Master Budget Case

Master Budget Case: Camera Adapter Ltd Camera Adapter Ltd. is a company that manufactures and sells a single product, which they call a EF-EOS-R. 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 Their sales forecast consisted of these few lines For the year ended December 31, 2018: 95,000 units at $45.00 each For the year ended December 31, 2019: 100,000 units at $50.00 each For the year ended December 31, 2020: 110,000 units at $52.00 each Expected sales for the year ended December 31, 2018 are based on actual sales to date and budgeted sales for the duration of the year 1. Sales are seasonal with the peak months being summer and winter holidays. The following table shows expected distribution of sales for each month based on percentage of the total budgeted sales. This pattern of sales is not expected to change in the next three years Months Jan, Feb, Mar Apr, Aug, Sept May, Jun, Jul Oct Nov Dec Percentage of sales 3% each 5% each 10% each 11% 15% 20% 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, Camera Adapter must rent an additional storage facility from October to December to house the additional inventory on hand. The related costs, which cover the rent, additional security and extra insurance, is a flat $6,000 per month, payable at the beginning of the month 4. There are three types of raw material used in the production of EF-EOS-Rs Plastic base (PB) is a very compact material that is purchased in powder form Each EF-EOS-R requires 0.4 kilograms of PB, at a cost of $30.00 per kilogram This is an increase of $6.00 from 2018. The supplier of PB tends to be somewhat erratic so Camera Adapter finds it necessary to maintain an inventory balance equal to 50% of the following month's production needs as a precaution against stock-outs A metallic ring assembly is purchased in kit form, and is attached during the assembly process. For a small premium, Camera Adapter has made a JIT agreement with the supplier which includes on-time and quality assurances. Each EF-EOS-R uses two kits, which cost $1.80 each. . The final component for the adapter is a length of hemp rope which is used to pull the adapter. The rope is supplied by a student entrepreneur, who must be paid in cash. On the first day of every month she delivers exactly the right amount to manufacture the budgeted number of units for that month. It costs $1.00 per meter and Camera Adapter uses 0.8 meters for each EF-EOS-R . 5. The beginning accounts payable (associated with PB purchases only) will consist of $57,810 arising from the following estimated material purchases for November and December of 2018: Material purchases in Navember 201: $146,100 Material purchases in December 2018: $86.400 Camera Adapter pays for 50% of a month's purchases in the month of purchase. 40% in the following month and the remaining 10% two months after the month of purchase. There is no early payment discount 6. The manufacturing process for EF-EOS-Rs is divided into three separate activities The first step is the forming process, during which the PB is liquefied and formed into several shapes that snap together to make the adapter. During the next stage, the molded pieces are fused together using heat. This step is referred to as the assembly stage. The last stage is for finishing, during which the metallic ring and the pull rope are attached and the adapter is prepared for shipping. 7. The first two steps of the manufacturing process are highly automated, so the only direct labour required consists of four highly specialized technicians, who are trained to operate the equipment and make repairs as required. These employees work shifts, allowing the plant to operate for langer hours during the busier months. On an annual basis, they are each paid an average of $60,000 including employee benefits. 8. The last step, finishing, employs wage earners. Most of the staff work on a part-time basis, so their hours can be set based on production requirements. This also eliminates the need for overtime. These employees are paid based on the number of units produced. They receive an average of $12.00 per hour including employee benefts. Each EF-EOS-R spends 18 utes in the finishing department. 9. Because of the large difference in the manufacturing stages, Camera Adapter uses two separate variable manufacturing overhead rates. The forming and assembly departments use similar equipment and with the company's concentration on a single product, the manufacturing overhead is allocated based on volume (i.e. the units produced). The combined unit variable overhead manufacturing rate for forming and assembly is $6.20, consisting of: Utilities--$2.50; Indirect Materials-- $1.00; Plant maintenance-$1.50; environmental fee--$0.70; and Other--$0.50 The best cost driver for the finishing department is considered to be direct labour hours. Here the predetermined variable manufacturing overhead is expected to be $4.00 per hour 10. Fixed manufacturing overhead costs are not separated between departments. The total costs for the entire year are as follows Training and development Supervisor's salaries & benefits Amortization on equipment Insurance Other $ 43,620 169,224 178,800 72,600 120,900 The annual insurance premium, which will be paid on July 1, will be $73,200 All other "cash-related" fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred Camera Adapter uses the straight-line method of amortization 11. 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 (rounded) Lowest level of sales: Highest level of sales: 75,000 units 115,000 units Total Operating Expenses: $863,700 Total Operating Expenses: $1,123,700 The annual amount of amortization on office furniture and equipment is only $9,000-and this amount is already included in the fixed portion of the selling and administration expenses. Not included in the above expenses is bad debt expense Payments for selling and administrative expenses occur in the month in which they are incurred 12. Sales are on a cash and credit basis, with 75% collected during the month of the sale, 15% the following month, and 9.5% the month thereafter. considered uncollectible (bad debt expense) of 1% of sales are 13. Sales in November and December 2018 are expected to be $641,250 and $855,000 respectively. Based on the above collection pattern this will result in Accounts Receivable of $270,394 at December 31, 2018 which will be collected in January and February, 2019 14. During the fiscal year ended December 31, 2019, Camera Adapter will be required to make monthly income tax installment payments of $5,000. Outstanding income taxes from the year ended December 31, 2018 must be paid in April 2019. Income tax expense is estimated to be 35% of net income. Income taxes for the year ended December 31, 2019, in excess of installment payments, will be paid in April, 2020 15. Camera Adapter is planning to acquire additional manufacturing equipment on July 1, 2019 for $306,000 cash (including installation). The equipment is expected to last for 10 years, and will be replacing an older model with a net book value of zero. They have a special agreement to pay the supplier in three equal installments starting in August, 2019. The manufacturing overhead costs shown above do not include the amortization on this equipment Because of recent innovations, the new equipment is expected to operate more efficiently than the old one. It is expected that the per unit cost for utilities will decrease by $0.93 when the new machine comes on-line. 16. An arrangement has been made with the local bank that if Camera Adapter maintains a minimum balance of $30,000 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. Camera Adapter 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 16. A listing of the estimated balances in the company's ledger accounts as of December 31, 2018 is given below Assets Cash Accounts receivable Inventory-raw materials (PB) Inventory-finished goods Prepaid Insurance Capital assets (net) Total assets $ 97,888 270,394 18,000 22,875 36,000 724,000 Liabilities and Shareholders' Equity Accounts payable Income taxes payable Capital stock Retained Earnings Total liabilities and shareholders' equity $1169 157 $57,810 34,500 850,000 216,894 Required 1. Prepare a monthly master budget for Camera Adapter for the year ended December 31, 2019, 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, 2019, using absorption costing 3. Prepare a budgeted balance sheet at December 31, 2019 4. Calculate the break-even point in units and in dollars Master Budget Case: Camera Adapter Ltd Camera Adapter Ltd. is a company that manufactures and sells a single product, which they call a EF-EOS-R. 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 Their sales forecast consisted of these few lines For the year ended December 31, 2018: 95,000 units at $45.00 each For the year ended December 31, 2019: 100,000 units at $50.00 each For the year ended December 31, 2020: 110,000 units at $52.00 each Expected sales for the year ended December 31, 2018 are based on actual sales to date and budgeted sales for the duration of the year 1. Sales are seasonal with the peak months being summer and winter holidays. The following table shows expected distribution of sales for each month based on percentage of the total budgeted sales. This pattern of sales is not expected to change in the next three years Months Jan, Feb, Mar Apr, Aug, Sept May, Jun, Jul Oct Nov Dec Percentage of sales 3% each 5% each 10% each 11% 15% 20% 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, Camera Adapter must rent an additional storage facility from October to December to house the additional inventory on hand. The related costs, which cover the rent, additional security and extra insurance, is a flat $6,000 per month, payable at the beginning of the month 4. There are three types of raw material used in the production of EF-EOS-Rs Plastic base (PB) is a very compact material that is purchased in powder form Each EF-EOS-R requires 0.4 kilograms of PB, at a cost of $30.00 per kilogram This is an increase of $6.00 from 2018. The supplier of PB tends to be somewhat erratic so Camera Adapter finds it necessary to maintain an inventory balance equal to 50% of the following month's production needs as a precaution against stock-outs A metallic ring assembly is purchased in kit form, and is attached during the assembly process. For a small premium, Camera Adapter has made a JIT agreement with the supplier which includes on-time and quality assurances. Each EF-EOS-R uses two kits, which cost $1.80 each. . The final component for the adapter is a length of hemp rope which is used to pull the adapter. The rope is supplied by a student entrepreneur, who must be paid in cash. On the first day of every month she delivers exactly the right amount to manufacture the budgeted number of units for that month. It costs $1.00 per meter and Camera Adapter uses 0.8 meters for each EF-EOS-R . 5. The beginning accounts payable (associated with PB purchases only) will consist of $57,810 arising from the following estimated material purchases for November and December of 2018: Material purchases in Navember 201: $146,100 Material purchases in December 2018: $86.400 Camera Adapter pays for 50% of a month's purchases in the month of purchase. 40% in the following month and the remaining 10% two months after the month of purchase. There is no early payment discount 6. The manufacturing process for EF-EOS-Rs is divided into three separate activities The first step is the forming process, during which the PB is liquefied and formed into several shapes that snap together to make the adapter. During the next stage, the molded pieces are fused together using heat. This step is referred to as the assembly stage. The last stage is for finishing, during which the metallic ring and the pull rope are attached and the adapter is prepared for shipping. 7. The first two steps of the manufacturing process are highly automated, so the only direct labour required consists of four highly specialized technicians, who are trained to operate the equipment and make repairs as required. These employees work shifts, allowing the plant to operate for langer hours during the busier months. On an annual basis, they are each paid an average of $60,000 including employee benefits. 8. The last step, finishing, employs wage earners. Most of the staff work on a part-time basis, so their hours can be set based on production requirements. This also eliminates the need for overtime. These employees are paid based on the number of units produced. They receive an average of $12.00 per hour including employee benefts. Each EF-EOS-R spends 18 utes in the finishing department. 9. Because of the large difference in the manufacturing stages, Camera Adapter uses two separate variable manufacturing overhead rates. The forming and assembly departments use similar equipment and with the company's concentration on a single product, the manufacturing overhead is allocated based on volume (i.e. the units produced). The combined unit variable overhead manufacturing rate for forming and assembly is $6.20, consisting of: Utilities--$2.50; Indirect Materials-- $1.00; Plant maintenance-$1.50; environmental fee--$0.70; and Other--$0.50 The best cost driver for the finishing department is considered to be direct labour hours. Here the predetermined variable manufacturing overhead is expected to be $4.00 per hour 10. Fixed manufacturing overhead costs are not separated between departments. The total costs for the entire year are as follows Training and development Supervisor's salaries & benefits Amortization on equipment Insurance Other $ 43,620 169,224 178,800 72,600 120,900 The annual insurance premium, which will be paid on July 1, will be $73,200 All other "cash-related" fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred Camera Adapter uses the straight-line method of amortization 11. 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 (rounded) Lowest level of sales: Highest level of sales: 75,000 units 115,000 units Total Operating Expenses: $863,700 Total Operating Expenses: $1,123,700 The annual amount of amortization on office furniture and equipment is only $9,000-and this amount is already included in the fixed portion of the selling and administration expenses. Not included in the above expenses is bad debt expense Payments for selling and administrative expenses occur in the month in which they are incurred 12. Sales are on a cash and credit basis, with 75% collected during the month of the sale, 15% the following month, and 9.5% the month thereafter. considered uncollectible (bad debt expense) of 1% of sales are 13. Sales in November and December 2018 are expected to be $641,250 and $855,000 respectively. Based on the above collection pattern this will result in Accounts Receivable of $270,394 at December 31, 2018 which will be collected in January and February, 2019 14. During the fiscal year ended December 31, 2019, Camera Adapter will be required to make monthly income tax installment payments of $5,000. Outstanding income taxes from the year ended December 31, 2018 must be paid in April 2019. Income tax expense is estimated to be 35% of net income. Income taxes for the year ended December 31, 2019, in excess of installment payments, will be paid in April, 2020 15. Camera Adapter is planning to acquire additional manufacturing equipment on July 1, 2019 for $306,000 cash (including installation). The equipment is expected to last for 10 years, and will be replacing an older model with a net book value of zero. They have a special agreement to pay the supplier in three equal installments starting in August, 2019. The manufacturing overhead costs shown above do not include the amortization on this equipment Because of recent innovations, the new equipment is expected to operate more efficiently than the old one. It is expected that the per unit cost for utilities will decrease by $0.93 when the new machine comes on-line. 16. An arrangement has been made with the local bank that if Camera Adapter maintains a minimum balance of $30,000 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. Camera Adapter 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 16. A listing of the estimated balances in the company's ledger accounts as of December 31, 2018 is given below Assets Cash Accounts receivable Inventory-raw materials (PB) Inventory-finished goods Prepaid Insurance Capital assets (net) Total assets $ 97,888 270,394 18,000 22,875 36,000 724,000 Liabilities and Shareholders' Equity Accounts payable Income taxes payable Capital stock Retained Earnings Total liabilities and shareholders' equity $1169 157 $57,810 34,500 850,000 216,894 Required 1. Prepare a monthly master budget for Camera Adapter for the year ended December 31, 2019, 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, 2019, using absorption costing 3. Prepare a budgeted balance sheet at December 31, 2019 4. Calculate the break-even point in units and in dollars