World United manufactures industrial dye. The company is preparing is 2018 master budget and has presented you with the following information.
a.The December 31, 2017 balance sheet for the company follows:
December 31, 2017
Assets Liabilities and Stockholder's Equity
Cash $5,080 Notes Payable $ 25,000
Account Receivable 26,500 Accounts Payable 2.148
Raw Material Inventory 800 Dividends Payable 10,000
Finished Goods Inventory 2,104 Total Liabilities $ 37,148
Prepaid Insurance 1,200 Common Stock $100,000
Building $300,000 Paid-in Capital 50,000
Accum Depr. (20,000) 280,000 Retained Earnings 128,536 278, 536
Total Assets $ 315,684 Total Liabilities and Equity $315,684
b. The Accounts Receivable balance at 12/31/17 represents the remaining balances of November and December credit sales. Sales were $70,000 and $65,000, respectively for those two months.
c. Estimated sales in gallons of dye for January through May 2018 follow:
Each gallon of dye sells for $12.00.
d. The collection pattern for accounts receivable is as follows: 70 percent in the month of sale, 20 percent in the first month after the sale, and 10 percent in the second month after the sale. The company expects no bad debts and gives no cash discounts.
e. Each gallon of dye has the following standard quantities and costs for direct material and direct labor:
1.2 gallons of direct material (some evaporation occurs during processing) X $.80 per gallon $ 0.96
0.5 hours of direct labor X $6 per hour $ 3.00
f. Variable overhead (VOH) is applied to the product on a machine-hour basis. Processing 1 gallon of dye takes 5 hours of machine time. The variable overhead rate is $0.06 per machine hour; VOH consists entirely of utility costs. Total annual fixed overhead is $120,000; it is applied at $1 per gallon based on an expected annual capacity of 120,000 gallons. Fixed overhead per year is composed of the following costs:
g. There is no beginning Work in Process Inventory. All work in process is completed in the period in which it is started. Raw Material Inventory at the beginning of the year consists of 1,000 gallons of direct material at a standard cost of $0.80 per gallon. There are 400 gallons of dye in Finished Goods Inventory at the beginning of the year carried at a standard cost of $5.26 per gallon; direct material, $0.96; direct labor, $3,00, variable overhead, $0.30; and fixed overhead, $1.00.
h. Accounts Payable relates solely to raw material and is paid 60 percent in the month of purchase and 40 percent in the month after purchase. No discounts are received for prompt payment.
i. The dividend will be paid in January 2018.
J. A new piece of equipment costing $9,000 will be purchased on March 1, 2018. Payment of 80 percent will be made in March and 20 percent in April. The equipment has a useful life of three years and will have no salvage value.
K. The note payable has a 12 percent interest rate, interest is paid at the end of each month. The principal of the note is repaid as cash is available to do so.
l. The company's management has a set minimum cash balance of $5,000. Interest on any borrowings is expected to be 12 percent per year.
m. The ending Finished Goods Inventory should include 5 percent of the next month's needs. This is not true at the beginning of 2018 due to a miscalculation in sales for December. The ending inventory of raw materials should also be 5 percent of the next month's needs.
n. Selling and administrative costs per month are as follows: salaries, $18,000, rent, $7,000, and utilities $800.
o. The company's tax rate is 35 percent.
Prepare a master budget for each month of the first quarter of 2018 and pro forma financial statements as of the end of the first quarter of 2018.