[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

 

Property and business taxes

 

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

 

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:

 

Assets

 

Cash

 

Accounts receivable

 

Inventory-raw materials

 

Inventory-finished goods

 

Prepaid Insurance

 

Prepaid property and business taxes

 

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 & 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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