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The Williams Company Budgeting Example The Williams Company manufactures PVC piping in long pipes which a finish manufacturer purchases and cuts to length for sale to retailers. Williams Company manufactures their piping using resin, sheets of raw PVC, and direct labor. The Wlliams Company has the following balance sheet as of December 31". Williams Company Balance Sheet on December 31 The information shown below is extracted from the records of the Williams Company. 1. The Williams Company has projected its unit sales for the next five months to be: All sales are made on account. Each unit of PVC sells for $60. Forty percent of all sales are collected in the month of the sale. The remaining 60% of the sales are collected in the following month. 2. Williams Company has a management rule that at the end of each month the ending finished goods inventory of PVC must be 20% of the following month's forecasted sales. Williams Company's finished goods inventory on December 31t consists of 1400 units of PVC piping. The Williams Company Budgeting Example 3. In order to produce one unit of PVC pipe, the following units of raw PVC and resin are used. The price of raw PVC sheets is now $4.00 per unit. The price of resin is $2.80 per unit, Management desires to maintain ending raw materials inventories for raw PVC and resin at 25% of the next month's production needs. William Company's December 311t raw material holdings were 18,000 units of raw PVC (at $4.00 per unit) and 10,800 units of resin (at $2.80 per unit). 4. Seventy percent of all purchases (raw PVC and resin) are paid in the month of purchase. The remaining 30% is placed on an account payable and paid the following month. 5. The production of PVC by Williams Company requires 30 minutes of direct labor time to complete. All labor costs are paid in the month incurred. Each hour of direct labor costs Williams Company $24. 6. Factory overhead is applied at the rate of $12 per direct labor hour. Actual overhead costs are paid as they are incurred. Monthly differences between applied and actual overhead costs are expected to be negligible. 7. Selling and Administrative expenses are $10,000 per month plus 10% of sales. All these expenses are paid in the month in which they are incurred. 8. Plant and equipment depreciates at the rate of $12,000 per year. This depreciation is incurred evenly throughout the year and is included in the factory overhead costs mentioned earlier. FINISHED GOODS INVENTORY: PVC 29 Beginning Inventory 30 Ending Inventory % of Nea Month's Sales 1,400 31. 32. PRODUCTION OF PVC 33 ONE UNIT OF PVCPRODUCED USING 34 PRICES OF RAW MATERIALS AND LABOA 35 MAW MATERALS FACTORY OVEPHEAD 43 Applied Per Direct Labor Hour. 44 A. 43.00 AS SELUNGAND ADMINISTRATION 46 Total 47 P 46 Permonth plus 48. PLANT ALD EQUPMAENT Depreciates Evenly inchuded in Factory Overhead at 512000 per year Monthly Deprediation. $1,000 Sales Budget Williams Company First Quarter Expected unit sales Unit selling price Total sales A \begin{tabular}{llllll} B & C & D & E & F & G \\ \hline \end{tabular} Production Budget in Units Williams Company First Quarter January February March Quarter 1 April May Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units Notes Desired ending inventory is currently 20% of next month's expected sales Direct Labor Budget Williams Company First Quarter Quarter 1 Units to be produced Direct labor time (hours) per unit Total required direct labor hours Direct labor costs per hour Total direct labor costs A \begin{tabular}{ll} B & \multicolumn{1}{c}{ C } \\ \hline & Overhead Budget \\ \hline & Williams Company \\ \hline & First Quarter \\ \hline \end{tabular} F January February March Quarter 1 Direct labor hours Applied factory overhead rate Factory overhead Less: included plant and equipment depreciation Total factory overhead A B C D E Selling and Administrative Expense Budget Williams Company First Quarter January February March Quarter 1 5 Variable expenses 7 Sales 8 Selling and adminstrative expense percentage Total variable selling and administrative expense \begin{tabular}{|r|r|r|} \hline$420,000 & $480,000 & $600,000 \\ \hline 10.00% & 10.00% & 10.00% \\ \hline$42,000.00 & $48,000.00 & $60,000.00 \\ \hline \end{tabular} Fixed expenses Fixed selling and administrative expense Total selling and administrative expense \begin{tabular}{|r|r|r|r|} \hline$10,000 & $10,000 & $10,000 & \\ \hline$52,000 & $58,000 & $70,000 & $180,000.00 \\ \hline \hline & & & \\ \hline \end{tabular} Budgeted Balance Sheet Williams Company First Quarter End of January End of Febraury End of March Quarter 1 Assets Cash Accounts receivable Finished goods inventory Raw materials inventory RAW PVC 4 RESIN Land Building and equipment Less: Accummulated depreciation Total assets Liabilities \& Stockholders' Equity Accounts payable Common Stock Retained earnings Total liabilities \& Stockholders' Equity \begin{tabular}{rrrr} $0 & $0 & $0 \\ \hline \end{tabular} A B C D E F Budgeted Income Statement Williams Company First Quarter January February March Quarter 1 Sales Cost of goods sold (units sold* unit cost) Gross profit Selling and administration expenses Income from operations 1 Interest expense Income before income taxes 13 Income tax expense Net income \begin{tabular}{|llll|} \hline$0 & $0 & $0 & $0 \\ \hline \end{tabular} Notes: 1. 1400 finished PVC in inventory 12/31 balance sheet value of $64,400. Unit cost for these units $64,400/1400=$46. 2. COGS in January calculated 1400$46 plus (70001400)$46.4

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