Question

Waterways Corporation is preparing its budget for the coming year, 2020. The first step is to plan for the first quarter of that coming year. The company has gathered information from its managers in preparation of the budgeting process.

Sales
Unit sales for November 2019		113,000
Unit sales for December 2019		101,000
Expected unit sales for January 2020		114,000
Expected unit sales for February 2020		114,000
Expected unit sales for March 2020		117,000
Expected unit sales for April 2020		124,000
Expected unit sales for May 2020		139,000
Unit selling price		$12

Waterways likes to keep 10% of the next month’s unit sales in ending inventory. All sales are on account. 85% of the Accounts Receivable are collected in the month of sale, and 15% of the Accounts Receivable are collected in the month after sale. Accounts receivable on December 31, 2019, totaled $181,800.

Direct Materials

Direct materials cost 80 cents per pound. Two pounds of direct materials are required to produce each unit.

Waterways likes to keep 5% of the materials needed for the next month in its ending inventory. Raw Materials on December 31, 2019, totaled 11,400 pounds. Payment for materials is made within 15 days. 50% is paid in the month of purchase, and 50% is paid in the month after purchase. Accounts Payable on December 31, 2019, totaled $102,885.

Direct Labor

Labor requires 12 minutes per unit for completion and is paid at a rate of $9 per hour.

Manufacturing Overhead
Indirect materials		30¢		per labor hour
Indirect labor		50¢		per labor hour
Utilities		50¢		per labor hour
Maintenance		20¢		per labor hour
Salaries		$43,000		per month
Depreciation		$16,900		per month
Property taxes		$2,900		per month
Insurance		$1,100		per month
Maintenance		$1,400		per month

Selling and Administrative
Variable selling and administrative cost per unit is $1.50.
Advertising		$17,000	a month
Insurance		$1,200	a month
Salaries		$72,000	a month
Depreciation		$2,400	a month
Other fixed costs		$2,800	a month

Other Information

The Cash balance on December 31, 2019, totaled $99,000, but management has decided it would like to maintain a cash balance of at least $800,000 beginning on January 31, 2020. Dividends are paid each month at the rate of $2.70 per share for 4,850 shares outstanding. The company has an open line of credit with Romney’s Bank. The terms of the agreement requires borrowing to be in $1,000 increments at 9% interest. Waterways borrows on the first day of the month and repays on the last day of the month. A $480,000 equipment purchase is planned for February.

For the first quarter of 2020, prepare a production budget.

Answer 1

Production Budget

	Jan	Feb	Mar	Quarter
Expected Unit Sales	114,000	114,000	117,000	345,000
Add: Desired Ending Inventory	11,400	11,700	12,400	35,500
Total Required	125,400	125,700	129,400	380,500
Less: Beginning Inventory	11,400	11,400	11,700	34,500
Required Production(Units)	114,000	114,300	117,700	346,000

Note: Ending Inventory of one month becomes the opening Inventory of next month.