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[answered] MGMT1600 Managerial Accounting Case 2 - Master Budget Maste

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MGMT1600 Managerial Accounting


Case 2 - Master Budget Master Budget Case: HES, Inc.


HES, Inc. is a company that manufactures and sells a single product, which they call a


Smarty. 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 December 31.


During the summer of 2016, Katie and Pia, the HES, Inc. controllers, spent considerable


time with Judy and Emiko, the Managers of Marketing, putting together a sales forecast


for the next budget year (January to December, 2017). Unfortunately, they submitted


their resignation and a sales forecast to the President Council of HES, Inc. Kenny Roger,


Yekaterina, Ingrid, and Deepti


Their sales forecast consisted of these few lines:


For the year ended December 31, 2016: 475,000 units at $10.00 each*


For the year ended December 31, 2017: 500,000 units at $10.00 each


For the year ended December 31, 2018: 500,000 units at $10.00 each


*Expected sales for the year ended December 31, 2016 are based on actual sales to date and


budgeted sales for the duration of the year. 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. 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




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. Because sales are seasonal, HES, Inc. must rent an additional storage facility from


September to December to house the additional inventory on hand. The only related


cost is a flat $20,000 per month, payable at the beginning of the month.


4. There is only one type of raw material used in the production of Smartys. Space-age


acrylic (SAA) is a very compact material that is purchased in powder form. Each


Smarty requires 5 kilograms of SAA, at a cost of $0.45 per kilogram. The supplier of


SAA tends to be somewhat erratic so HES, Inc. finds it necessary to maintain an


inventory balance equal to 40% of the following month?s production needs as a


precaution against stock-outs. HES, Inc. pays for 20% of a month?s purchases in MGMT1600 Managerial Accounting


Case 2 - Master Budget 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.


5. Beginning accounts payable will consist of $208,406.50 arising from the following


estimated direct material purchases for November and December of 2016:


SAA purchases in November 2016:


SAA purchases in December 2016 $223,875.00


$162,563.50 6. HES, Inc. 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.


7. 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.


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


Training and development


Property and business taxes


Supervisor?s salary


Amortization on equipment




Other $ 43,200












$ 624,000 The property and business taxes are paid on June 30 of each year. The


expected payment for next year is $39,600.


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


There should be 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.


HES, Inc. uses the straight line method of amortization.


9. 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:


Highest level of sales: 375,000 units


750,000 units Total Operating Expenses: $778,710


Total Operating Expenses: $1,022,460 MGMT1600 Managerial Accounting


Case 2 - Master Budget These costs are paid in the month in which they occur. Not included in the above


expenses is bad debt expense.


10. 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. ? of 1% of sales are


considered uncollectible (bad debt expense).


11. Sales in November and December 2016 are expected to be $700,000 and


$1,500,000 respectively. Based on the above collection pattern this will result in


Accounts Receivable of $734,000 at December 31, 2016 which will be collected in


January and February, 2017.


12. During the fiscal year ended December 31, 2017, HES, Inc. will be required to make


monthly income tax installment payments of $5,000. Outstanding income taxes from


the year ended December 31, 2016 must be paid in April 2017. Income tax expense


is estimated to be 25% of net income. Income taxes for the year ended December


31, 2017, in excess of installment payments, will be paid in April, 2018.


13. HES, Inc. is planning to acquire additional manufacturing equipment for $204,300


cash. 40% of this amount is to be paid in November 2017, the rest, in December


2017. The manufacturing overhead costs shown above already include the


amortization on this equipment.


14. An arrangement has been made with the local bank that if HES, Inc. 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.


15. HES, 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 $50,000 per quarter. MGMT1600 Managerial Accounting


Case 2 - Master Budget 16. A listing of the estimated balances in the company?s ledger accounts as of December


31, 2016 is given below:






Accounts receivable


Inventory-raw materials


Inventory-finished goods


Prepaid Insurance


Prepaid property and business taxes


Capital assets (net)


Total assets $ 83,365














$1,642,690 Liabilities and Shareholders? Equity


Accounts payable


$ 208,407


Income taxes payable




Capital stock




Retained Earnings




Total liabilities and shareholders? equity


$1,642,690 Required:


1. Prepare a monthly master budget for HES, Inc. for the year ended December 31,


2017, 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


2. Prepare a budgeted income statement and a budgeted statement of retained


earnings for the year ended December 31, 2017, using absorption costing.


3. Prepare a budgeted balance sheet at December 31, 2017.


4. Prepare a budgeted income statement for the year ended December 31, 2017, using


variable costing. Assume the per unit variable cost for 2016 was $6.0520.


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