Question

Master Budget Case: Wooden Pull Toys Inc. Wooden Pull Toys Ltd. is a company that manufactures and sells a single product, which they call a Baby Turtle. For planning and control purposes they utilize a quarterly master budget, which is usually developed at least six months in advance of the budget period. Their fiscal year end is December 31. During the summer of 2019, Jimmy C., the Wooden Pull Toys controller, spent considerable time with Fanny L., the Manager of Marketing, putting together a sales forecast for the first quarter of next year (January to March, 2020). Unfortunately, their collaboration worked so well they eloped to Niagara, ON, were married and settled down. Prior to their departure they e-mailed letters of resignation and a cryptic sales forecast to the President of Wooden Pull Toys. Their sales forecast consisted of these few lines: • For the year ended December 31, 2019: 475,000 units at $11.00 each* • For the year ended December 31, 2020: 500,000 units at $11.00 each • For the year ended December 31, 2021: 500,000 units at $11.00 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. Wooden Pull Toys’ 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 first quarter. Your conversations with the President and your investigations of the company’s records have revealed the following information: 1. Sales of Baby Turtles are seasonal. History shows that January, March, May and June are the slowest months with only 5% of sales for each month. Sales pick up over the summer with July, August and September each contributing 6% to the total. Valentines Day in February boosts sales to 10%, and spring break in April accounts for 7%. As Christmas shopping picks up momentum, winter sales start at 10% in October, move to 15% in November and then peak at 20% in December. This pattern of sales is not expected to change in the next two years. 2. From previous experience, management has determined that an ending inventory equal to 25% of the next month’s sales is required to fit the buyer’s demands. 3. There is only one type of raw material used in the production of Baby Turtles. R700 is a very compact material that is purchased in powder form. Each Baby Turtle requires 5 kilograms of R700, at a cost of $0.45 per kilogram. The supplier of R700 tends to be somewhat erratic so Wooden Pull Toys finds it necessary to maintain an inventory balance equal to 40% of the following month’s production needs as a precaution against stock-outs. Wooden Pull Toys pays for 20% of a month’s purchases in the month of purchase, 45% in the following month and the remaining 35% two months after the month of purchase. There is no early payment discount. 4. Beginning accounts payable will consist of $167,084 arising from the following estimated direct material purchases for November and December of 2019: R700 purchases in November 2019: $173,953 R700 purchases in December 2019 $132,750 5. Wooden Pull Toys’ 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 $9.00 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 18 minutes in production. 6. 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 $1.30, consisting of: Utilities--$0.60; Indirect Materials--$0.20; Plant maintenance--$0.30; environmental fee--$0.14; and Other--$0.06. 7. The fixed manufacturing overhead costs for the entire year are as follows: Training and development $ 43,200 Repairs and maintenance 39,000 Supervisors’ salaries 149,400 Depreciation on equipment 178,800 Plant Insurance 96,000 Other 117,600 $ 624,000 • The annual insurance premium of $96,000 will be paid at the beginning of January. There is no change in the premium from last year. • All other “cash-related” fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred. • Wooden Pull Toys uses the straight line method of depreciation. 8. 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 years’ experience has provided the following information: Lowest level of sales: 375,000 units Total Operating Expenses: $778,710 Highest level of sales: 750,000 units Total Operating Expenses: $1,022,460 These costs are paid in the month in which they occur. Not included in the above expenses is bad debt expense. 9. Sales are on a cash and credit basis, with 55% collected during the month of the sale, 35% the following month, and 9.5% the month thereafter. ½ of 1% of sales are considered uncollectible (bad debt expense). 10. Sales in November and December 2019 are expected to be $783,750 and $1,045,000 respectively. Based on the above collection pattern this will result in Accounts Receivable of $539,481 at December 31, 2019 which will be collected in January and February, 2020. 11. During the fiscal year ended December 31, 2020, Wooden Pull Toys will be required to make monthly income tax installment payments of $1,500. Outstanding income taxes from the year ended December 31, 2019 must be paid in March 2020. Income tax expense is estimated to be 25% of net income. Income taxes for the year ended December 31, 2020, in excess of installment payments, will be paid in March, 2021. 12. Wooden Pull Toys is planning to acquire additional manufacturing equipment for $304,200 cash. 40% of this amount is to be paid in January 2020, the rest, in February 2020. The manufacturing overhead costs shown above already include the depreciation on this equipment. 13. An arrangement has been made with the local bank that if Wooden Pull Toys maintains a minimum balance of $20,000 in their bank account, they will be given a line of credit at a preferred rate of 6% per annum. 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. 14. Wooden Pull Toys Ltd. 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 $50,000 per quarter. 15. A listing of the estimated balances in the company’s ledger accounts as of December 31, 2019 is given below: Cash $ 64,165 Accounts receivable 539,481 Inventory-raw materials 28,125 Inventory-finished goods 45,625 Capital assets (net) 724,000 $ 1,401,396 Accounts payable $ 167,084 Income tax payable 21,500 Capital stock 1,000,000 Retained earnings 212,813 $ 1,401396 ________________________________________

Required: Prepare a master budget for Wooden Pull Toys for the first quarter (January, February and March) of the year ending December 31, 2020, including the following schedules: Schedule of Cash Receipts

Answer 1

	Master Budget for First Quarter 2020			Jan	Feb	March
Sales Budget	Sales(units)			25000	50000	25000
	S.P. per unit			$                  11.00	$                      11.00	$                 11.00
	Sales Revenue			$       275,000.00	$           550,000.00	$      275,000.00
Production Budget	FINISHED GOODS
	Sales(UnitS)			25000	50000	25000
	Add: Closing Stock( 25% of Next Month Sale)			12500	6250	8750
	Less: Opening Stock			-6250	-12500	-6250
	Production( Units)			31250	43750	27500
	Material Used(5 Kg Per Unit)			156250	218750	137500
	Labour Hours Used(0.30 hrs/unit)			9375	13125	8250
	Material Cost @ $0.45 per Kg			$          70,312.50	$             98,437.50	$        61,875.00
	Labour Cost @ $9 per Hours			$          84,375.00	$           118,125.00	$        74,250.00
	Production Overhead
	Variable cost ($1.30 per unit)			$          40,625.00	$             56,875.00	$        35,750.00
	Fixed(annual rate $ 1.29/unit)			$          40,312.50	$             56,437.50	$        35,475.00
	Total Production Cost			$       235,625.00	$           329,875.00	$      207,350.00
	Production Cost per Unit			$                    7.54	$                        7.54	$                   7.54
S& D Overhead Budget	Unit Sold			25000	50000	25000
	Cost of Production			$       188,500.00	$           377,000.00	$      188,500.00
	Selling & Distribution Overhead:
	Variable Cost( 0.65 per unit)			$          16,250.00	$             32,500.00	$        16,250.00
	Fixed Cost( $ 534960/500000 = 1.07 per unit)			$          26,750.00	$             53,500.00	$        26,750.00
	Total Cost of Sale			$       231,500.00	$           463,000.00	$      231,500.00
Purchase Budget	RM required for production(Kg)                                   A			156250	218750	137500
	Closing Stock(40% next month Production)             B			87500	55000	65000
	Oening Stock                                                                         C			62500	87500	55000
	Purchases for the month                                   A+B-C(In Kgs.)			181250	186250	147500
	Purchase Cost ($ 0.45 per kg)			$          81,562.50	$             83,812.50	$        66,375.00
A P Settelment	PURCHASE COST MONTHLY DATA
	Current Month Purchases			$          81,562.50	$             83,812.50	$        66,375.00
	Previous month purchases			$       132,750.00	$             81,562.50	$        83,812.50
	Previous to Previous Month purchases Cost			$       173,953.13	$           132,750.00	$        81,562.50
	PAYMENT TO CREDIROS FOR R700
	20% of current month purchase'			$          16,312.50	$             16,762.50	$        13,275.00
	45% of previous month purchase			$          59,737.50	$             36,703.13	$        37,715.63
	35% of previous to previous month purchase			$          60,883.59	$             46,462.50	$        28,546.88
	Total Payment in month			$       136,933.59	$             99,928.13	$        79,537.50
ACCT. RECEIVABLE SETTELMENT	SALES MONTHLY DATA
	Current Month Sale			$       275,000.00	$           550,000.00	$      275,000.00
	Previous Month Sale			$    1,045,000.00	$           275,000.00	$      550,000.00
	Previous to Previous month sale			$       783,750.00	$       1,045,000.00	$      275,000.00
	COLLECTION OF SALES REVENUE
	Cash Sale(55% of the month sale)			$       151,250.00	$           302,500.00	$      151,250.00
	35% of previous month sales			$       365,750.00	$             96,250.00	$      192,500.00
	9.5% of previous to previous month sales			$          74,456.25	$             99,275.00	$        26,125.00
	Total Cash Collection			$       591,456.25	$           498,025.00	$      369,875.00
FIXED MFG. OVERHEAD COST	Manufacturing Fixed Overhead Expenses
		Annual	Qtr
	Training & Dfevelopment	$     43,200.00	$    10,800.00	$            3,600.00	$                3,600.00	$           3,600.00
	repair	$     39,000.00	$       9,750.00	$            3,250.00	$                3,250.00	$           3,250.00
	Salary Superwiser	$   149,400.00	$    37,350.00	$          12,450.00	$             12,450.00	$        12,450.00
	Plant Insurance	$     96,000.00	$    24,000.00	$          96,000.00	$                             -	$                        -
	Other	$   117,600.00	$    29,400.00	$            9,800.00	$                9,800.00	$           9,800.00
	Total Cash fixed overhead cost	$   445,200.00		$       125,100.00	$             29,100.00	$        29,100.00
	Add: Non Cash Dep	$   178,800.00
	Total Fixed Overhead	$   624,000.00
CASH BUDGET	CASH INFLOW:
	Opening Cash Balance			$          64,165.00	$           102,407.66	$        26,384.53
	Add Cash collection from sales revenue			$       591,456.25	$           498,025.00	$      369,875.00
	A			$       655,621.25	$           600,432.66	$      396,259.53
	CASH OUTFLOWS:
	Payment for Raw Material			$       136,933.59	$             99,928.13	$        79,537.50
	Labour Cost @ $9 per Hours			$          84,375.00	$           118,125.00	$        74,250.00
	Production Cvariable Overhead Cost			$          40,625.00	$             56,875.00	$        35,750.00
	Production Fixed Overhead Cost			$       125,100.00	$             29,100.00	$        29,100.00
	S & D Variable Overhead Cost			$          16,250.00	$             32,500.00	$        16,250.00
	S & D Fixed Overhead Cost			$          26,750.00	$             53,500.00	$        26,750.00
	Payment for Equipment			$       121,680.00	$           182,520.00	$                        -
	Advance Payment of Taxes			$            1,500.00	$                1,500.00	$           1,500.00
	Annual Tax for 2019			$                         -	$                             -	$        21,500.00
	Minimum Cash Balance in Hand			$          20,000.00	$             20,000.00	$        20,000.00
	B			$       573,213.59	$           594,048.13	$      304,637.50
	Surplus/(deficit)   A-B			$          82,407.66	$                6,384.53	$        91,622.03
	Add: Minimum Cash Balance			$          20,000.00	$             20,000.00	$        20,000.00
	Closing Balance At End of the month			$       102,407.66	$             26,384.53	$      111,622.03

Working
Selling & Distribution Overhead rate
	Unit	Amount	Variable(unit x rate)	Fixed
Lowest level	375000	778710	$       243,750.00	$           534,960.00
Highest level	750000	1022460	$       487,500.00	$           534,960.00
Diffrence	375000	243750	$                    0.65

Thanks