Comprehensive Budget Problem

Tina's Fine Juices is a bottler of orange juice located in the Northeast. The company produces bottled orange juice from fruit concentrate purchased from suppliers in Florida, Arizona, and California. The only ingredients in the juice are water and concentrate. The juice is blended, pasteurized, and bottled for sale in 12-ounce plastic bottles. The process is heavily automated and is centered on five machines that control the mixing and bottling of the juice. The amount of labor required is very small per bottle of juice. The average worker can process 10 bottles of juice per minute, or 600 bottles per hour. The juice is sold by a number of grocery stores under their store brand name and in smaller restaurants, delis, and bagel shops under the name of Tina's Fine Juices. Tina's has been in business for several years and uses a sophisticated sales forecasting model based on previous sales, expected changes in demand, and economic factors affecting the industry. Sales of juice are highly seasonal, peaking in the first quarter of the calendar year.

Forecasted sales for the last two months of 2012 and all of 2013 are as follows:

Following is some other information that relates to Tina's Fine Juices:

Juice is sold for $1.05 per 12-ounce bottle, in cartons that hold 50 bottles each.

Tina's Fine Juices tries to maintain at least 10 percent of the next month's estimated sales in inventory at the end of each month.

The company needs to prepare two purchases budgets: one for the concentrate used in its orange juice and one for the bottles that are purchased from an outside supplier. Tina's has determined that it takes 1 gallon of orange concentrate for every 32 bottles of finished product. Each gallon of concentrate costs $4.80. Tina's also requires 20 percent of next month's direct material needs to be on hand at the end of the budget period. Bottles can be purchased from an outside supplier for $0.10 each.

Factory workers are paid an average of $15 per hour, including fringe benefits and payroll taxes. If the production schedule doesn't allow for full utilization of the workers and machines, one or more workers are temporarily moved to another department.

Most of the production process is automated, the juice is mixed by machine, and machines do the bottling and packaging. Overhead costs are incurred almost entirely in the mixing and bottling process. Consequently, Tina's has chosen to use a plantwide cost driver (machine hours) to apply manufacturing overhead to products.

Variable overhead costs will be in direct proportion to the number of bottles of juice produced, but fixed overhead costs will remain constant, regardless of production. For budgeting purposes, Tina's separates variable overhead from fixed overhead and calculates a predetermined overhead rate for variable manufacturing overhead costs.

Variable overhead is estimated to be $438,000 for the year, and the production machines will run approximately 8,000 hours at the projected production volume for the year (4,775,000 bottles). Therefore, Tina's predetermined rate for variable overhead is $54.75 per machine hour ($438,000 ÷ 8,000 machine hours).Tina's has also estimated fixed overhead to be $1,480,000 per year ($123,333 per month), of which $1,240,000 per year ($103,333 per month) is depreciation on existing property, plant, and equipment.

All of the company's sales are on account. On the basis of the company's experience in previous years, the company estimates that 50 percent of the sales each month will be paid for in the month of sale. The company also estimates that 35 percent of the month's sales will be collected in the month following sale and that 15 percent of each month's sales will be collected in the second month following sale.

Tina's has a policy of paying 50 percent of the direct material purchases in the month of purchase and the balance in the month after purchase. Overhead costs are also paid 50 percent in the month they are incurred and 50 percent in the next month.

Selling and administrative expenses are $100,000 per month and are paid in cash as they are incurred.