Discussion Problem: Operating Budgets

Chic Containers, Inc. manufactures CD cases. The cases sell for $10 per unit. The sales forecast predicts sales of 60,000 units for the coming year (2002), and 70,000 for the following year (2003). All sales to customers are on account. Receivables at the beginning of the year were $20,000. Chic Containers expects to collect all of the opening receivables balance and 75% of the sales made during the coming year.

At the beginning of the year, Chic Containers had 3,000 units in finished goods inventory. Desired ending inventory is 5% of the next year's projected sales.

The nylon to make these cases costs $.50 per yard, and it takes 1.5 yards to make a single case. The company began the year with 1,600 yards of nylon in raw materials inventory, and desired ending raw materials inventory is 2,000 yards. All purchases of nylon are made with cash.

Each case requires .25 direct labor hours to produce, at a rate of $10 per hour.

Variable overhead is applied using a predetermined overhead rate of $1.50 per unit. Fixed overhead for the coming year is expected to be as follows:

Depreciation $30,000
Inspector's salary $25,000
Property tax $8,000
Supervisor's salary $30,000

Variable selling and administrative expenses for the coming year are estimated at $.75 per unit sold. Fixed selling and administrative expenses are expected to be as follows:

Depreciation $10,000
Sales staff $40,000
Advertising $5,000
President's salary $45,000

Prepare the following:

1. Sales budget and schedule of expected cash collections
2. Production budget
3. Direct materials budget
4. Direct labor budget
5. Manufacturing overhead budget
6. Selling and administrative expense budget