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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, XXXXXXXXXXUnfortunately, their collaboration worked so well they eloped to Niagara, ON, were ma
ied 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 ma
iage 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 Fe
uary boosts sales to 10%, and spring
eak 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 e
atic 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 incu
ed.
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 incu
ed evenly over the year and paid as incu
ed.
· 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 Fe
uary, 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 Fe
uary XXXXXXXXXXThe manufacturing overhead costs shown above already include the depreciation on this equipment.
13. An a
angement 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 prefe
ed rate of 6% per annum. All bo
owing is considered to happen on the first day of the month, repayments are on the last day of the month. All bo
owings 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 bo
owed 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
$ XXXXXXXXXX,165
Accounts receivable
XXXXXXXXXX,481
Inventory-raw materials
XXXXXXXXXX,125
Inventory-finished goods
XXXXXXXXXX,625
Capital assets (net)
XXXXXXXXXX,000
$ 1,401,396
Accounts payable
$ 167,084
Income tax payable
XXXXXXXXXX,500
Capital stock
1,000,000
Retained earnings
XXXXXXXXXX,813
$ 1,401396
Required:
Prepare a master budget for Wooden Pull Toys for the first quarter (January, Fe
uary and March) of the year ending December 31, 2020, including the following schedules:
Sales Budget
Schedule of Cash Receipts
Production Budget
Direct Materials Budget
Schedule of Cash Disbursements
Direct Labour Budget
Manufacturing Overhead Budget
Ending Finished Goods Inventory Budget
Selling and Administrative Expense Budget
Cash Budget
Prepare a budgeted income statement for the quarter ended March 31, 2020.
Prepare a budgeted balance sheet at March 31, 2020.