Style House Design Pty Ltd’s balance sheet at December 31, 2017
is shown below:
| Style House Design balance sheet December 31,
2017 |
| Asset |
| Current Assets |
|
|
| Cash |
|
7500 |
| Accounts receivable |
|
73500 |
| Finished goods inventory (1500 units) |
|
24000 |
| Total current assets |
|
10500 |
| Property, plant and equipment |
40000 |
|
| Equipment |
10000 |
|
| Less: Accumulated depreciation |
|
30000 |
| Total Assets: |
|
135000 |
| |
|
|
| Liabilities |
| Notes payable |
|
25000 |
| Accounts payable |
|
45000 |
| Total Liabilities |
|
70000 |
| |
|
|
| Stockholders' Equity |
| Common stock |
40000 |
|
| retained earings |
25000 |
|
| Total stockholders' equity |
|
65000 |
| Total liabilities and stockholders' equity |
|
135000 |
Budgeted data for the year 2018 includes the following:
| 2018 |
|
|
Quarter 4 |
Total |
|
|
Sales budget (8,000 units at $32) |
76800 |
256000 |
|
Direct materials used |
17000 |
62500 |
|
|
Direct labour |
12500 |
50900 |
|
Manufacturing overhead applied |
10000 |
48600 |
|
Selling and administrative expenses |
18000 |
75000 |
Additional Information: To meet sales requirements and to have
2,500 units of finished goods on hand at December 31, 2018, the
production budget shows 9,000 required units of output. The total
unit cost of production is expected to be $18. The company uses the
first-in, first out (FIFO) inventory costing method. Interest
expense is expected to be $3,500 for the year. Income taxes are
expected to be 40% of income before income taxes, in 2018, the
company expects to declare and pay $8,000 cash dividends. The
company’s cash budget shows and expected cash balance of $5,880 at
December 31, 2018. All sales and purchases are on account. It is
expected that 60% of quarterly sales are collected in cash within
the quarter and the remainder is collected in the following
quarter. Direct materials purchased from suppliers and paid 50% in
the quarter incurred and the remainder in the following quarter.
Purchases in the fourth quarter were the same as the materials
used. In 2018, the company expects to purchase additional equipment
costing $9,000. $4,000 of depreciation expense on equipment is
included in the budget data and split equally between manufacturing
overhead and selling and administrative expenses. The company
expects to pay $8,000 on the outstanding notes payable balance plus
all interest due and payable to December 31 (included in interest
expense $3,500, above). Accounts payable at December 31, 2018,
includes amounts due suppliers (see above) plus other accounts
payable of $7,200. Unpaid income taxes at December 31 will be
$5,000.
a) Discuss all the primary benefits of budgeting to the CEO of
Style House Design Pty Ltd. Provide detailed information.
b) How may a Style House Design’s budget report for the second
quarter differ from the first quarter. Provide detailed
explanation.
