Question

Happy Place Inc. is a company that manufactures and sells outdoor benches. For planning and control purposes they utilize a quarterly 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 spring of 2019, Linda Dempster, the Happy Place controller, spent some time putting together a sales forecast for the next budget year (January to December, 2020). In June, Linda’s numbers really came in as she won the jackpot in the lottery. Shortly thereafter, the President of Happy Place received Linda’s letter of resignation, which she sent from Bermuda.   

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. Linda’s sales forecast consisted of these few lines:

         For the year ended December 31, 2019: 26,000 units at $310.00 each*

   For the year ended December 31, 2020: 30,000 units at $310.00 each

   For the year ended December 31, 2021: 32,000 units at $310.00 each

*Expected sales for the year ended December 31, 2019 are based on actual sales to date and budgeted sales for the duration of the year.

2. History has shown that sales are seasonal, with 58% of sales occurring in the second quarter, 32% in the third quarter, 4% in the first quarter, and the remaining 6% in the last quarter.

3. Because sales are seasonal, Happy Place must rent an additional storage facility from March to June to house the additional finished benches on hand. The only related cost is a flat $2,200 per month, payable at the beginning of the month.

4. Sales are on a cash and credit basis, with 88% collected during the quarter of the sale, and 12% the following quarter.

5. Happy Place has negotiated a line of credit with the bank such that they can borrow up to $675,000, in increments of $5,000, at an interest rate of 4%. Assume all borrowing takes place at the beginning of the quarter (interest is paid for the full quarter when borrowing takes place) and repayment takes place at the end of the quarter (interest is paid for the full quarter that repayment is made.)

6. From previous experience, management has determined that an ending finished goods inventory equal to 10% of the next quarter’s sales is required to meet customer demand. Opening finished goods inventory consists of 120 benches.

7. The primary raw material used is 4x6 cedar boards. Each bench averages 60

linear feet of wood (including a wastage allowance), which the company purchases for $1.50 per linear foot. Happy Place finds it necessary to maintain an inventory balance equal to 12% of the following quarter’s production needs of cedar as a precaution against stock-outs. Opening raw materials inventory consists of 20,304 linear feet of cedar. Happy Place pays for 85% of a quarter’s purchases in the quarter of purchase and 15% in the following quarter.

Each bench also requires a cast iron frame, which the company purchases pre-made from Cheatle Forge. The frames are readily available at a cost of $100, are purchased as needed and paid for at the time of purchase.

8. Beginning accounts payable will consist of $22,673 arising from the estimated direct material purchases for Q4, 2019 of $151,157.

9. While much of the wood cutting process is automated, the assembly process is labour intensive. Employees are paid an average of $25 per hour, including the employer’s portion of employee benefits. All payroll costs are paid in the period in which they are incurred.

Each bench spends a total of 90 minutes in production.

10. Due to 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 $12.00 per unit, consisting of: Utilities--$2.75; Indirect Materials--$5.25; Plant maintenance--$2.00; and Other--$2.00

                                               

11. The fixed manufacturing overhead costs for the entire year are as follows:

Training and development                 $     9,000

Property and business taxes                   36,000

Supervisor’s salary                                120,000

Depreciation on equipment                    117,000

Insurance                                                 60,000

Other                                                        34,200

                                                            $ 376,200

• The property and business taxes are paid on June 30 of each year.

• The annual insurance premium is paid at the beginning of October each year.

• All other “cash-related” fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred.

• Happy Place uses the straight-line method of depreciation.

12. Selling and administrative expenses are $22 per unit sold and $18,000 per month. These costs are paid in the quarter in which they occur.

13. During the fiscal year ended December 31, 2020, Happy Place will be required to make quarterly income tax installment payments of $35,000. Outstanding income taxes from the year ended December 31, 2019 must be paid in April 2020. Income tax expense is estimated to be 20% of net income. Income taxes for the year ended December 31, 2020, in excess of installment payments, will be paid in April, 2021.

14. Happy Place is planning to acquire additional manufacturing equipment for $152,000 cash. 40% of this amount is to be paid in January 2020, the rest, in February 2020. The manufacturing overhead costs in 11. already include the extra depreciation.

15. Happy Place Inc. 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 $25,000 per quarter.

16. A listing of the estimated balances in the company’s ledger accounts as of December 31, 2019 is given below:

	Cash				$     61,870
	Accounts receivable				58,032
	Inventory-raw materials				30,456
	Inventory-finished goods (120 units)				30,244
	Prepaid insurance				45,000
	Prepaid property tax				18,000
	Property, Plant & Equip (net)				928,000
					$ 1,171,602
	Accounts payable				$ 22,673
	Income tax payable				10,500
	Common shares				850,000
	Retained earnings				288,430
					$ 1,171,602

REQUIRED:

1. Prepare a Quarterly Manufacturing Overhead Budget for Happy Place for the year ended December 31, 2020

Answer 1

WORKINGS