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

Read the article

Using a PPF model, how would education (capital goods on the vertical axis and consumption goods on the horizontal axis) change the PPF? B) Aside from the article, how is the current economic recession affecting the frontier? Are we on the PPF?

ECONOMISTS have long argued that free trade makes everyone richer. But lately that view has come under attack, most notably from President Donald Trump. Economists are asking themselves some tough questions. Is free trade always a good thing? Do the losers from free trade need to be compensated? To explore the basics of free trade, The Economist spoke to John Van Reenen an economist at MIT. The conversation has been lightly edited for clarity. The Economist: At its most basic level, what is free trade? John Van Reenen: Free trade means allowing goods and services to move as freely as possible across different countries. As countries developed, they started making and swapping things among people within the borders of their own country. As transport improved, they could start buying and selling stuff abroad. For a long time, there were big barriers to international trade. At a time when governments struggled to raise tax from their own people, levying heavy import duties on things coming in from abroad was easier to implement. But economists eventually won the argument, which said that keeping those barriers as low as possible was sensible policy. With free trade, you come into more contact with foreign companies, new ideas, new people The Economist: Is free trade good for economic growth? John Van Reenen: As I see it, there are four big benefits. The first one can be traced all the way back to David Ricardo in the early 1800s. It allows countries to specialize in producing what they do best. For instance, the French are good at making wine, the British not so good. But the British are good at producing The Economist. Without trade, Britain would have to produce and consume its own its own wine. But with trade, Britain and France can focus on what they do best, with the French exchanging wine for more copies of The Economist. This is sometimes called “comparative advantage”. As time has gone by, trade is increasingly not just about exchanges in final goods—newspapers versus wine—but “intermediate” goods. Think of a car. Thousands and thousands of parts go into making a car. Increasingly what has happened is that one part is made in France, another in Germany, another in Japan, and so on. Then they can all be combined in a fourth country like Britain. Even for a complex thing like a car, nations can specialize in what they are good at. The second benefit of trade is that it makes markets bigger. If you are producing just for one country, your market is quite limited. But with trade, you can also start selling things to customers all over the world. That means that things like spending large amounts of money on research—self-driving vehicles or whatever—looks a lot more viable. The lump-sum costs of such investment are spread out, so we can get more innovation, which is the key to growing national income. Free trade increases the size of the pie. But it doesn’t mean that everyone is better off. Some get a smaller slice of the pie The third benefit relates to productivity differences between firms. Some firms are really productive, others are really poorly managed. What happens when you have trade, is that you have much stronger competition. Domestic firms are competing not just with other domestic firms but with firms all over the world. The less-efficient ones face more competition, so they shrink and they exit the market. Or they shape up. And the really innovative firms can expand. So it’s about creative destruction, really—shifting resources from less productive firms to more productive ones. The final benefit, which economists sometimes forget, relates to politics. With free trade, you come into more contact with foreign companies, new ideas, new people and so on. That’s mutually beneficial. And it is a political force for cooperation. Think of Europe. Since the second world war, those countries have had lower trade barriers, and that period has coincided with an unprecedented period of peace and cooperation. The Economist: What are the downsides of free trade? John Van Reenen: There are well-known downsides. The way I like to think about it is that free trade increases the size of the pie. The overall amount of material wellbeing expands. But just because the size of the pie expands, it doesn’t mean that everyone is better off. There are going to be some losers whose slice of the pie is so much smaller that they would have been better off with less trade. However, because the overall size of the pie has got bigger, the government can compensate the losers which can still make everyone better off. Let’s think about how this might happen. In the 1980s China began opening up to the rest of the world. China was a low-wage country, so it started selling a lot of low-end manufactured goods like clothes. Although that’s a great thing—people can buy cheaper clothes—workers in richer countries who were producing manufactured goods now faced much tougher competition. Workers in Bradford no longer just competed with those in Birmingham, but also those in Beijing. Those workers, especially less skilled ones in those industries, can be very seriously affected. It’s important to take a longer-term view. The education system needs to make people resilient to shocks I think economists underestimated the China shock. That may explain why policies to compensate the losers were insufficient—especially in America where the social safety net, such as for health care, is so threadbare. If there had been better policies, there would be much less of a political backlash against trade than we are seeing right now. The Economist: What can countries do to compensate those people who do lose out? John Van Reenen: There are lots of different options. The first thing I would emphasize is that you want to grease the wheels of mobility—to make it easier to move from one firm to another, or one industry to another, or one place to another. Putting up barriers to doing that is costly. For instance, planning regulations sometimes make housing in dynamic parts of the country very expensive, which makes it difficult for people in struggling areas to move there. You also want to help citizens get the skills to move. So-called “active labour market policies” are important here. Scandinavian countries like Denmark do these quite well. Rather than protecting jobs by increasing the costs of downsizing which ends up making employers reluctant to hire, these nations have generous unemployment-benefit systems combined with a lot of help for people who have become unemployed. Retraining is well resourced. Governments also enforce looking for work pretty strongly. It’s also important to take a longer-term view. Your education system needs to make people resilient to shocks. You want people to be well educated, and you want that education not to be too tightly linked to a particular skill. Having general skills—literacy, numeracy, social skills—is the right idea. So, when people are hit by tough times, they can reskill and move around more easily. But it is also important to be realistic. Some people, especially older people, are not going to be able to retrain if they were made unemployed by structural economic changes. For these people, there is nothing wrong with a reasonably generous welfare state and direct investment to support communities that are under stress from trade, technology or any other crisis. But remember: thanks to free trade, you can afford that, because the overall size of the pie is bigger.

Aaron, Deanne, and Keon formed the Blue Bell General Partnership at the beginning of the current year. Aaron and Deanne each contributed $110,000 and Keon transferred an acre of undeveloped land to the partnership. The land had a tax basis of $70,000 and was appraised at $180,000. The land was also encumbered with a $70,000 nonrecourse mortgage for which no one was personally liable. All three partners agreed to split profits and losses equally. At the end of the first year, Blue Bell made a $7,000 principal payment on the mortgage. For the first year of operations, the partnership records disclosed the following information:

Required:

1. a. Compute the adjusted basis of each partner’s interest in the partnership immediately after the formation of the partnership.

2. b. List the separate items of partnership income, gains, losses, and deductions that the partners must show on their individual income tax returns that include the results of the partnership’s first year of operations.

3. d. What are the partners’ adjusted bases in their partnership interests at the end of the first year of operations?

1) Which of the following is likely to occur as the result of the law of diminishing marginal utility?

a) Petra's utility from her second apple was less than her satisfaction from her first orange.

b) Hudson enjoyed his second slice of pizza more than his first.

c) Sabine's utility from her first granola bar is greater than Rachel's utility from her second granola bar.

d) Wesley enjoyed his second bottle of iced tea less than his first bottle, other things constant.

2) A consumer's utility-maximizing combination of goods is given by the bundle that corresponds to the point on

a) the indifference curve that intersects the horizontal axis.

b) the indifference curve that intersects the vertical axis.

c) an indifference curve that is tangent to the budget constraint.

d) the budget constraint where it intersects one of the axes.

3) Which of the following is not a property of indifference curves?

a) Indifference curves never cross.

b) Indifference curves have a concave shape.

c) Indifference curves slope downward.

d) The farther away from the origin, the higher utility.

e) All of the above are properties of indifference curves.

I. Master Budget

Pedro’s Pizza makes frozen pizza dough. Thecompany just finished its first year of operation (12 months, Jan-Dec). The following is its traditional income statement and Balance Sheet

Sales (15,000 units)​   $ 300,000

CGS ​  ​180,000

Gross Profit​  ​   $ ​120,000

Sales Commissions​     $​30,000

Salaries​  ​30,000

Depreciation expense     6,000

Net Income​   $​54,000

​   Cash ​$5,000 AP $3,000

​      AR​  5,000     Credit Line 7,000

​   Inventory – Raw Mat​ 9,000

Inventory – Finished Goods 3,000   Common Stock  12,000

Equipment​60,000   Retained Earn   54,000

​   Acc Depreciation​      ( 6,000)     

Total Assets​     $76,000     Total L & Eq   $76,000

VCP wants to prepare a cash budget for the first 3 months of the next year.

Use the following estimates:

- The quantity sold is projected to increase 4% for the year. Price will increase 5%. Sales are spread evenly throughout the year.   CGS should be calculated on a FIFO basis.

- 25% of sales is collected in the month of sale; the remainder is collected the next month.

- Inventory:

o Last year’s Finished Goods and Cost of Goods Sold had a constant cost per unit.

o All raw materials is purchased on credit ($1.50per lb) and is the same price as last year. Each product requires 2.5 lbs).

o Ending inventory for both should be 40% of next month’s activity (activity is constant).

o Beginning and ending WIP is zero

- 20% of purchases are paid in the month of purchase, 80% in the following.  All other expenses are paid with cash.

- Direct Labor is 0.2 hours per product at $30 per hour. Variable Overhead is $2.25 per product. Fixed Overhead is zero.

- The credit line is used for cash shortfalls. Excess cash will pay down this line. Interest is 1% per month of last month’s balance.

- Projections are to buy $6000 of new equipment at the end of January. Equipment is depreciated straight-line to zero salvage over 5 years.  All of this is used in administration.

- Sales commission rate will remain the same. Salaries will increase by 4%.

- VCP wants to maintain a minimum cash balance of at least $5,000.  Excess to repay credit line.

f. Cost of Goods Sold/Ending Finished Goods (FIFO) (10 points)

Jan

Feb

Mar

Beg FG (units)

Cost per unit, BEG FG

Quantity produced (units)

Cost per produced unit

Quantity of Units sold

Cost of Goods Sold

Units in Ending FG

Cost of Ending FG

Cash Budget/Interest/Credit line (10 points)

Jan

Feb

Mar

Cash Beg Bal

Collections

AP Payments

Other Cash Payments:

Cash subtotal

Projected monthly Income statement for Jan, Feb, Mar (10 points)

*please help. I want to make sure I’m heading the right direction. Thank you

You are the audit manager assigned to the audit of MNO Corporation. MNO imports goods from around the world and sells the goods to small and midsize retailers. This is the first year of the audit. Andy has recently graduated and has joined your firm as a junior accountant. He has been assigned to the inventory section for the interim audit and is eager to do a good job. Andy uses the model documentation used by your firm. His notes show that MNO has thirty personnel at the warehouse in Brampton and four at the head office in midtown Toronto who work on inventory. Downtown there is a purchasing agent who works closely with the sales team to buy what retailers want to sell. The purchasing agent authorizes the orders that he enters into the computer system. A logistics specialist arranges for shipping and customs clearance, including any shipments to customers. The inventory analyst monitors sales and stock levels. She makes journal entries to write off any obsolete or slow moving inventory, oversees the annual inventory count, and reconciles the perpetual records with sales records. She has an assistant reporting to her. The assistant gets a copy of all receiving reports for incoming goods and a copy of all shipping documents for sales. He enters these into the computer system to match to purchase orders and customer sales orders, making notes of any backorders and short shipments to bring to the inventory analyst’s attention. At the warehouse, the warehouse manager supervises two receiving clerks and four shipping clerks as well as the twenty-three warehousemen. He also authorizes any write-offs for damaged goods. The warehousemen put received goods on the shelf as well as pick goods off the shelf to prepare for shipment to customers. They also look for any damaged goods that need to be written off. The clerical staff double check all counts for received or shipped and prepare the relevant reports. A copy of each report is kept for the warehouse records, a copy is sent to the assistant inventory analyst, and a third copy is sent to either accounts payable or to the invoicing clerks depending on whether the goods were received or shipped out.

Required

a) Evaluate the general and environmental controls over inventory.

b) How would you explain to Andy the difference between validity and completeness as they apply to testing inventory controls in a perpetual inventory system?

Bunnell Corporation is a manufacturer that uses job-order costing. On January 1, the company’s inventory balances were as follows:

The company applies overhead cost to jobs on the basis of direct labor-hours. For the current year, the company’s predetermined overhead rate of $16.25 per direct labor-hour was based on a cost formula that estimated $650,000 of total manufacturing overhead for an estimated activity level of 40,000 direct labor-hours. The following transactions were recorded for the year:

1. Raw materials were purchased on account, $510,000.
2. Raw materials use in production, $480,000. All of of the raw materials were used as direct materials.
3. The following costs were accrued for employee services: direct labor, $600,000; indirect labor, $150,000; selling and administrative salaries, $240,000.
4. Incurred various selling and administrative expenses (e.g., advertising, sales travel costs, and finished goods warehousing), $367,000.
5. Incurred various manufacturing overhead costs (e.g., depreciation, insurance, and utilities), $500,000.
6. Manufacturing overhead cost was applied to production. The company actually worked 41,000 direct labor-hours on all jobs during the year.
7. Jobs costing $1,680,000 to manufacture according to their job cost sheets were completed during the year.
8. Jobs were sold on account to customers during the year for a total of $2,800,000. The jobs cost $1,690,000 to manufacture according to their job cost sheets.

Q1. What is the total amount of manufacturing overhead applied to production during the year?

Q2. Record the maufactured goods completed during the year.

Q3. What is the ending balance in work in progress?

Q4. Record the cost of goods sold to the customer

Q5. What is the ending balance in finished goods?

Q6. Assuming that the company closes its underapplied or overapplied overhead to Cost of Goods Sold, what is the adjusted cost of goods sold for the year?

Q7. What is the gross margin for the year?

Q8.What is the net operating income for the year?

Q9. What is the journal entry to record raw materials used in production? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Q4. Is manufacturing overhead underapplied or overapplied for the year? By how much?

Q5. What is the cost of goods available for sale during the year?

Q6.

Vico Bank Ltd. has just been issued with a Universal Banking License (provisionally) by the Bank of Ghana (BOG) to operate business of banking in Ghana. The Bank is duly incorporated in Ghana and has fulfilled all the initial legal and regulatory requirements. However, Vico Bank Ltd. failed to meet its target for the first quarter IN 2020 due to COVID-19. The Board and Management of the Bank has decided to engage a consultant who has an in-depth knowledge, skills and understanding in treasury operations and risk management to set-up and manage the treasury department of the Bank. The Board and Management have decided to employ you as the new Treasury Manager. You have been called upon by the Board of Vico Bank Ltd. to make a detailed 12 hour presentation on how you are going to organize the treasury department. (a) Suggest five strategic ways you can help them to improve their cash management (b) Explain how you are going to implement them.

Vera Ernst is a licensed dentist. During the first month of the operation of her business, the following events and transactions occurred.

Prepare a trial balance on April 30, 2020.