Question

ToyWorks Ltd. is a company that manufactures and sells a single product, which they call a Toodle. 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 June 30.

During the summer of 2019, Chris Leigh, the ToyWorks controller, spent considerable time with Pat Frazer, the Manager of Marketing, putting together a sales forecast for the next budget year (July 2020 to June 2021). Unfortunately, their collaboration worked so well they eloped to Las Vegas, were married by an Elvis impersonator, and settled down somewhere in the desert. Prior to their departure they e-mailed letters of resignation and a cryptic sales forecast to the President of ToyWorks. Their sales forecast consisted of these few lines:

• For the year ended June 30, 2020: 475,000 units at $10.00 each*
• For the year ended June 30, 2021: 500,000 units at $10.00 each
• For the year ended June 30, 2022: 500,000 units at $10.00 each

*Expected sales for the year ended June 30, 2020 are based on actual sales to date and budgeted sales for the duration of the year.

ToyWorks’s President felt certain that the marriage wouldn’t last, and expected Chris would be back any day. But time is passing quickly, and there is still no word from the desert. The President, desperately needing the budget completed, has approached you on April 20, 2020, 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. Peak months for sales correspond with gift-giving holidays. History shows that January, March, May and June are the slowest months with only 1% of sales for each month. Sales pick up over the summer with July, August and September each contributing 2% to the total. Valentines Day in February boosts sales to 5%, and Easter in April accounts for 10%. As Christmas shopping picks up momentum, winter sales start at 15% in October, move to 20% in November and then peak at 40% in December. This pattern of sales is not expected to change in the next two years.

1. Sales in May and June 2020 are budgeted to be 4,750 units and 5,100 units also at $10.00 each, respectively.  

1. Sales are on a cash and credit basis, with 75% collected during the month of the sale, 15% the following month, and 9.5% the month thereafter. 0.5% of sales are considered uncollectible.

1. From previous experience, management has determined that an ending inventory equal to 30% of the next month’s sales is required to fit the buyer’s demands.  

1. There is only one type of raw material used in the production of toodles. Space-age acrylic (SAA) is a very compact material that is purchased in powder form. Each toodle requires 10 kilograms of SAA, at a cost of $0.25 per kilogram. The supplier of SAA tends to be somewhat erratic so ToyWorks finds it necessary to maintain an inventory balance equal to 50% of the following month’s production needs as a precaution against stock-outs.  

1. ToyWorks pays for 30% of a month’s purchases in the month of purchase, 35% in the following month and the remaining 35% two months after the month of purchase. There is no early payment discount.

1. ToyWorks’s manufacturing process is highly automated, so their direct labour cost is low. Employees are paid on a per unit basis. Their total pay each month is, therefore, dependent on production volumes and averages $12.00 per hour. This rate already includes the employer’s portion of employee benefits. All payroll costs are paid in the period in which they are incurred. Each unit spends a total of 15 minutes in production.

1. 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 unit variable overhead manufacturing rate is $1.50, consisting of: Utilities--$0.60; Indirect Materials--$0.10; Plant maintenance--$0.50; environmental fee--$0.14; and Other--$0.16.

                                               

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

Training and development                  $   43,200

Property and business taxes 39,000

Supervisor’s salary 149,400

Amortization on equipment 178,800

Insurance premium 24,000

Other      75,600

$ 510,000

• The property and business taxes and insurance premium as shown above have been prepaid in the previous year. You should treat these two prepaid items as follows:
  • Spread the prepaid costs evenly over each month in the determination of total fixed manufacturing overhead costs in each month.
  • These items should be treated as “non-cash” for the budgeted year (i.e. you should deduct the prepaid items to arrive at “cash disbursements” in the manufacturing overhead budget). This is obvious because the amounts have already been prepaid and have not actually been incurred in the corresponding month of the budgeted year.
• All other fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred.  
• ToyWorks uses the straight line method of amortization.

1. Selling and administrative expenses are known to be a mixed cost; however, there is a lot of uncertainty about the portion that is fixed. Previous year’s experience has provided the following information:

Lowest level of sales:     375,000 units     Total S & A Expenses: $596,100

Highest level of sales:    750,000 units     Total S & A Expenses: $858,600

The High-Low method is used to determine the variable and fixed component of selling and administrative expense. It is estimated that both components of selling and administrative expenses for the budget year will be about 10% greater than the previous average. These costs are paid in the month in which they occur, with the exception of the only non-cash item: a monthly amortization of office equipment in the amount of $800. Not included in the above expenses is bad debt expense which should be considered. Bad debt expense in each month is equal to all sales that are considered uncollectible.

1. Another component of selling and administrative expenses for ToyWorks is warehouse rental. Because sales are seasonal, ToyWorks must rent an additional storage facility from September to December to house the additional inventory on hand. The only related cost is a flat $5,000 per month, payable at the beginning of the month.

1. During the fiscal year ended June 30, 2021 ToyWorks will be required to make monthly income tax installment payments of $3,000. Moreover, outstanding income taxes from the year ended June 30, 2020 must be paid in October 2020 which is equal to $21,500. These payments are made in cash.

1. Note that property and business taxes and insurance that are part of fixed manufacturing overhead are prepaid. The property and business taxes are paid on December 31 of each year, and the expected payment for next year is $39,600. The annual insurance premium is paid at the beginning of March each year. There should be no change in the premium from last year, so the expected payment is $24,000. These payments are also made in cash.

1. Prior to the busy season, ToyWorks is planning to upgrade its manufacturing equipment for which they will need to pay cash. The bid that was accepted totaled $212,000 of which 40% is to be paid in August 2020 and 50% in September 2020. The 10% holdback will be paid in January 2021, assuming everything goes as planned.

1. ToyWorks Ltd. has a policy of paying cash dividends at the end of each quarter. The President tells you that the board of directors is planning on continuing their policy of declaring cash dividends of $25,000 per quarter.

1. ToyWorks Ltd. has an internal policy to maintain a cash balance of at least $20,000 before considering its financing activity.

1. An arrangement has been made with the local bank that they will be given a line of credit at a preferred rate of 6% per year. All borrowing is considered to happen on the first day of the month, repayments are on the last day of the month. All borrowings and repayments from the bank should be in multiples of $1,000 and interest must be paid at the end of each month. Interest is calculated on the balance at the beginning of the month, which includes any amounts borrowed that month.   

1. A listing of the estimated balances in the company’s ledger accounts as of June 30, 2020 is given below:

	Cash			$    72,728
	Accounts receivable			17,008
	Inventory-raw materials			12,500
	Inventory-finished goods			23,550
	Prepaid insurance			16,000
	Prepaid tax			19,200
	Capital assets (net)			724,000
				$ 884,985
	Accounts payable			$    19,497
	Income tax payable			21,500
	Capital stock			500,000
	Retained earnings			343,988
				$ 884,985

Required:

You MUST follow the instructions below:

• Use the excel file “Problem 4_MasterBudget_Template” uploaded on Quercus under Assignment → Problem 4 to answer questions a) and b) below. This is a template the company historically used, and you would just have to populate the right numbers in the yellow cells. (Note that using equations and excel’s “drag” function can significantly reduce your time in completing this task.)
• Save the excel file as “P4_LastName_FirstName_StudentNumber”
• Submit the excel file on Quercus under Assignment → Problem 4

1. Prepare a monthly master budget for ToyWorks for the year ended June 30, 2021, including the following schedules:

Sales Budget & Schedule of Cash Receipts (3.5 points)

Production Budget (2 points)

Direct Materials Budget & Schedule of Cash Disbursements (5.5 points)

Direct Labour Budget (1 point)

Manufacturing Overhead Budget (3 points)

Ending Finished Goods Inventory Budget (3 points)

Selling and Administrative Expense Budget (4 points)

Cash Budget (7 points)

1. Prepare a budgeted income statement for the year ended June 30, 2021 using absorption costing. (1 point)

Answer 1

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