Question: The Arthur Tire Company manufactures racing tires for bicycles Arthur

The Arthur Tire Company manufactures racing tires for bicycles. Arthur sells tires for $ 55 each. Arthur is planning for the next year by developing a master budget by quarters. Arthur’s balance sheet for December 31, 2014, follows:

Other data for Arthur Tire Company:
a. Budgeted sales are 800 tires for the first quarter and expected to increase by 100 tires per quarter. Cash sales are expected to be 30% of total sales, with the remaining 70% sales on account.
b. Finished Goods Inventory on December 31 consists of 250 tires at $ 29 each.
c. Desired ending Finished Goods Inventory is 30% of the next quarter’s sales; first quarter sales for 2016 are expected be 1,200 tires; FIFO inventory costing method is used.
d. Direct materials cost is $ 16 per tire.
e. Desired ending Raw Materials Inventory is 20% of the next quarter’s direct materials needed for production; desired ending inventory for December 31 is $ 3,000; indirect materials are insignificant and not considered for budgeting purposes.
f. Each tire requires 0.20 hours of direct labor; direct labor costs average $ 20 per hour. g. Variable manufacturing overhead is $ 2 per tire.
h. Fixed manufacturing overhead includes $ 3,000 per quarter in depreciation and $ 4,820 per quarter for other costs, such as utilities, insurance, and property taxes.
i. Fixed selling and administrative expenses include $ 10,000 per quarter for salaries; $ 1,800 per quarter for rent; $ 500 per quarter for insurance; and $ 600 per quarter for depreciation.
j. Variable selling and administrative expenses include supplies at 1% of sales.
k. Capital expenditures include $ 30,000 for new manufacturing equipment, to be purchased and paid in the first quarter.
l. Cash receipts for sales on account are 50% in the quarter of the sale and 50% in the quarter following the sale; December 31, 2014, Accounts Receivable is received in the first quarter of 2015; uncollectible accounts are considered insignificant and not considered for budgeting purposes.
m. Direct materials purchases are paid 75% in the quarter purchased and 25% in the following quarter; December 31, 2014, Accounts Payable is paid in the first quarter of 2015.
n. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.
o. Income tax expense is projected at $ 2,000 per quarter and is paid in the quarter incurred.
p. Arthur desires to maintain a minimum cash balance of $ 30,000 and borrows from the local bank as needed in increments of $ 1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $ 1,000; interest is 12% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

1. Prepare Arthur’s operating budget and cash budget for 2015, by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, cash receipts, cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours.
2. Prepare Arthur’s annual financial budget for 2015, including budgeted income statement, budgeted balance sheet, and budgeted statement of cashflows.

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  • CreatedJanuary 16, 2015
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