Mr. Smith is the CFO of Suffolk Fasteners, Inc. and he ispreparing for a meeting with SCC Bank to arrange the financing forthe first quarter of 2020. Based on his sales forecast and theinformation he has provided (as detailed in the Situation below),your job as the company’s new management accountant is to preparethe following budgeted reports for the First Quarter of2020:
- Monthly Sales Budget
- Monthly Production Budget
- Monthly Direct Materials Budget
Situation:
Suffolk Fasteners, Inc. makes standard-size 2-inch fasteners,which it sells for $155 per thousand. Mr. Smith is the majorityowner of the corporation and manages the inventory and finances ofthe company. He estimates sales for the following months in year2020 to be:
January............... | $263,500 (1,700,000 fasteners) |
February............. | $186,000 (1,200,000 fasteners) |
March................. | $217,000 (1,400,000 fasteners) |
April................... | $310,000 (2,000,000 fasteners) |
May.................... | $387,500 (2,500,000 fasteners) |
In 2019, Suffolk Fasteners budgeted sales were $175,000 inNovember and $232,500 in December (1,500,000 fasteners).
Past history shows that Suffolk Fasteners collects 50 percent ofits accounts receivable in the normal 30-day credit period (themonth after the sale) and the other 50 percent in 60 days (twomonths after the sale).It pays for its materials 30 days afterreceipt. In general, Mr. Smith likes to keep a two-month supply ofinventory in anticipation of sales. Inventory at the beginning ofDecember was 2,600,000 units. (This was not equal to his desiredtwo-month supply.)
The major cost of production is the purchase of raw materials inthe form of steel rods, which are cut, threaded, and finished. Lastyear raw material costs were $52 per 1,000 fasteners, but Mr. Smithhas just been notified that material costs have risen, effectiveJanuary 1, to $60 per 1,000 fasteners. Suffolk Fasteners uses FIFOinventory accounting. Labor costs are relatively constant at $20per thousand fasteners, since workers are paid on a pieceworkbasis. Overhead is allocated at $10 per thousand units, and sellingand administrative expense is 20 percent of sales. Labor expenseand overhead are direct cash outflows paid in the month incurred,while interest and taxes are paid quarterly.
The corporation usually maintains a minimum cash balance of$25,000, and it puts its excess cash into marketable securities.The average tax rate is 40 percent, and Mr. Smith usually pays out50 percent of net income in dividends to stockholders. Marketablesecurities are sold before funds are borrowed when a cash shortageis faced. Ignore the interest on any short-term borrowings.Interest on the long-term debt is paid in March, as are taxes anddividends.
As of year-end, the Suffolk Fasteners budgeted balance sheet wasas follows:
Suffolk Fasteners, Inc. Budgeted Balance Sheet December 31, 2019 |
Assets | | |
Current assets: | | |
Cash.............................................................. | $ 30,000 | |
Accountsreceivable...................................... | 320,000 | |
Inventory....................................................... | 237,800 | |
Total currentassets.................................... | | $ 587,800 |
Fixed assets: | | |
Plant andequipment...................................... | 1,000,000 | |
Less: Accumulateddepreciation................ | 200,000 | 800,000 |
Totalassets..................................................... | | $1,387,800 |
Liabilities and Stockholders’ Equity | | |
Accounts payable............................................ | | $ 93,600 |
Long-term debt, 8 percent............................... | | 400,000 |
| | |
Common stock................................................ | $ 504,200 | |
Retained earnings........................................... | 390,000 | 894,200 |
Total liabilities and stockholders’ equity........ | | $1,387,800 |
