Requirements:
This is an individual assignment due on March 14, 2012 at 9 am at CC307. After this time, the assignment will be considered late assignment and wont be accepted, resulting in a zero mark. This assignment must be computer based (excel). Only a hard copy will be accepted. You must keep an electronic copy in case it is required. A folder is not required. Be sure before you submit your assignment that it is complete. Messy assignments wont be accepted.
Teddy Ltd.
Master Budget
Teddy Ltd. is a company that manufactures and sells a single product, which they call a Knxt. For planning and control purposes they utilize a monthly master budget, which is usually developed at least six months in advance of the budget year. Their fiscal year end is December 31.
During the summer of 2012, Jason Currie, the Teddy controller, spent considerable time with Pat Ferguson, the Manager of Marketing, putting together a sales forecast for the next budget year (January to December, 2013). Unfortunately, their collaboration worked so well they eloped to Paris, were married by a Monet impersonator, and settled down somewhere in Bordeaux. Prior to their departure they e-mailed letters of resignation and a cryptic sales forecast to the President of Teddy.
Their sales forecast consisted of these few lines:
For the year ended December 31, 2012: 200,000 units at $25.00 each*
For the year ended December 31, 2013: 210,000 units at $25.00 each
For the year ended December 31, 2014: 210,000 units at $25.00 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.
Teddys President felt certain that the marriage wouldnt last, and expected Jason 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 approachedYOU, a management accounting student, for help in preparing the budget for the coming fiscal year. Your conversations with the president and your investigations of the companys records have revealed the following information:
2
1. Sales are seasonal with the peak months being summer and winter holidays. The following table shows expected distribution of sales for each month based on percentage of the total budgeted sales.
Months
Percentage of sales
Jan, Feb, Mar
3% each
Apr, Aug, Sept
5% each
May, Jun, Jul
10% each
Oct
11%
Nov
15%
Dec
20%
2. From previous experience, management has determined that an ending inventory equal to 30% of the next months sales is required to fit the buyers demands.
3. Because sales are seasonal, Teddy must rent an additional storage facility from October to December to house the additional inventory on hand. The only related cost is a flat $20,000 per month, payable at the beginning of the month.
4. There are three types of raw material used in the production of Knxts.
PVC is a very compact material that is purchased in powder form. Each Knxt requires 0.5 kilograms of PVC, at a cost of $10.00 per kilogram. The supplier of PVC tends to be somewhat erratic so Teddy finds it necessary to maintain an inventory balance equal to 50% of the following months production needs as a precaution against stock-outs.
A plastic wheel assembly is purchased in kit form, and is attached during the assembly process. For a small premium, Teddy has made a JIT agreement with the supplier which includes on-time and quality assurances. Each Knxt uses two kits, which cost $0.50 each.
The final component for the toy is a length of hemp rope which is used to pull the toy along the ground or floor. The rope is supplied by a student entrepreneur, who must be paid in cash. On the first day of every month she delivers exactly the right amount to manufacture the budgeted number of units for that month. It costs $1.60 per meter and Teddy uses one-half meter for each toodlle.
5. The beginning accounts payable (associated with PVC purchases only) will consist of $118,361 arising from the following estimated material purchases for November and December of 2012:
Material purchases in November 2012:
$157,225
Material purchases in December 2012:
$90,475
3
Teddy pays for 30% of a months purchases in the month of purchase, 35% in the following month and the remaining 35% two months after the month of purchase. There is no early payment discount.
6. The manufacturing process for Knxts is divided into three separate activities. The first step is the forming process, during which the PVC is liquefied and formed into several shapes that snap together to make the toy. During the next stage, the molded pieces are fused together using heat. This step is referred to as the assembly stage. The last stage is for finishing, during which the wheel and the pull rope are attached and the toy is prepared for shipping.
7. The first two steps of the manufacturing process are highly automated, so the only employees are three supervisors, who are trained to operate the equipment and make repairs as required. The supervisors work shifts, allowing the plant to operate for longer hours during the busier months. They are also responsible for managing the employees who work in the finishing department.
8. The last step, finishing, is the only part of the manufacturing process that employs direct labour. Most of the staff work on a part-time basis, so their hours can be set based on production requirements. This also eliminates the need for overtime.
These employees are paid based on the number of units produced. They receive an average of $18.00 per hour including employee benefits.
Each Knxt spends 12 minutes in the finishing department.
9. Because of the large difference in the manufacturing stages, Teddy uses two separate variable manufacturing overhead rates. The forming and assembly departments use similar equipment and with the companys concentration on a single product, the manufacturing overhead is allocated based on volume (i.e. the units produced). The combined unit variable overhead manufacturing rate for forming and assembly is $3.25, consisting of: Utilities–$1.50; Indirect Materials– $0.50; Plant maintenance–$0.75; environmental fee–$0.35; and Other–$0.15.
The best cost driver for the finishing department is considered to be direct labour hours. Here the predetermined variable manufacturing overhead is expected to be $2.05 per hour.
10. Fixed manufacturing overhead costs are not separated between departments. The total costs for the entire year are as follows:
Training and development
$
43,200
Property and business taxes
39,000
Supervisors salary
269,400
Amortization on equipment
178,800
Insurance
96,000
Other
117,600
$
744,000
The property and business taxes are paid in one lump sum on June 30 of each year. The expected payment for next year is $39,600.
4
The annual insurance premium is paid at the beginning of September each year. There should be 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.
Teddy uses the straight line method of amortization.
11. 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 years experience has provided the following information (rounded):
Lowest level of sales:
140,000 units
Total Operating Expenses: $778,200
Highest level of sales:
220,000 units
Total Operating Expenses: $1,023,000
The annual amount of amortization on office furniture and equipment is only $24,000and this amount is already included in the fixed portion of the selling and administration expenses. Not included in the above expenses is bad debt expense.
Payments for selling and administrative expenses occur in the month in which they are incurred.
12. 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).
13. Sales in November and December 2012 are expected to be $750,000 and $1,000,000 respectively. Based on the above collection pattern this will result in Accounts Receivable of $516,250 at December 31, 2012 which will be collected in January and February, 2013.
14. During the fiscal year ended December 31, 2013, Teddy will be required to make monthly income tax installment payments of $5,000. Outstanding income taxes from the year ended December 31, 2012 must be paid in April 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 April, 2014.
15. Teddy is planning to acquire additional manufacturing equipment for $306,000 cash. They have a special agreement to pay the supplier in three equal installments starting in February, 2013. The manufacturing overhead costs shown above already include the amortization on this equipment.
16. An arrangement has been made with the local bank that if Teddy 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.
5
15. Teddy 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.
16. A listing of the estimated balances in the companys ledger accounts as of December 31, 2012 is given below:
Assets
Cash
$
83,365
Accounts receivable
516,250
Inventory-raw materials (PVC)
15,750
Inventory-finished goods
33,548
Prepaid Insurance
64,000
Prepaid property and business taxes
19,200
Capital assets (net)
724,000
Total assets
$
1,456,113
Liabilities and Shareholders Equity
Accounts payable
$
118,361
Income taxes payable
22,500
Capital stock
1,000,000
Retained Earnings
315,251
Total liabilities and shareholders equity
$
1,456,113
.0/msohtmlclip1/01/clip_image001.gif”>.0/msohtmlclip1/01/clip_image002.gif”>.0/msohtmlclip1/01/clip_image003.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image005.gif”>
Required:
1. Prepare a monthly master budget for Teddy for the year ended December 31, 2013, including the following schedules:
Sales Budget & Schedule of Cash Receipts
Production Budget
Direct Materials Budget & Schedule of Cash Disbursements
Direct Labour Budget
Manufacturing Overhead Budget
Ending Finished Goods Inventory Budget
Selling and Administrative Expense Budget
Cash Budget
2. Prepare a budgeted income statement and a budgeted statement of retained earnings for the year ended December 31, 2013, using absorption costing.
3. Prepare a budgeted balance sheet at December 31, 2013.