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Comprehensive Budgeting Case

Dubai Clothing Co. (DCC) makes a very popular undyed cloth sandal in one style, but in Regular and Deluxe. The Regular sandals have cloth soles and the Deluxe sandals have cloth covered wooden soles. Dubai Clothing Co. is preparing its budget for June 2012, and has estimated sales based on past experience.

Other information for the month of June follows:

Input Prices
Direct materials
Cloth 			        $3.50 per yard
Wood 			        $5.00 per board foot (b.f.)
Direct manufacturing labor 	$10 per direct manufacturing labor-hour

Input Quantities per Unit of Output (per pair of sandals)
                                           Regular 		Deluxe
Direct materials
Cloth 					  1.3 yards 	        1.5 yards
Wood 					  0 		        2 b.f.
Direct manufacturing labor-hours (DMLH)	  5 hours 	        7 hours
Setup-hours per batch 			  2 hours 		3 hours

Inventory Information, Direct Materials
                                         Cloth 		        Wood
Beginning inventory 			 610 yards 	        800 b.f.
Target ending inventory 		 386 yards 	        295 b.f.
Cost of beginning inventory		 $2,146 		$4,040
Dubai Clothing Co. accounts for direct materials using a FIFO cost flow assumption.

Sales and Inventory Information, Finished Goods
                                            Regular 		  Deluxe
Expected sales in units (pairs of sandals)  2,000		  3,000
Selling price 				    $ 80 $ 		  130
Target ending inventory in units 	    400 		  600
Beginning inventory in units 		    250		          650
Beginning inventory in dollars 		    $15,500 		  $61,750

Dubai Clothing Co. uses a FIFO cost flow assumption for finished goods inventory.

All the sandals are made in batches of 50 pairs of sandals. Dubai Clothing Co. incurs manufacturing overhead costs, marketing and general administration, and shipping costs. Besides materials and labor, manufacturing costs include setup, processing, and inspection costs. Dubai Clothing Co. ships 40 pairs of sandals per shipment.

Dubai Clothing Co. uses activity-based costing and has classified all overhead costs for the month of June as shown in the following chart:

Cost type 		       Denominator 			Activity Rate
Manufacturing:
Setup 			       Setup-hours 			$12 per setup-hour
Processing 		       Direct manufacturing labor-hours $1.20 per DMLH
Inspection 		       Number of pairs of sandals 	$0.90 per pair
Nonmanufacturing:
Marketing and general adm.     Sales revenue 			8%
Shipping 		       Number of shipments 		$10 per shipment

Required:

1. Prepare each of the following for June:
   1. Revenues budget
   2. Production budget in units
   3. Direct material usage budget and direct material purchases budget in both units and dollars; round to dollars
   4. Direct manufacturing labor cost budget
   5. Manufacturing overhead cost budgets for processing and setup activities
   6. Budgeted unit cost of ending finished goods inventory and ending inventories budget
   7. Cost of goods sold budget
   8. Marketing and general administration costs budget
2. Dubai Clothing Co.’s balance sheet for May 31 follows. Use it and the following information to prepare a cash budget for Dubai Clothing Co. for June. Round to dollars.
• All sales are on account; 60% are collected in the month of the sale, 38% are collected the following month, and 2% are never collected and written off as bad debts.
• All purchases of materials are on account. Dubai Clothing Co. pays for 80% of purchases in the month of purchase and 20% in the following month.
• All other costs are paid in the month incurred, including the declaration and payment of a $10,000 cash dividend in June.
• Dubai Clothing Co. is making monthly interest payments of 0.5% (6% per year) on a $100,000 long term loan.
• Dubai Clothing Co. plans to pay the $7,200 of taxes owed as of May 31 in the month of June. Income tax expense for June is zero.
• 30% of processing and setup costs, and 10% of marketing and general administration costs are depreciation.

                              Dubai Clothing Co.
                              Balance Sheet
                              as of May 31
Assets
Cash 							$ 6,290
Accounts receivable 		     $216,000
Less: Allowance for bad debts 	      10,800 		205,200
Inventories
Direct materials 				        6,186
Finished goods						77,250
Fixed assets 			     $580,000
Less: Accumulated depreciation 	      90,890 		489,110
Total assets 						$784,036

Liabilities and Equity
Accounts payable 					$ 10,400
Taxes payable						7,200
Interest payable 				        500
Long-term debt 						100,000
Common stock 						200,000
Retained earnings 					465,936
Total liabilities and equity 				$784,036

3. Prepare a budgeted income statement for June and a budgeted balance sheet for Dubai Clothing Co. as of June 30.