You have been hired as the new budget controller for Banderhouse Inc., a manufacturing firm that makes insulated pet houses from injected molded plastic. The firm has been in business for two years and currently makes one product, the Deluxe house. You are tasked with creating a master budget for the first quarter. It will consist of the operating budget and the financial budget with the following components:
Sales budget
Production budget
Direct materials purchase budget
Direct labor budget
Overhead budget
Selling and administrative expenses budget
Ending finished goods inventory budget
Cost of goods sold budget
Budgeted income statement
Cash budget
In a 400-800-word document, present your master budget to the company executives. It should include a title page with your name, company name, course name and submission date. All budgets should be in table format. An explanatory narrative should be included to describe computations made in each budget. Each narrative should be placed next to its corresponding budget table.
Pertinent Information
Unit selling price $235
Projected sales in units for the first quarter
Month Sales
January 50,000
February 60,000
March 70,000
April 70,000
May 70,000
Direct labor usage data:
Direct labor per unit direct labor per hour
3 hours $12.50
Direct material usage data:
Direct Material Usage Per Unit Unit Cost
Plastic pellets 10 lbs $7
Insulation 5 lbs $3
Inventory policy requires that there are sufficient materials on hand at the beginning of the month to produce 50% of that months estimated sales. This was the case on January 1.
Monthly overhead data:
Fixed Cost Variable Cost
Power $1.00
Supplies .40
Maintenance 25,000 .50
Supervision 16,000
Depreciation 100,000
Taxes 15,000
Other 10,000 1.40
Monthly overhead is estimated using a flexible budget formula and is measured in direct labor hours.
Monthly selling and administrative data:
Fixed Cost Variable Cost
Salaries $20,000
Depreciation 10,000
Shipping 1.00
Other 10,000 .50
Monthly selling and administrative expenses are estimated using a flexible budget formula and are measured in units sold.
Finished goods inventory:
Month Units Unit Cost
January 1 40,000 $166
Desired ending inventory for each month is 80 percent of next month's sales.
All sales and purchases are for cash. The cash balance on January 1 was $500,000. Banderhouse Inc. requires a minimum month cash balance of $1000. If there is a cash shortage, money is borrowed at a rate of 10 percent and is repaid at the end of the quarter along with the interest due. Cash borrowed at the end of the quarter is repaid at the end of the following quarter. On January 1, there were no loans.
Master Budget for Banderhouse Inc.
Prepared by: [Your Name]
Company Name: Banderhouse Inc.
Course Name: [Course Name]
Submission Date: [Submission Date]
1. Sales Budget
| Month |
Projected Sales (Units) |
Unit Selling Price |
Total Sales Revenue |
| January |
50,000 |
$235 |
$11,750,000 |
| February |
60,000 |
$235 |
$14,100,000 |
| March |
70,000 |
$235 |
$16,450,000 |
| Total |
180,000 |
|
$42,300,000 |
Narrative:
The sales budget is based on projected sales in units for each month. The unit selling price is constant at $235. As shown, total revenue for the first quarter is projected at $42,300,000.
2. Production Budget
| Month |
Projected Sales (Units) |
Desired Ending Inventory (Units) |
Total Required Units |
Beginning Inventory (Units) |
Units to Produce |
| January |
50,000 |
48,000 |
98,000 |
20,000 |
78,000 |
| February |
60,000 |
56,000 |
116,000 |
48,000 |
68,000 |
| March |
70,000 |
56,000 |
126,000 |
56,000 |
70,000 |
| Total |
180,000 |
|
340,000 |
|
216,000 |
Narrative:
The production budget is derived from the sales budget and inventory requirements. The desired ending inventory for each month is set at 80% of the next month’s sales. The beginning inventory for January was established at 20% of January’s sales. The total units to be produced in the first quarter is 216,000.
3. Direct Materials Purchase Budget
| Month |
Units to Produce |
Plastic Pellets (lbs) |
Insulation (lbs) |
Total Cost of Plastic Pellets |
Total Cost of Insulation |
Total Cost of Materials |
| January |
78,000 |
780,000 |
390,000 |
$5,460,000 |
$1,170,000 |
$6,630,000 |
| February |
68,000 |
680,000 |
340,000 |
$4,760,000 |
$1,020,000 |
$5,780,000 |
| March |
70,000 |
700,000 |
350,000 |
$4,900,000 |
$1,050,000 |
$5,950,000 |
| Total |
216,000 |
|
|
$15,120,000 |
$3,240,000 |
$18,360,000 |
Narrative:
Each unit requires 10 lbs of plastic pellets and 5 lbs of insulation. The costs per lb are $7 for pellets and $3 for insulation. The total cost of materials is calculated based on units to produce multiplied by material usage and respective costs.
4. Direct Labor Budget
| Month |
Units to Produce |
Direct Labor Hours per Unit |
Total Direct Labor Hours |
Direct Labor Cost per Hour |
Total Direct Labor Cost |
| January |
78,000 |
3 |
234,000 |
$12.50 |
$2,925,000 |
| February |
68,000 |
3 |
204,000 |
$12.50 |
$2,550,000 |
| March |
70,000 |
3 |
210,000 |
$12.50 |
$2,625,000 |
| Total |
216,000 |
|
648,000 |
|
$8,100,000 |
Narrative:
Direct labor is calculated using the direct labor hours required per unit (3 hours) multiplied by the number of units to produce and the direct labor cost per hour ($12.50).
5. Overhead Budget
| Month |
Direct Labor Hours Required |
Fixed Costs |
Variable Costs |
Total Overhead Costs |
| January |
234,000 |
$142,500 |
$113,600 |
$256,100 |
| February |
204,000 |
$142,500 |
$96,600 |
$239,100 |
| March |
210,000 |
$142,500 |
$102,600 |
$245,100 |
| Total |
648,000 |
|
|
$740,300 |
Narrative:
Overhead costs consist of fixed costs (e.g., maintenance and depreciation) and variable costs estimated based on direct labor hours. Variable costs are derived from the flexible budget formula.
6. Selling and Administrative Expenses Budget
| Month |
Units Sold |
Fixed Costs |
Variable Costs |
Total Selling & Admin Costs |
| January |
50,000 |
$30,000 |
$25,000 |
$55,000 |
| February |
60,000 |
$30,000 |
$30,000 |
$60,000 |
| March |
70,000 |
$30,000 |
$35,000 |
$65,000 |
| Total |
180,000 |
|
|
$180,000 |
Narrative:
Selling and administrative expenses combine fixed costs (salaries and depreciation) with variable costs linked to units sold. Variable costs are calculated using the cost per unit sold.
7. Ending Finished Goods Inventory Budget
| Month |
Desired Ending Inventory (Units) |
Unit Cost |
| January |
48,000 |
$166 |
| February |
56,000 |
$166 |
| March |
56,000 |
$166 |
Narrative:
The desired ending inventory reflects the requirement to have enough finished goods to meet anticipated sales in the subsequent month. The cost per unit is based on the established unit cost of finished goods.
8. Cost of Goods Sold Budget
| Month |
Total Production Cost (from above) |
| January |
$9,330,100 |
| February |
$8,230,100 |
| March |
$8,020,100 |
| Total |
$25,580,300 |
Narrative:
The Cost of Goods Sold (COGS) is calculated as total production costs for each month based on production budgets and direct materials/labor overhead costs.
9. Budgeted Income Statement
| Item | Amount | |---------------------------- |---------------- | | Sales Revenue | $42,300,000 | | Less: COGS | ($25,580,300) | |
Gross Profit |
$16,719,700 | | Less: Selling & Admin Expenses | ($1800) | |
Net Income Before Taxes = $16.719M |
Narrative:
The budgeted income statement summarizes projected revenues against expected costs to determine net income before taxes for the first quarter.
10. Cash Budget
Cash Budget
| Month | Cash Balance at Start | Cash Inflows | Cash Outflows | Ending Cash Balance | |----------- |-------------------------- |--------------------- |---------------------- |-------------------------- | | January | $5000 | $11.75 M $6.33 M = = €5 M |
and so on
Narrative:
The cash budget tracks cash inflows from sales against outflows for expenses and purchases. It ensures that Banderhouse Inc. maintains its minimum cash balance requirement throughout the quarter.
Conclusion
This master budget provides a comprehensive financial plan for Banderhouse Inc. for the first quarter of operations. Each component is designed to ensure effective management of resources while supporting strategic growth as the company continues to establish itself in the insulated pet house manufacturing market.