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5.DATA: Carewood makes an environmentally friendly artificial fireplace log. You have been asked to prepare the company’s master budget for the first quarter of the year 2013 and have been provided with the following:

a. The 12/31/2012 balance sheet data follows:


Cash $ 4,330

Accounts Receivable 8,450

Direct Materials Inventory (2,178 pounds) 436

Finished Goods Inventory (1,200 logs) 2,808

Plant and Equipment $220,000

Less Accumulated Depreciation (56,000) 164,000

Total Assets $180,024


Accounts Payable $ 1,109

Note Payable 20,000

Total Liabilities $ 21,109

Common Stock $100,000

Retained Earnings 58,915 158,915

Total Liabilities and Stockholder’s Equity $180,024

b. Each log requires the following standards for direct material and labor:

• 3.3 pounds of material mix at $.20 per lb 

• 10 minutes of labor time per unit; direct labor

averages $14.40 per hour 

Each finished log requires three minutes of machine time. Variable overhead is applied at the rate of $12.00 per hour of machine time. Annual fixed production overhead is budgeted at $46,800 (see breakdown below).

Salaries $30,000

Insurance 1,800

Fixed portion of utilities 6,000

Depreciation 9,000

Total $46,800

Fixed overhead is incurred evenly throughout the year

c. Expected sales in units for the first five months of 2013 are:

January 6,000

February 9,000

March 6,500

April 5,900

May 5,100

Carewood grants no discounts, and all sales are on credit at $6.00 per log. The company’s collection pattern is 80 percent in the month of sale, 15 percent in the month following sale, and 5 percent in the second month following the sale. The Accounts Receivable balance in the balance sheet data represents amounts remaining due from November sales of $33,000 and December sales of $34,000.

d. Carewood completes all production each day. The desired ending balance of Direct Materials Inventory is 10 percent of the amount needed to satisfy the next month’s production for finished goods. The desired ending balance in Finished Goods Inventory is 20 percent of the next month’s sales.

e. Purchases of direct materials are paid 70 percent in the month of purchase and 30 percent in the month following the purchase. No discounts are taken. The note payable has a 12 percent interest rate, and the interest is paid at the end of each month. The $20,000 balance of the principal on the note is due on March 31, 2013.

f. CareWood’s minimum cash balance desired is $4,000. The firm may only borrow at the beginning of a month and repay at the end of a month in $500 increments ($500, $1,000, $1,500 etc.). Principal should only be repaid in a month when excess cash exists. Interest on these short-term loans, if any, is payable monthly at a 14% rate. You may have to borrow money to meet your monthly interest obligations on any loans outstanding.

g. Selling and Administrative expenses, paid as incurred, run $9,000 per month plus 1 percent of sales. Direct labor and overhead are paid as incurred.

h. The company accrues income taxes at a 40 percent rate. A quarterly tax installment will be paid on April 15, 2013.

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