Question

Baci is a well-known lollipops maker in Western Australia and produces lollipops in two size, i.e., regular and large. The company sells their products to convenience stores, fairs, schools for fundraisers and in bulk on the internet. 2018 summer is approaching and Baci is preparing its budget for the December. All Baci’s lollipops are hand-made, mostly out of sugar, and attached to wooden sticks. Expected sales are based on past experience.

Other information for December 2018 is as follows:

Input prices :

Direct materials:

Sugar $0.50 per kg

Sticks $0.30 each

Direct manufacturing labour $8 per direct manufacturing labour hour (DMLH)

Input quantities per unit of output

Regular Large

Direct materials:

Sugar 0.25 kg 0.5 kg

Sticks 1 1

Direct manufacturing labour hour (DMLH) 0.2 hour 0.25 hour

Set-up hours per batch 0.08 hour 0.09 hour

Inventory data for direct materials1

Sugar Sticks

Beginning inventory 125 kg 350

Target ending inventory 240 kg 480

Cost of beginning inventory $64 $105

1: Baci accounts for direct materials using a FIFO cost flow assumption.

Sales and inventory data for finished goods2

Regular Large

Expected sales in units 3,000 1,800

Selling price $3 $4

Target ending inventory in units 300 180

Beginning inventory in units 200 150

Beginning inventory in dollars $500 $474

require 2: Baci uses a FIFO cost flow assumption for finished goods inventory.

All the lollipops are made in batches of 10. Baci incurs manufacturing overhead cost, and marketing and general administration costs, but customers pay for shipping. Other 3 than manufacturing labour costs, monthly processing costs are very small. Baci uses activity-based costing (ABC) and has classified all overhead costs for December 2018 as follows:

Cost type Denominator activity Rate

Manufacturing:

Set-up Set-up hours $20 per set-up hour

Processing Direct manufacturing labour hour (DMLH) $1.70 per DMLH

Non-manufacturing:

Marketing & general admin Sales revenue 10%

2. Baci’s balance sheet for 30 November 2018 follows. Use it and the following information to prepare a cash budget for Baci for December 2018:

• 80% of sales are on account, of which 50% are collected in the month of the sale, 49% are collected the following month and 1% are never collected and written off as bad debts.

• All purchases of materials are on account. Baci pays for 70% of purchases in the month of purchase and 30% in the following month.

• All other costs are paid in the month incurred.

• Baci is making monthly interest payments of 1% (12% per year) on a $20,000 long-term loan.

• Baci plans to pay the $500 of taxes owed as of 30 November 2018 in December 2018. Income tax expense for December is zero.

•40% of processing and set-up costs, and 30% of marketing and general administration costs, are depreciation.

Baci Balance Sheet as of 30 November 2018

Assets

Cash $587

Account receivable $4,800

Less: Allowance for bad debts 96 4,704

Inventories:

Direct materials 169

Finished goods 974

Fixed assets $190,000

Less: Accumulated depreciation 55,759 134,241

Total assets $140,675

Liabilities and equity

Account payable $696

Taxes payable 500

Interest payable 200

Long-term debt 20,000

Ordinary shares 10,000

Retained earnings 109,279

Total liabilities and equity $140,675

Answer 1

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a. Revenue Budget
		Regular	Large
Budgeted Sales units		3000	1800
Selling Price per unit		$               3	$                           4
Total Budgeted Revenue		$       9,000	$                  7,200
b. Production Budget
		Regular	Large
Budgeted Sales units		3000	1800
Add: Desired Ending Inventory		300	180
Units Needed		3300	1980
Less: Beginning Inventory		-200	-150
Budgeted Production Units		3100	1830
c. Direct Material usage and purchase budget	Sugar
		Regular	Large	Total
Budgeted Production Units		3100	1830
Per unit of Finished Goods need Sugar	Kg	0.25	0.5
Total Sugar Needed for Budgeted Production	Kg	775	915	1690
Add: Desired Ending Inventory				240
Units Needed				1930
Less: Beginning Inventory				-125
Total Budgeted Purchase of Sugar	Kg			1805
Per kg price of Sugar				$                                 0.5
Total Budgeted Purchase of Sugar	$			$                                903
c. Direct Material usage and purchase budget	Sticks
		Regular	Large	Total
Budgeted Production Units		3100	1830
Per unit of Finished Goods need Sugar	Kg	1	1
Total Sugar Needed for Budgeted Production	Kg	3100	1830	4930
Add: Desired Ending Inventory				480
Units Needed				5410
Less: Beginning Inventory				-350
Total Budgeted Purchase of Sugar	Kg			5060
Per kg price of Sugar				$                                 0.3
Total Budgeted Purchase of Sugar	$			$                            1,518
d. Direct Manufacturing Labor Cost Budget:
		Regular	Large	Total
Budgeted Production Units		3100	1830
Labor Hours needed per Unit of Lollypop		0.2	0.25
Total Labor Hours needed		620	457.5	1077.5
Per Hour Rate				$                                     8
Total Budgeted Direct Labor Cost				$                            8,620
e. Manufacturing Overhead Budgeted Cost:
		Regular	Large	Total
Set Up Hours per Batch		0.08	0.09
No of Batches	Prod/10	310	183
Total Set Up Hours		24.8	16.47
Rate	$	$             20	$                        20
Total Set Up Cost A		$           496	$                      329	$                                825
Processing Hours (Direct Labor Hours)		620	457.5
Per Hour Processing Rate		1.7	1.7
Total Processing Cost B		$       1,054	$                      778	$                            1,832
Total Manufacturing Overhead Budgeted Cost	A+B	$       1,550	$                  1,107	$                            2,657
Production		3100	1830	$                            4,930
Predetermined Overhead rate		$         0.50	$                     0.61
Part-2 Cash Budget
Budgeted Cash collection Schedule:
				Accounts Receivable
Total Sale		$     16,200
Cash Sale 20%		$       3,240
Credit Sale 80%:
Same Month 50%	16200*80%*50%	$       6,480
Next Month 49%	16200*80%*49%			$                            6,350
Accounts Receivable collected in December		$       4,704
Total Collection In December		$     14,424
Budgeted Cash payment for Purcahse:
				Accounts Payable
Budgeted total Purchase (Sugar and Sticks)		$       2,421
Payment in Same month 70%		$       1,694
Accounts Payable collected in December		$           696		$                                726
Total payment for purchase in december		$       2,390
Final Cash Budget:
Beginning Balance		$           587
Add: Budgeted Collection from customers		$     14,424
Total Available Cash	A	$     15,011
Payment towards:
Purchases		$       2,390
Direct Labor		$       8,620
Manufacturing Overheads	2657*60%	$       1,594
Marketing and General Adminstration	(16200*10%)*70%	$       1,134
Monthly Interest Payment	20000*1%	$           200
Tax		$           500
Total Cash payment		$     14,439
Cash balance, Ending		$           572
Part 3: Budgeted Income Statement:
Cost of Goods Sold Working:
Direct Material Inventory, Beginning	64+105	$           169
Add: Purchase of Material		$       2,421
Total Direct Material Available		$       2,590
Less: Direct Material Inventory, Ending	(240*0.5)+(480*0.3)	$         -264
Direct Material Used		$       2,326
Direct Labor		$       8,620
Factory Overhead:
Set UP	$                                          825
Processing	$                                      1,832
Total Overhead		$       2,657
Manufacturing Cost Incurred		$     13,603
Add: Work in process, Beginning		$              -
Less: Work in process, Ending		$              -
Cost of Goods Manufactured		$     13,603
Add: Finished Goods Inventory, Beginning	500+474	$           974
Cost of Goods Available for sale		$     14,577
Less: Finished Goods Inventory, Ending	(300*2.525)+(180*3.155)	$     -1,325
Cost of Goods Sold		$     13,251
Income Statement:
Sales Revenue		$     16,200
Less: Cost of Goods Sold		$     13,251
Gross Margin		$       2,949
Less: Allowance for Bad Debts		$           130
Less: Marketing and Gen Adm Expenses	16200*10%	$       1,620
Net Operating Income		$       1,199
Less: Interest		$           200
Net Income		$           999
Budgeted Balance Sheet:
Assets
Cash		$           572
Account receivable	$                                      6,480
Less: Allowance for bad debts	$                                        -130	$       6,350
Inventories:
Direct materials		$           264
Finished goods		$       1,325
Fixed assets	$                                 190,000
Less: Accumulated depreciation	$                                  -57,308	$ 132,692	55759+1063+486
Total assets		$ 141,204
Liabilities and equity
Account payable $696		$           726
Taxes payable		$              -
Interest payable		$           200
Long-term debt		$     20,000
Ordinary shares		$     10,000
Retained earnings	109279+999	$ 110,278
Total liabilities and equity		$ 141,204

Regular	Q	Per Unit	Total Cost		Large	Q	Per Unit	Total Cost
Sugar	0.25	0.5	$       0.13		Sugar	0.5	0.5	$       0.25
Stick	1	0.3	$       0.30		Stick	1	0.3	$       0.30
Direct Labor	0.2	8	$       1.60		Direct Labor	0.25	8	$       2.00
Processing	0.2	1.7	$       0.34		Processing	0.25	1.7	$       0.43
Set Up	0.008	20	$       0.16		Set Up	0.009	20	$       0.18
Total			$    2.525		Total			$    3.155