Assets

Liabilities

Stockholders’ Equity

In preparation for developing the master budget for the first three months of 2012, the following has been extracted from the company’s accounting records

1. All sales are made on account at $20 per unit. Sixty Percent of the sales are collected in the month of sale, the remaining 40% are
   collected in the following month. Forecast sales for the first five months of 2012 are: January, 1500 units; February, 1600 units; March, 1,800 units; April,
   2000 units; May 2,100 units.
2. Management wants to maintain the finished goods inventory at 30% of the following months sales.

3. Watson uses four square inches of direct materials in each finished unit. The direct material prices

have been stable and is expected to remain so over the next six months. Management wants to maintain he ending direct materials inventory at 60% of the
following months production needs.

1. 70% of all purchases are paid in the month of purchase; the remaining 30% are paid in the subsequent month.
2. Watson’s product requires 30 minutes of direct labor time. Each hour of direct labor costs $8. Additionally factory overhead is charged
   to products at a rate of $4 per labor hour.
3. Equipment depreciation for 2012 (already included in the factory overhead) will be $4,800 ($400 per month).
4. No new equipment will be purchased and no new common stock will be issued during 2012.
5. Operating expenses paid in cash are expected to be $1,400 in January and grow 1% each month after that.
6. Beginning and ending Work In Process inventories are insignificant and can be ignored.

Prepare the following for January, February and March:

1. a production budget
2. a direct materials budget
3. a schedule of cash disbursements for materials purchased
4. a combination direct labor and factory overhead budget
5. a cash budget (you may combine items B and E with this budget)
6. a budgeted income statement
7. a budgeted balance sheet

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