Comprehensive budgeting The balance sheet of Watson Company as of December 31, 20X1, follows: WATSON COMPANY Balance Sheet December 31, 20X1

Comprehensive budgeting

The balance sheet of Watson Company as of December 31, 20X1, follows:

WATSON COMPANY

Balance Sheet

December 31, 20X1

                                                                                                Assets

Cash                                                                                                                                                                                         $   4,595

Accounts receivable                                                                                                                                                                  10,000

Finished goods (575 units × $7.00)                                                                                                                                             4,025

Direct materials (2,760 units × $0.50)                                                                                                                                          1,380

Plant & equipment                                                                                                         $50,000

Less: Accumulated depreciation                                                                                       10,000                                                  40,000

Total assets                                                                                                                                                                              $ 60,000

       Liabilities & Stockholders’ Equity

Accounts payable to suppliers                                                                                                                                                   $ 14,000

Common stock                                                                                                             $25,000

Retained earnings                                                                                                             21,000                                                  46,000

Total liabilities & Stockholders’ equity                                                                                                                                        $ 60,000

The following information has been extracted from the firm’s accounting records:

    •       1) All sales are made on account at $20 per unit. Sixty percent of the sales are collected in the month of sale; the remaining 40% are collected in the following month. Forecasted sales for the first 5 months of 20X2 are as follows: January, 1,500 units; February, 1,600 units; March, 1,800 units; April, 2,000 units; and May, 2,100 units.

    •       2) Management wants to maintain the finished goods inventory at 30% of the following month’s sales.

    •       3) Watson uses four units of direct material in each finished unit. The direct material price has been stable and is expected to remain so over the next 6 months. Management wants to maintain the ending direct materials inventory at 60% of the following month’s production needs.

    •       4) Seventy percent of all purchases are paid in the month of purchase; the remaining 30% are paid in the subsequent month.

    •       5) Watson’s product requires 30 minutes of direct labor time. Each hour of direct labor costs $7.

Instructions

    a       Rounding computations to the nearest dollar, prepare the following for January through March:

                •       1) Sales budget

                •       2) Schedule of cash collections

                •       3) Production budget

                •       4) Direct material purchases budget

                •       5) Schedule of cash disbursements for material purchases

                •       6) Direct labor budget

    b      Determine the balances in the following accounts as of March 31:

                •       1) Accounts Receivable

                •       2) Direct Materials

                •       3) Accounts Payable

 

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