Case: Pialligo Stationery
Pialligo Stationery has changed from being a traditional stationery company to a producer of compact flash disks which it markets as a portable and reliable data storage solution. The Budget Director Jane Good is preparing to build its master budget for the coming year (2005). The budget will detail each quarter’s activity and the activity for the year in total. The master budget will be based on the following information.
In order to assist you with your task, Jane has provided the following information.
• Fourth quarter sales for 2004 are 55,000 units
• Projected unit sales by quarter for 2005 are as follows:
|
First quarter
|
65,000
|
|
Second quarter
|
70,000
|
|
Third quarter
|
75,000
|
|
Fourth quarter
|
90,000
|
• The selling price is $400 per unit. All sales are credit sales. Pialligo collects 85% of all sales within the quarter in which they are realised, the other 15% is collected in the following quarter. There are no bad debts.
• There is no beginning inventory of finished goods. Pialligo is planning the following ending finished goods for each quarter:
|
First quarter
|
13,000
|
|
Second quarter
|
15,000
|
|
Third quarter
|
20,000
|
|
Fourth quarter
|
10,000
|
• Each unit uses five hours of direct labour and three units of direct materials. Labour is paid at the rate of $25 per hour, and one unit of direct materials costs $80.
• There are 65,700 units of direct materials in beginning inventory as of January 1, 2005. At the end of each quarter Pialligo plans to have 30% of the direct materials needed for next quarter’s unit sales. Pialligo will end the year with the same level of direct materials found in this years beginning inventory.
• Pialligo buys direct materials on account. Half the purchases are paid for in the quarter of acquisition, the remaining half are paid in the following quarter. Wages and salaries are paid on the 15th and 30th of each month.
• Fixed overheads total $1,000,000 each quarter. Of this total $350,000 represents depreciation. All other fixed expenses are paid in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year’s total fixed overhead by the year’s expected actual units produced.
• Variable overhead is budgeted at $6 per direct labour hour. All variable overhead expenses are paid for in the quarter incurred.
• Fixed selling and administration expenses total $250,000 per quarter, including $50,000 depreciation.
• Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.
• The Statement of financial position as of 31 December 2004 is as follows:
Assets
|
First quarter
|
13,000
|
|
Second quarter
|
15,000
|
|
Third quarter
|
20,000
|
|
Fourth quarter
|
10,000
|
Liabilities and shareholders’ equity
|
Accounts payable
|
$7,248,000*
|
|
Issued shares
|
27,000,000
|
|
Retained earnings
|
8,058,000
|
|
Total liabilities and shareholders' equity
|
$42,306,000
|
* for purchase of direct materials only
• Pialligo will pay half yearly dividends of $600,000. At the end of the fourth quarter, $2,000,000 of equipment will be purchased.
Requirements:
You have been assigned to work with Jane in preparing the master budget. The budget should include:
a. Sales budget
b. Production budget
c. Direct materials budget
d. Direct labor budget
e. Manufacturing overhead budget
f. Selling, general and administrative expense budget
g. Cash receipt budget.
h. Cash disbursement budget.
i. Cash budget
j. Budgeted schedule of Cost of Goods Manufactured and Sold
k. Budgeted Income Statement
l. Budgeted Statement of Cash Flows
m. Budgeted Balance Sheet.
1. Explain to Jane the development and importance of each budget you prepared.
2. Comment on the significant features of each of the budget.