Sunday 24 November 2019

Style House Design Pty Ltd’s balance sheet at December 31, 2017 is shown below:

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.

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