Altec Manufacturing Inc. (Altec) is a company that manufactures
and sells a single product, which they call an Altec. 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. As per the request of
the CEO of Altec John Hofmann, you as new controller will be
preparing the next budget (January to December 2022). Prior to the
task, you received a sales forecast from 2022-2023. As new
controller of Altec, Their sales forecast consisted of these few
lines: • For the year ended December 31, 2021*: 70,000 units at
$160.00 each • For the year ended December 31, 2022: 80,000 units
at $160.00 each • For the year ended December 31, 2023: 90,000
units at $160.00 each *Expected sales for the year ended December
31, 2021 are based on actual sales to date and budgeted sales for
the duration of the year. Altec’s President felt 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 coming fiscal
year. Your conversations with the President and your investigations
of the company’s records have revealed the following information:
1) Sales are seasonal, and sometimes correspond with general
holidays. Please see the Sales pattern a below: January 3% February
5% March 6% April 9% Mary 7% June 9% July 10% August 8% September
6% October 9% November 13% December 15% Total 100% 2) From previous
experience, management has determined that an ending inventory
equal to 38% of the next month’s sales is required to fit the
buyer’s demands. 2 3) Because sales are seasonal, Altec must rent
an additional storage facility from September to December to house
the additional inventory on hand. The only related cost is a flat
$28,000 per month, payable at the beginning of the month. 4) The
only raw material used in the production of toodles is space-age
acrylic (SAA), a compact material that is purchased in powder form.
Each product requires 55 kilograms of SAA, at a cost of $0.85 per
kilogram. The supplier of SAA tends to be somewhat erratic so Altec
finds it necessary to maintain an inventory balance equal to 38% of
the following month’s production needs as a precaution against
stock-outs. Altec pays for 55% of a month’s purchases in the month
of purchase, 25% in the following month and the remaining 20% two
months after the month of purchase. The ending balance of raw
materials at December 31, 2021 is 33,000 kilograms. 5) Altec
expects that any payments made in the month of purchase will be
subject to 2%, net/30 terms. The purchase discounts are reported as
one metric on their administration department’s balanced scorecard.
To provide the information for the balanced scorecard, purchase
discounts are included in the selling and administration budget,
and are considered a non-cash item. 6) Beginning accounts payable
will consist of $227,800 arising from the following estimated
direct material purchases for November and December of 2021: SAA
purchases in November 2021: $450,500 SAA purchases in December
2021: $306,000 7) Altec’s manufacturing process is highly
automated. Employees are paid on a per unit basis. Their total pay
each month is, therefore, dependent on production volumes and
averages $20.00 per hour before benefits. The employer’s portion of
employee benefits adds 20% to the hourly rate. All payroll costs
are paid in the period in which they are incurred. Each unit spends
a total of 75 minutes in production. 8) 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 variable
overhead manufacturing rate is $25.95 per unit, consisting of:
Utilities--$12.00; Indirect Materials--$5.00; Plant
maintenance--$4.50; environmental fee--$1.95; and Other--$2.50. 9)
The expected fixed manufacturing overhead costs below cover the
twelve months ended December 31, 2021 and are based on actual costs
to date and budgeted costs for the duration of the year. Training
and development $ 47,520 Property and business taxes 36,000
Supervisor’s salary 89,400 Amortization on equipment 227,760
Insurance 92,460 Other 109,600 $ 602,740 3 a) The property and
business taxes, levied by the municipality covering the calendar
year, are paid in one lump sum on June 30 of each year. The
expected payment for next year (2022) is $39,000. b) The annual
insurance premium is paid at the beginning of April each year,
covering the subsequent 12 months, from April 1 of the current year
to March 31 of the next year. The premium is expected to go up to
$93,300 on April 1, 2022. c) All other “cash-related” fixed
manufacturing overhead costs are incurred evenly over the year,
paid as incurred, and are not expected to change in 2022. d) Altec
uses the straight line method of amortization. 10) In 20x1, the
average total cost to manufacture one unit was $93.90 under
absorption costing. 11) Selling and administrative expenses
(S&A) are known to be a mixed cost; however, there is a lot of
uncertainty about what portion is fixed and what is variable.
Previous experience has provided the following information: Lowest
level of sales: 42,500 units Total S&A Expenses: $1,273,123
Highest level of sales: 87,500 units Total S&A Expenses:
$2,493,073 These costs are paid in the month in which they occur.
Not included in the above expenses are bad debt expense and the
purchases discount. 12) Sales are on a cash and credit basis, with
21% collected during the month of the sale, 42% the following
month, and 35% the month thereafter. 2% of sales are uncollectible
(bad debt expense). 13) Sales in November and December 2021 are
expected to be $1,100,000 and $1,600,000 respectively. Based on the
above collection pattern this will result in accounts receivable of
$1,617,000 at December 31, 2021 which will be collected in January
and February, 2022. 14) During the fiscal year ending December 31,
2022, Altec will be required to make monthly income tax installment
payments of $10,000. Outstanding income taxes from the year ended
December 31, 2021 must be paid in March 2022. Income tax expense is
estimated to be 25% of income before tax. Income taxes for the year
ended December 31, 20x2, in excess of installment payments, will be
paid in March, 2023. 15) Altec is planning to acquire additional
manufacturing equipment for $304,750 cash. 40% of this amount is to
be paid in April 2022, the rest, in May 2022. The manufacturing
overhead costs shown above already include the amortization on this
equipment. 16) Altec. 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 $32,000 per quarter. 17) An arrangement has been made
with the local bank that if Altec maintains a minimum balance of
$15,000 in their bank account, they will be given a line of credit
at a preferred 4 rate of 5% per annum. All borrowings from and
repayments to the bank must be in multiples of $1,000 and interest
must be paid at the end of each month. All borrowing is considered
to occur on the first day of the month, repayments on the last day
of the month. Therefore, the amount subject to interest each month
is the balance owing at the beginning of the month plus any amounts
borrowed at the beginning of the month. Note that any amounts
repaid that month do not reduce the amount subject to interest that
month because they are assumed repaid on the last day of the month.
18) A listing of the estimated balances in the company’s ledger
accounts as of December 31, 2021 is given below (this is the ending
balance sheet for 2021): Cash $ 15,680 Accounts receivable
1,617,000 Inventory-raw materials 28,050 Inventory-finished goods
28,170 Prepaid insurance 23,115 Capital assets (net) 1,328,000 $
3,040,015 Bank loan payable $ 102,000 Accounts payable 227,800
Income tax payable 11,200 Common Shares 1,200,000 Retained earnings
1,610,500 $ 3,04,015
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ekkarill92 answered 2 years ago