Thus we can back out the materials issued as shown below Quarter 1 Quarter 2

Thus we can back out the materials issued as shown

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Thus, we can back out the materials issued, as shown below: Quarter 1 Quarter 2 Quarter 3 Quarter 4 Opening balance for materials $400,000 $420,000 $415,000 $425,000 + Purchases 235,000 211,200 222,300 207,500 = Total available $635,000 $631,200 $637,300 $632,500 - Ending balance 420,000 415,000 425,000 410,000 = Materials used for production $215,000 $216,200 $212,300 $222,500 In this table, notice that we link quarters by the fact that ending inventory in Q1 = beginning inventory in Q2. Let us now compute Peterson’s COGM. Quarter 1 Quarter 2 Quarter 3 Quarter 4 Materials used for production $215,000 $216,200 $212,300 $222,500 + Direct labor 240,000 244,500 238,500 248,600 = Cost of goods manufactured $455,000 $460,700 $450,800 $471,100 Next, we use the inventory equation for the FG inventory to determine COGS. Quarter 1 Quarter 2 Quarter 3 Quarter 4 Opening balance $380,000 $390,400 $385,600 $391,250 + Cost of goods manufactured 455,000 460,700 450,800 471,100 = Total available $835,000 $851,100 $836,400 $862,350 - Ending balance 390,400 385,600 391,250 396,500 = Cost of goods sold $444,600 $465,500 $445,150 $465,850 Again, notice that ending balance in Q1 = opening balance in Q2. Balakrishnan, Sivaramakrishnan, & Sprinkle – 2e FOR INSTRUCTOR USE ONLY
7-29 We are finally ready to prepare the Peterson’s contribution margin income statement. Quarter 1 Quarter 2 Quarter 3 Quarter 4 Revenue $795,200 $834,200 $864,450 $856,250 - Variable cost of goods sold 444,600 465,500 445,150 465,850 = Contribution margin $350,600 $368,700 $419,300 $390,400 - Fixed manufacturing costs 150,000 172,250 169,250 174,300 - Fixed selling expenses 80,000 95,000 106,000 100,000 = Profit before taxes $120,600 $101,450 $144,050 $116,100 7.64 Let us begin by first constructing Peterson’s budgeted cash collections. We have: Q1 Q2 Q3 Q4 Opening receivables balance $125,000 $106,027 $111,227 $115,260 + Sales 795,200 834,200 864,450 856,250 = Total collectible $920,200 $940,227 $975,677 $971,510 - Collections 814,173 829,000 860,417 857,343 = Ending balance $106,027 $111,227 $115,260 $114,167 Notice that collections include all of the opening balance. They also include all sales for the first two months of the quarter and 60% for the third month. Alternatively, we compute the ending balance as 40% of the last month’s sales (all else would have been collected) and back out the collections. Next, we compute the cash outflow for purchases. Q1 Q2 Q3 Q4 Opening payables balance $126,500 $39,167 $35,200 $37,050 + Purchases 235,000 211,200 222,300 207,500 = Total Payable $361,500 $250,367 $257,500 $244,550 - Payments 322,333 215,167 220,450 209,967 = Ending balance $39,167 $35,200 $37,050 $34,583 As with collections, payments include all of the opening balance. They also include all purchases for the first two months of the quarter and 50% for the third month. Alternatively, we compute the ending balance as 50% of the last month’s purchases (Peterson’s would have paid all other bills.) Balakrishnan, Sivaramakrishnan, & Sprinkle – 2e FOR INSTRUCTOR USE ONLY
7-30 With these estimates in hand, we are now ready to construct the overall cash budget. Q1 Q2 Q3 Q4 Opening balance $75,000 111,840 $228,923 $370,140 + Collections 814,173 829,000 860,417 857,343 = Total available $889,173 $940,840 $1,089,340 $1,227,483 Payments for purchases 322,333 215,167 220,450 209,967 Labor costs 240,000 244,500 238,500 248,600 Fixed manufacturing costs 135,000 157,250 154,250 159,300 Fixed selling costs 80,000 95,000 106,000 100,000 = Ending balance $111,840 $228,923 $370,140 $509,616 In our computations, notice that we have removed $15,000 each quarter for non-cash manufacturing overhead expenses. Notice that the cash balance is growing while income (see the prior problem) stays relatively stable over the four quarters. Why is this? This occurs because we assumed that Peterson hoards all of its cash – thus, the cash balance increases each quarter by the amount of income (there also is a $15,000 difference due to the non-cash overhead expense, which is accounted for in the income statement but not in the cash budget). In

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