ToyWorks Ltd. is a company that manufactures and sells a single product, which they call a Toodle. For planning and control purposes they utilize aquarterly master budget, which is usually developed at least six months in advance of the budget period. Their fiscal year end is December 31.
During the summer of 2012, Chris Leigh,theToyWorks controller, spent considerable time with Pat Frazer, the Manager of Marketing, putting together a sales forecast for the first quarter of next year (January to March, 2013). Unfortunately, their collaboration worked so well they eloped to Las Vegas, were married by an Elvis impersonator, and settled down somewhere in the desert. Prior to their departure they e-mailed letters of resignation and a cryptic sales forecast to the President of ToyWorks.
Their sales forecast consisted of these few lines:
- For the year ended December 31, 2012: 475,000 units at $10.00 each*
- For the year ended December 31, 2013: 500,000 units at $10.00 each
- For the year ended December 31, 2014: 500,000 units at $10.00 each
*Expected sales for the year ended December 31, 2012 are based on actual sales to date and budgeted sales for the duration of the year.
ToyWorks’s Presidentfelt certain that the marriage wouldn’t last, and expected Chris would be back any day. But the end of the year is quickly approaching, and there is still no word from the desert. The President, desperately needing the budget completed, has approached you, a management accounting student, for help in preparing the budget for the first quarter. Your conversations with the President and your investigations of the company’s records have revealed the following information:
1. Sales of toodles are seasonal. History shows that January, April and June each generate 6% of the year’s sales. Sales in March, July and August each contribute 5% and September contributes 7% to the total. Valentines Day in February boosts sales to 11%, and Mother’s Day in May accounts for 8%. As Christmas shopping picks up momentum, winter sales start at 11% in October, move to 14% in November and then peak at 16% in December. This pattern of sales is not expected to change in the next two years.
2. From previous experience, management has determined that an ending inventory equal to 25% of the next month’s sales is required to fit the buyer’s demands.
3. There is only one type of raw material used in the production of toodles. Space-age acrylic (SAA) is a very compact material that is purchased in powder form. Each toodle requires 5 kilograms of SAA, at a cost of $0.45 per kilogram. The supplier of SAA tends to be somewhat erratic so ToyWorksfinds it necessary to maintain an inventory balance equal to 40% of the following month’s production needs as a precaution against stock-outs. ToyWorks pays for 20% of a month’s purchases in the month of purchase, 45% in the following month and the remaining 35% two months after the month of purchase. There is no early payment discount.
4. Beginning accounts payable will consist of $148,621 arising from the following estimated direct material purchases for November and December of 2012:
SAA purchases in November 2012: $151,031
SAA purchases in December 2012 $119,700
5. ToyWorks’s manufacturing process is highly automated, so their direct labour cost is low. Employees are paid on a per unit basis. Their total pay each month is, therefore, dependent on production volumes and averages $9.20 per hour. This rate already includes the employer’s portion of employee benefits. All payroll costs are paid in the period in which they are incurred.
Each unit spends a total of 18 minutes in production.
6. Due to the similarity of the equipment in each of the production stages and the company’s concentration on a single product, manufacturing overhead is allocated based on volume (i.e. the units produced). The unit variable overhead manufacturing rate is $1.30, consisting of: Utilities–$0.60; Indirect Materials–$0.20; Plant maintenance–$0.30; environmental fee–$0.14; and Other–$0.06.
7. The fixed manufacturing overhead costs for the entire year are as follows:
Training and development $ 43,200
Repairs and maintenance 39,000
Supervisors’ salaries 149,400
Amortization on equipment 178,800
Plant Insurance 84,000
· The annual insurance premium of $84,000 will be paid at the beginning of January. There is no change in the premium from last year.
· All other “cash-related” fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred.
· ToyWorks uses the straight line method of amortization.
8. Selling and administrative expenses are known to be a mixed cost; however, there is a lot of uncertainty about the portion that is fixed. Previous year’s experience has provided the following information:
Lowest level of sales: 375,000 units Total Operating Expenses: $778,710
Highest level of sales: 750,000 units Total Operating Expenses: $1,022,460
These costs are paid in the month in which they occur. Not included in the above expenses is bad debt expense.
9. Sales are on a cash and credit basis, with 55% collected during the month of the sale, 35% the following month, and 9.5% the month thereafter. ½ of 1% of sales are considered uncollectible (bad debt expense).
10. Sales in November and December 2012 are expected to be $665,000 and $760,000 respectively. Based on the above collection pattern that applies to all years, this will result in total Accounts Receivable of $401,375 at December 31, 2012.
11. During the fiscal year ended December 31, 2013, ToyWorks will be required to make monthly income tax installment payments of $1,500. Outstanding income taxes from the year ended December 31, 2012 must be paid in March 2013. Income tax expense is estimated to be 25% of net income. Income taxes for the year ended December 31, 2013, in excess of installment payments, will be paid in March, 2014.
12. ToyWorks is planning to acquire additional manufacturing equipment for $304,200 cash. 40% of this amount is to be paid in January 2013, the rest, in February 2013. The manufacturing overhead costs shown above already include the amortization on this equipment.
13. An arrangement has been made with the local bank that if ToyWorks maintains a minimum balance of $20,000 in their bank account, they will be given a line of credit at a preferred rate of 6% per annum. All borrowing is considered to happen on the first day of the month, repayments are on the last day of the month. All borrowings and repayments from the bank should be in multiples of $1,000 and interest must be paid at the end of each month. Interest is calculated on the balance at the beginning of the month, which includes any amounts borrowed that month.
14. ToyWorks Ltd. has a policy of paying dividends at the end of each quarter. The President tells you that the board of directors is planning on continuing their policy of declaring dividends of $50,000 per quarter.
15. A listing of the estimated balances in the company’s ledger accounts as of December 31, 2012 is given below:
|Capital assets (net)||724,000|
|Accounts payable||$ 148,621|
|Income tax payable||21,500|
1. Prepare a master budget for ToyWorks for the first quarter (January, February and March) of the year ending December 31, 2013, including the following schedules:
Sales Budget & Schedule of Cash Receipts
Direct Materials Budget & Schedule of Cash Disbursements
Direct Labour Budget
Manufacturing Overhead Budget
Ending Finished Goods Inventory Budget
Selling and Administrative Expense Budget
2. Prepare a budgeted income statement for the quarter ended March 31, 2013.
3. Prepare a budgeted balance sheet at March 31, 2013.