Question: HoDown Hats makes felt cowboy hats with leather trim that

HoDown Hats makes felt cowboy hats with leather trim that sell for \$70 each. Each hat requires three-fourths of a yard of felt and 24 inches of leather. Felt costs \$3 per yard; leather costs \$15 per yard. The company’s policy is to have raw materials equal to at least 10 percent of the next month’s production needs. HoDown can only buy felt in 100-yard quantities and leather in 5-yard quantities. Thus, if HoDown needs 4,257 yards of felt, it must purchase 4,300 yards. This situation means that there might be more ending inventory than desired at the end of a month for felt and leather. Such a circumstance would affect the quantity of the beginning inventory for the following month.
Another company policy is to have a monthly ﬁnished goods ending inventory of 25 percent of the next month’s sales.
During the ﬁrst quarter of 2010, management expects no work in process inventories at the beginning or ending of any month. Additionally, the company expects April’s production of hats to be exactly equal to its sales volume for that month. Sales for the ﬁrst four months of 2010 follow.
The company collects 35 percent of its Accounts Receivable in the month of sale and the remainder in the month following the sale. There are no uncollectible accounts.
The December 31, 2009, balance sheet revealed the following selected balances: Cash, \$3,500; Accounts Receivable, \$162,500; Raw Material Inventory (450 yards of felt and 305 yards of leather), \$5,925; Finished Goods Inventory (3,200 hats), \$80,800; and Accounts Payable, \$31,500.
The company pays for 30 percent of a month’s purchases of raw material in the month of purchase (rounded to the nearest dollar). The remaining amount is paid in the month after purchase.
Direct labor cost per hat is \$9 per hat produced and is paid in the month of production. Total factory overhead is \$18,000 per month plus \$2.50 per hat produced; of that amount, \$3,000 per month is for depreciation. Total non factory cash costs are equal to \$32,800 per month plus 10 percent of sales revenue. All factory and non-factory cash expenses are paid in the month of incurrence. In addition, the company plans to make an estimated quarterly tax payment of \$245,000 and pay executive bonuses of \$435,000 in March 2010.
Required:
(a) Prepare a sales budget by month and in total for the ﬁrst quarter of 2010.
(b) Prepare a schedule of cash collections from customers by month and in total for the ﬁrst quarter of 2010. The Accounts Receivable balance on December 31, 2009, represents the unpaid amount of December sales.
(c) What were total sales for December 2009? What is the April 1, 2010, balance of Accounts Receivable?
(d) Prepare a production budget by month and in total for the ﬁrst quarter of 2010.
(e) Prepare purchases budgets for felt and leather by month and in total for the ﬁrst quarter of 2010.
(f) Prepare a schedule of cash payments for purchases by month and in total for the ﬁrst quarter of 2010. The Accounts Payable balance on December 31, 2009, represents the unpaid amount of December purchases.
(g) What were total raw material purchases for December 2009? What is the April 1, 2010, balance of Accounts Payable?
(h) Prepare a combined payments schedule for factory overhead and nonfactory cash costs for each month and in total for the ﬁrst quarter of 2010.
(i) Prepare a cash budget for each month and in total for the ﬁrst quarter of 2010.
(j) What is the standard cost per cowboy hat? (Hint: Review the beginning balance information.) How was this cost calculated? Given the cost per hat for ﬁxed production overhead, what is the expected quantity of production each month?

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