% interest at month-end. Repayments will be made from excess cash, and the schedule will reflect these activities to facilitate accurate cash flow management.

Budget Preparation Steps

1. Sales Budget: Calculate monthly sales revenue based on units and unit price, considering collection policies.
2. Production Budget: Determine units to produce based on sales forecast, beginning inventory, and ending inventory policies.
3. Raw Materials Purchases Budget: Calculate raw materials required for production, considering ending inventory policies, and determine purchase needs.
4. Direct Labor Budget: Compute direct labor hours and costs for each month based on production units.
5. Manufacturing Overhead Budget: Allocate overhead costs using labor hours and fixed overhead expenses.
6. Selling & Administrative Expenses Budget: Estimate expenses based on fixed costs, variable costs, and interest payments.
7. Cash Budget: Forecast cash receipts, cash disbursements, borrowing, repayments, and ending cash balances.
8. Capital Expenditure Budget: Schedule equipment purchases and incorporation into cash flow planning.

Conclusion

The comprehensive planning facilitated by the master budget enables Zigby Manufacturing to manage its operational activities efficiently during the second quarter. It ensures cash flow needs are met, excess cash is utilized optimally, and financial objectives such as maintaining minimum cash balances and planning for investments are achieved. The budget also provides a foundation for managerial decision-making and strategic planning for future periods.

Sample Paper For Above instruction

Zigby Manufacturing's strategic planning during the second quarter of 2015 exemplifies effective budgetary management essential for manufacturing operations. By integrating sales forecasts, inventory policies, production schedules, and financial planning, the company aims to align its operational activities with overall financial health and strategic goals.

The process begins with detailed sales forecasting, which indicates units expected to sell each month, directly impacting revenue projections. Given the sales mix, cash flow from sales is forecasted meticulously, considering the collection pattern—25% cash sales in the month of sale and 75% credit sales collected in the following month. This collection structure significantly influences the cash budget, requiring careful planning for short-term borrowing when cash inflows are insufficient to meet expenses.

Production planning relies heavily on inventory policies. The firm maintains ending finished goods inventory equal to 80% of the next month's sales forecast, which stabilizes production needs and prevents stockouts. Raw materials inventory policies specify that ending raw materials inventory should be at least 50% of the next month's raw materials requirement, ensuring smooth production flow. The budgeted raw materials purchases are thus driven by forecasted production needs, considering beginning inventories, desired ending inventories, and purchase timing, which involve on-credit procurement and payment schedules.

Cost management is another vital aspect, particularly labor and overhead costs. Direct labor hours, set at 0.50 hours per unit and $18 per hour, form the basis for direct labor cost calculations. Overhead costs, allocated based on direct labor hours, include fixed depreciation costs and variable overheads at $3 per labor hour, underpinning the manufacturing expense structure. Accurate budgeting of these costs is crucial for determining total production costs, contributing to pricing strategies and profit margin analysis.

Selling expenses encompass sales commissions at 9% of revenue and fixed managerial salaries, both budgeted accurately for each month. Administrative expenses include regular salaries and interest expenses on long-term debt, influencing net income and cash flow planning. Dividends are scheduled to be paid in May, and no income taxes are payable during the quarter, simplifying the tax-related cash flow considerations.

The cash budget consolidates all inflows and outflows, factoring in sales collections, payments for raw materials, labor, overheads, expenses, dividends, and capital expenditures. The scheduled equipment purchase of $133,000 on June 30 is incorporated into the cash disbursement forecast. Borrowing needs are assessed monthly to ensure the minimum cash balance of $50,000 is maintained, with short-term notes used for interim borrowing and repayments as cash flows warrant.

Throughout this budgeting process, the management's goal is to optimize liquidity, fund necessary investments, and sustain financial stability. The resulting master budget serves not only as a financial roadmap but also as a control tool, facilitating proactive management of resources and strategic decision-making.

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