Question

Karantika Ltd operates at capacity and makes glass-topped coffee table. At the end of 2019, Karantika Ltd’s management accountant gathered the following data to prepare budgets for the first six months 2020:

1. Units sales per quarter and the selling price per unit are estimated as follows:

Unit sales Price per unit

January 2,700 $400

February 2,600 $400

March 2,800 $550

April 2,600 $550

May 2,650 $500

June 2,600 $500

July 3,000 $500

August 3,000 $550

Sales on November 2019 were 2,500 units and on December 2,400 units at a selling price of $450.

20% of sales are cash sales and 80% are credit sales. From experience, Karantika Ltd collected 40% of credit sales within the month of sale, 30% in the following month and 25% in two months after the month of sale. 5% of credit sales is uncollectable. The bad debt is calculated at the end of six month.

2. The beginning inventories (BI) on 1 January 2020 and the desired ending inventories (EI) at the end of each month are as follows:

BI (1/1/19)	EI (end of each month)
Tables:500 (at $210/unit)	20% of following month estimated sales
Wood: 1,400 b.m.	25% b.m. needed for next month’s budgeted production (units)
Glass 500 sheets	20% sheets needed for next month’s budgeted production (units)

3. Materials and labour requirements

Direct materials:

Wood: 2 board meters (b.m.) per table

Glass: 1 sheet per table

Direct manufacturing labour: 4 hours per table

4. Costs of direct materials and labour:

Wood: $16 per b.m.

Glass: $22 per sheet

Direct labour: $25 per labour-hour

5. Direct materials are purchased in the month of production and are paid 60% in the month of purchase and 40% in the following month. Wages and salaries are paid monthly.
6. Variable manufacturing overhead is $25 per direct manufacturing labour-hour. There is also $210,000 in fixed manufacturing overhead costs per month. Fixed costs include $40,000 depreciation of factory equipment. The fixed manufacturing overhead rate is based on the number of units produced budgeted every six months, at the beginning of each semester, calculated dividing the budgeted fixed overhead costs by the budgeted number of units produced for the semester. Variable and fixed costs are paid in the month incurred.
7. Sales commissions are paid monthly at the rate of 10% of month’s sales revenue. There is $160,000 in fixed non-manufacturing costs (administrative expenses) budgeted per month including $20,000 depreciation costs of office equipment. Variable and fixed non-manufacturing costs are paid in the month incurred.
8. Karantika Ltd has estimated the following payments in the first semester 2020:

January: Loan for $40,000 plus interest payable at 31 December 2019 for $2,000 were paid on 2 January 2020.

End of January: Dividends $100,000

Beginning of May: Purchase of land $200,000

Beginning of June: Purchase of equipment for $300,000. Estimated of useful life 5 year with zero residual value.

9. Karantika Ltd maintain a 18% open line of credit for $400,000. Interests are paid at the end of each month. Karantika Ltd maintains a minimum cash balance of $20,000. The company borrows on the first day of the month and repays loans on the last day of the month, both in multiples of $1,000. The income tax is 30%.
10. Karantika Ltd’s balance sheet at 31 December 2019 is as follows:

ASSETS	LIABILITIES
Cash	32,000	Accounts payable **	64,000
Accounts receivable *	700,200	Interest payable	2,000
Inventory: Wood	22,400	Loan payable	40,000
Inventory: Glass	11,000	SHAREHOLDER’S EQUITY
Inventory: Finished goods	105,000	Share capital	801,600
Plant and equipment, net	450,000	Retained earnings	413,000
Total assets	1, 320,600	Total Liabilities and Shareholder’s equity	1,320,600

*At the beginning of the year there is no allowance of doubtful debt

** Account payable is from the direct material purchase.

Required:

Prepare a monthly master budget for Karantika Ltd’s for the first semester 2020. The following component budgets must be included ( round the number with two decimals):

1. Sales revenue budget
2. Production budget (in units)
3. Direct materials usage and purchases budget for each direct materials and total direct materials (in units and dollars)
4. Direct manufacturing labour budget
5. Manufacturing overhead budget
6. Manufacturing overhead rate for the semester
7. Ending finished goods inventory budget (unit cost and total cost) at June 2020.
8. Selling and administrative expenses budget
9. Cash budget
10. Cost of goods sold at 30 June 2020
11. Budgeted income statement for the first semester 2020
12. Budgeted balance sheet as of 30 June 2020 (including separately the two direct materials inventory)

Note. There is no beginning and ending balance of WIP in each month.

Answer 1

Only first 4 budgets are prepared