Master Budget Problem

Spring Semester - 2016

Innovate Company is a highly-progressive organization that produces Netbook computers. The design of Innovate's system is unique and represents the latest breakthrough in touch-screen portable computers. The company is preparing to build its master budget for the coming year (20XX). The annual budget is segmented into detail for each quarter's activity and for the year in total. The master budget will be based on the following information:

Fourth quarter sales from the prior year are 5,500 units.
Unit sales by quarter (for 20XX) are projected as follows:
First quarter 6,000
Second quarter 8,000
Third quarter 8,000
Fourth quarter 9,000

The selling price is $650 per unit. All sales are on credit. Innovate collects 85 percent of all sales within the quarter in which they are realized; the other 15 percent are collected in the following quarter. Innovate will start recording bad debt expense this year. The company estimates that 1 percent of the balance of accounts receivable will be uncollected and will make an adjustment entry at the end of the year (it will not affect the cash account for the current year, but it will affect certain income statement and balance sheet accounts).

There is no beginning inventory of finished goods. Innovate is planning the following ending finished goods inventories for the quarter:
Innovate leases machines used in production. Per terms of the capital lease, the company has the right to use the machines, but must pay maintenance on the machines. At current capacity, Innovate's expense due to leasing will be $650,000 per quarter. The fixed utility cost is $50,000 per quarter and the salaries of factory supervisors and staff will be $300,000 per quarter.

Variable overhead consists primarily of machine maintenance and the costs incurred to run the machines. From past experience, Innovate estimates machine maintenance expense to be $1 per direct labor hour (DLH) and the cost of utilities and labor to run the machines is $5 per DLH. Overhead is allocated based on direct labor hours used in production. All overhead expenses are paid for in the quarter incurred.
The selling and administrative staff is based in a separate building from where the Netbook computers are produced. Rent expense for the administrative building is $40,000 per month, the fixed portions of telephone and utility expenses averages $20,000 per month, and the fixed fee for technical support is $20,000 every three months. Depreciation expense is $50,000 per quarter.

Variable selling and administration expenses consist of billing expenses of $1 per unit sold, sales commissions $7 per unit, and the variable portion of telephone and utility expenses is $2 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.
Each Netbook computer unit assembly require five hours of direct labor and three items of direct materials. Workers are paid $10 per hour, and although the items of direct materials are different (case, motherboard, and peripheral package), each item of materials average cost is $80.

There are 6,570 items of direct materials in beginning inventory as of January 1, 20XX. At the end of each quarter, Innovate plans to have 20 percent of the direct materials needed for next quarter's unit sales. Innovate will end the year with the same level of direct materials found in this year's beginning inventory.

Innovate buys direct materials on account. One-half of the purchases are paid for in the quarter of acquisition, and the remaining half is paid for in the following quarter. Direct labor wages are paid on the fifteenth and thirtieth of each month.
The trial-balance as of December 31, of the prior year is as follows: