## [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

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. 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

Supervisor?s salary

Amortization on equipment

Insurance

Other \$ 43,200

39,000

149,400

178,800

96,000

117,600

\$ 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

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

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

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:

Assets

Cash

Accounts receivable

Inventory-raw materials

Inventory-finished goods

Prepaid Insurance

Capital assets (net)

Total assets \$ 83,365

734,000

9,000

9,125

64,000

19,200

724,000

\$1,642,690 Liabilities and Shareholders? Equity

Accounts payable

\$ 208,407

Income taxes payable

21,500

Capital stock

1,000,000

Retained Earnings

412,783

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 &amp; Schedule of Cash Receipts

Production Budget

Direct Materials Budget &amp; Schedule of Cash Disbursements

Direct Labour Budget

Ending Finished Goods Inventory 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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