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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

Question:

Prepare a budgeted income statement and a budgeted statement of r etained earnings for the year ended December 31, 2022, using absorption costing.

Prepare a budgeted balance sheet as at December 31, 2022.

Answer 1

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Altec
Workings for Income Statement
Sales Budget	Yearly	Note
Sales (units)	80,000.00
Sell Price	160.00
Sales Budget	12,800,000.00	See Cash budget
Bad debt expense at 2 %	256,000.00	This is 2% of sales
Production Budget	Yearly	Note
Sales (units)	80,000.00
Add: Desired Ending Inventory	1,026.00	See Cash budget
Total needed	81,026.00
Less: Expected Beginning Inventory	300.00	See Cash budget
Production Budget	80,726.00
Direct Material Purchase Budget	Yearly
Production Budget	80,726.00
Material required per unit	55.00
Material needed for production	4,439,930.00
Add: Desired Ending Inventory	70,725.60
Total needed	4,510,655.60
Less: Expected Beginning Inventory	33,000.00
Direct Material Purchase Budget (Kg)	4,477,655.60
Cost per Kg	0.85
Direct Material Purchase Budget ($)	3,806,007.26	See Cash budget
Direct Labor Budget	Yearly
Production Budget	80,726.00
Labor hour required per unit	1.25
Labor hour needed for production	100,907.50
Labor rate per hour	20.00
Direct Labor Wages	2,018,150.00
Add Benefits at 20%	403,630.00
Direct Labor Budget	2,421,780.00	See Cash budget
Insurance Expense
Insurance	93,300.00	A
Paid for months	12.00	B
Monthly Insurance expense	7,775.00	C=A/B
Prepaid for 3 months (Jan to Mar-2023)	23,325.00	D=C*3
Remaining for 9 months (Apr to Dec-22)	69,975.00	E=A-D
Add: Prepaid in 2021	23,115.00	This is opening balance.
Insurance Expense	93,090.00	F
Manufacturing Overhead Budget	Yearly
Production Budget	80,726.00	G
Variable Overhead rate per unit	25.95	H
Variable Overhead Budget	2,094,839.70	I=G*H
Fixed Overhead Budget
Training and Development	47,520.00
Property and Business Taxes	39,000.00
Supervisor's Salary	89,400.00
Insurance	93,090.00
Amortization on equipment	227,760.00
Other	109,600.00
Fixed Overhead Budget	606,370.00
Manufacturing Overhead Budget	2,701,209.70	J
Ending Raw material inventory	Amount $
Ending quantity	70,725.60	K
Cost per Kg	0.85	L
Ending Raw material inventory	60,116.76	M=K*L
Cost of Goods Manufactured	Amount $
Beginning Raw material inventory	28,050.00	This is opening balance.
Raw material Purchases	3,806,007.26	See Cash budget
Total Raw material available for use	3,834,057.26
Less: Ending Raw material inventory	60,116.76	See Note M
Direct materials used	3,773,940.50
Direct Labor	2,421,780.00	See Cash budget
Manufacturing Overhead	2,701,209.70	See Note J
Cost of goods manufactured	8,896,930.20	N
Calculation of ending finished goods inventory	Amount $
Cost of goods manufactured	8,896,930.20	See N
Units produced	80,726.00	O
Cost per unit	110.21	P=N/O
Ending finished goods inventory	1,026.00	Q
Cost of ending finished goods inventory	113,076.96	R=P*Q
Cost of goods sold	Amount $
Cost of goods manufactured	8,896,930.20
Add: Finished goods inventory, opening	28,170.00
Less: Finished goods inventory, ending	113,076.96
Cost of goods sold	8,812,023.24	S
Income Statement	Amount $
Sales Revenues	12,800,000.00	See cash budget
Net Sales	12,800,000.00
Less: Cost of goods sold	8,812,023.24	See note S
Gross Profit	3,987,976.76
Less: Operating Expenses
Additional rent	112,000.00
Bad debt	256,000.00
Selling & admin expenses	2,289,748.00
Purchase discount	(41,866.08)
Total Operating Expenses	2,615,881.92
Operating Income	1,372,094.84	T
Less: Interest Expense	425.00
Income before tax	1,371,669.84	T
Less: Tax Expense	342,917.46	U=T*25%
Net Income	1,028,752.38	V
Statement of retained earnings	Amount $
Opening Balance	1,499,015.00
Add: Net Income	1,028,752.38	See V
Subtotal	2,527,767.38
Less: Dividends	128,000.00	See cash budget
Closing Balance	2,399,767.38	AA
Workings for Balance Sheet	Amount $
November Sales -35%	582,400.00
December Sales- 42% and 35%	1,478,400.00
Accounts receivable	2,060,800.00	W
Capital assets (net)- Opening	1,328,000.00
Add: Purchases	304,750.00
Less: Amortization on equipment	227,760.00
Capital assets (net)- closing	1,404,990.00	X
November purchases -20%	93,893.07
December purchases - 25% and 20%	137,476.70
Accounts payable	231,369.77	Y
Income Tax payable
Opening Balance	11,200.00
Add: Tax expense	342,917.46
Less: Payment of opening payable	11,200.00
Less: Monthly Payment	120,000.00
Income Tax payable- closing balance	222,917.46	Z
Balance Sheet	Amount $
Current Assets
Cash	391,745.89	See cash budget
Accounts Receivable	2,060,800.00	See W
Inventory- raw materials	60,116.76	See M
Inventory- finished goods	113,076.96	See R
Prepaid Insurance	23,325.00	See F
Capital assets (net)	1,404,990.00	See X
Total Assets	4,054,054.61
Liabilities & Shareholder's Equity
Liabilities	Amount $
Accounts Payable	231,369.77	See Y
Interest Payable	-
Income Tax payable	222,917.46	See Z
Total Liabilities	454,287.23
Shareholder's Equity
Common share	1,200,000.00
Retained Earnings	2,399,767.38	See AA
Total Shareholder's Equity	3,599,767.38
Total Liabilities & Shareholder's Equity	4,054,054.61