Question

The Thompson Toy Company manufactures toy building block sets for children. Thompson is planning for 2017 by developing a master budget by quarters. Thompson’s balance sheet for December 31, 2016, follows:
Other budget data for Thompson Toy Company:
a. Budgeted sales are 500 sets for the first quarter and expected to increase by 100 sets per quarter. Cash sales are expected to be 40% of total sales, with the remaining 60% of sales on account. Sets are budgeted to sell for $70 per set.
b. Finished Goods Inventory on December 31, 2016, consists of 100 sets at $32 each.
c. Desired ending Finished Goods Inventory is 30% of the next quarter’s sales; first quarter sales for 2018 are expected to be 900 sets. FIFO inventory costing method is used.
d. Direct materials cost is $10 per set.
e. Desired ending Raw Materials Inventory is 10% of the next quarter’s direct materials needed for production; desired ending inventory for December 31, 2017, is $1,000; indirect materials are insignificant and not considered for budgeting purposes.
f. Each set requires 0.20 hours of direct labor; direct labor costs average $10 per hour.
g. Variable manufacturing overhead is $2 per set.
h. Fixed manufacturing overhead includes $4,000 per quarter in depreciation and $1,540 per quarter for other costs, such as utilities, insurance, and property taxes.
i. Fixed selling and administrative expenses include $8,500 per quarter for salaries; $2,400 per quarter for rent; $750 per quarter for insurance; and $1,500 per quarter for depreciation.
j. Variable selling and administrative expenses include supplies at 1% of sales.
k. Capital expenditures include $30,000 for new manufacturing equipment, to be purchased and paid for in the first quarter.
l. Cash receipts for sales on account are 30% in the quarter of the sale and 70% in the quarter following the sale; Accounts Receivable balance on December 31, 2016, is expected to be received in the first quarter of 2017; uncollectible accounts are considered insignificant and not considered for budgeting purposes.
m. Direct materials purchases are paid 90% in the quarter purchased and 10% in the following quarter; Accounts Payable balance on December 31, 2016, is expected to be paid in the first quarter of 2017.
n. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.
o. Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred.
p. Thompson desires to maintain a minimum cash balance of $25,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 5% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.
Requirements
1. Prepare Thompson’s operating budget and cash budget for 2017 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours.
2. Prepare Thompson’s annual financial budget for 2017, including budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows.
3. Thompson sold 3,000 sets in 2017, and its actual operating income was as follows:
Prepare a flexible budget performance report through operating income for 2017. Show product costs separately from selling and administrative costs. To simplify the calculations due to sets in beginning inventory having a different cost than those produced and sold in 2017, assume the following product costs:
4. What was the effect on Thompson’s operating income of selling 400 sets more than the static budget level of sales?
5. What is Thompson’s static budget variance for operating income?
6. Explain why the flexible budget performance report provides more useful information to Thompson’s managers than the static budget performance report. What insights can Thompson’s managers draw from this performance report?
7. During 2017, Thompson recorded the following cost data:
Compute the cost and efficiency variances for direct materials and direct labor.
8. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.
9. Prepare the standard cost income statement for 2017.
10. Calculate Thompson’s ROI for 2017. To calculate average total assets, use the December 31, 2016, balance sheet for the beginning balance and the budgeted balance sheet for December 31, 2017, for the ending balance. Round all of your answers to four decimal places.
11. Calculate Thompson’s profit margin ratio for 2017. Interpret your results.
12. Calculate Thompson’s asset turnover ratio for 2017. Interpret your results.
13. Use the expanded ROI formula to confirm your results from Requirement 10. Interpret your results.
14. Thompson’s management has specified a 20% target rate of return. Calculate Thompson’s RI for 2017. Interpret your results.


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  • CreatedJune 15, 2015
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