Sigma Company manufactures snowboards. The company set up its balance sheet on December 1, 2019 by selling $4,400,000 in common stock. Some of the cash raised from selling the stock was then used to purchase land costing $1,000,000 and Building and Equipment costing $2,400,000. After setting up its balance sheet the company began operations on January 1, 2020.

Data Section

The company has assembled the following information to assist you in the budget preparation process for the first quarter (3 months) of 2020. The company has estimated the following budgeted unit sales for the first 5 months of the year: Jan 9000, Apr: 1050, Feb 1000, May: 1100, Mar: 12500

The selling price of the snowboard is $250 per unit. Thirty five percent of sales are cash sales and the balance is on credit. The credit sales are collected as follows: 50% in the month of sale, 45% in the second month of sale and the balance in the third month of sale.

The company maintains a finished goods inventory of 20% of the following month’s unit sales. There is no beginning inventory of finished goods. Each snowboard requires the following raw material and direct labor: Wood: 3.5 board feet at $24.25 per board feet, Direct labor: 4.2 hours per snowboard at $14.50 per hour.

Management would like to end each month with an inventory of raw (direct) materials equal to 15% of the following months production needs. There is no beginning inventory of raw materials. The company pays 25% of raw material purchases in the month of purchase, 30% in the second month and the balance in the third month.

Variable manufacturing overhead is $11.50 per direct manufacturing labor hour. The fixed manufacturing overhead cost per quarter is $168,625. The only non-cash element of manufacturing overhead is depreciation which is $37,500 per quarter.

The company’s variable selling and administrative expense per unit is $4.25. In addition, variable shipping expenses are $2.75 per unit. Fixed selling and administrative expenses include the following: advertising expenses of $45,000 per month, executive salaries of $55,000 per month, depreciation of $22,500 per month. Rental payment for the manufacturing facility is estimated at $100,000 per month. Additionally, insurance payment total $35,000 per month while property taxes total $24,000 per month.

The beginning cash balance on January 1, 2020 is $1,000,000. Management plans to spend some money on capital expenditures (fixed assets) on remodeling the administrative offices (non-manufacturing). This remodeling project would cost $2.5 million and would be spent in cash in Jan 2020. The project would be depreciated straight line over its 15-year useful life with no salvage value. (HINT: You will want to capitalize this remodeling project, to the existing building and equipment amount on your balance sheet.)

The company’s board of directors has also approved cash dividends of $37,500 paid in cash in the month of March 2020. (HINT – this impacts your ending retained earnings)

The company requires a minimum cash balance of at least $625,000 at the end of each month. If the ending cash balance is insufficient, the company would obtain a short-term loan from a local bank. The bank has agreed to extend financing to Sigma at an annual interest rate of 3.0% per year. Any borrowing would occur at the beginning of the current month and any payment (interest and principal) will be made in the beginning of the following month (if sufficient cash surplus is available for such payments). Interest must be paid first on any outstanding loan balance before any principal payments are made.

Prepare a cash budget for the quarter.

Answer rating: 100% (QA)

Ans Sigma Company Cash Budget for the quarter January March 2020 Amount in Particulars January February March A Opening Cash Balance 100000000 62500000 62500000 B Cash Receipts Cash Sales 35 of total ... View the full answer