McGraw-Hill Ryerson

Master Budget Case (vA.0) 1

Master Budget Case: ToyWorks Ltd. (A)
ToyWorks Ltd. is a company that manufactures and sells a single product, which they
call a Toodle. 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 ecember !".
uring the summer of #$$%, &hris Leigh, the ToyWorks controller, spent considerable
time with 'at Frazer, the (anager of (arketing, putting together a sales forecast for the
next budget year )*anuary to ecember, #$$+,. -nfortunately, their collaboration
worked so well they eloped to Las .egas, were married by an /lvis impersonator, and
settled down somewhere in the desert. 'rior to their departure they e0mailed letters of
resignation and a cryptic sales forecast to the 'resident of ToyWorks.
Their sales forecast consisted of these few lines1
For the year ended ecember !", #$$%1 2%3,$$$ units at 4"$.$$ each5
For the year ended ecember !", #$$+1 3$$,$$$ units at 4"$.$$ each
For the year ended ecember !", #$$61 3$$,$$$ units at 4"$.$$ each
5/xpected sales for the year ended ecember !", #$$% are based on actual sales to date and
budgeted sales for the duration of the year.
ToyWorks7s 'resident felt certain that the marriage wouldn7t last, and expected &hris
would be back any day. 8ut the end of the year is 9uickly approaching, and there is still
no word from the desert. The 'resident, desperately needing the budget completed, has
approached you, a management accounting student, for help in preparing the budget for
the coming fiscal year. :our conversations with the president and your investigations of
the company7s records have revealed the following information1
". 'eak months for sales correspond with gift0giving holidays. ;istory shows that
*anuary, (arch, (ay and *une are the slowest months with only "< of sales for
each month. =ales pick up over the summer with *uly, >ugust and =eptember each
contributing #< to the total. .alentines ay in February boosts sales to 3<, and
/aster in >pril accounts for "$<. >s &hristmas shopping picks up momentum,
winter sales start at "3< in ?ctober, move to #$< in @ovember and then peak at
2$< in ecember. This pattern of sales is not expected to change in the next two
years.
#. From previous experience, management has determined that an ending inventory
e9ual to #3< of the next month7s sales is re9uired to fit the buyer7s demands.
!. 8ecause sales are seasonal, ToyWorks must rent an additional storage facility from
=eptember to ecember to house the additional inventory on hand. The only related
cost is a flat 4#$,$$$ per month, payable at the beginning of the month.
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Master Budget Case (vA.0) 2
2. There is only one type of raw material used in the production of toodles. =pace0age
acrylic )=>>, is a very compact material that is purchased in powder form. /ach
toodle re9uires 3 kilograms of =>>, at a cost of 4$.23 per kilogram. The supplier of
=>> tends to be somewhat erratic so ToyWorks finds it necessary to maintain an
inventory balance e9ual to 2$< of the following month7s production needs as a
precaution against stock0outs. ToyWorks pays for #$< of a month7s purchases in the
month of purchase, 23< in the following month and the remaining !3< two months
after the month of purchase. There is no early payment discount.
3. 8eginning accounts payable will consist of 4#$+,2$A.3$ arising from the following
estimated direct material purchases for @ovember and ecember of #$$%1
=>> purchases in @ovember #$$%1 4##!,+%3.$$
=>> purchases in ecember #$$% 4"A#,3A!.3$
A. ToyWorks7s manufacturing process is highly automated, so their direct labour cost is
low. /mployees are paid on a per unit basis. Their total pay each month is,
therefore, dependent on production volumes and averages 46.$$ per hour. This rate
already includes the employer7s portion of employee benefits. >ll payroll costs are
paid in the period in which they are incurred.
/ach unit spends a total of "+ minutes in production.
%. ue to the similarity of the e9uipment in each of the production stages and the
company7s concentration on a single product, manufacturing overhead is allocated
based on volume )i.e. the units produced,. The unit variable overhead
manufacturing rate is 4".!$, consisting of1 -tilities004$.A$B Cndirect (aterials004$.#$B
'lant maintenance004$.!$B environmental fee004$."2B and ?ther004$.$A.
+. The fixed manufacturing overhead costs for the entire year are as follows1
Training and development 4 2!,#$$
'roperty and business taxes !6,$$$
=upervisor7s salary "26,2$$
>mortization on e9uipment "%+,+$$
Cnsurance 6A,$$$
?ther ""%,A$$
4 A#2,$$$
The property and business taxes are paid on *une !$ of each year. The expected
payment for next year is 4!6,A$$.

The annual insurance premium is paid at the beginning of =eptember each year.
There should be no change in the premium from last year.
>ll other Dcash0relatedE fixed manufacturing overhead costs are incurred evenly
over the year and paid as incurred.
ToyWorks uses the straight line method of amortization.
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Master Budget Case (vA.0)
6. =elling and administrative expenses are known to be a mixed costB however, there is
a lot of uncertainty about the portion that is fixed. 'revious year7s experience has
provided the following information1
Lowest level of sales1 !%3,$$$ units Total ?perating /xpenses1 4%%+,%"$
;ighest level of sales1 %3$,$$$ units Total ?perating /xpenses1 4",$##,2A$
These costs are paid in the month in which they occur. @ot included in the above
expenses is bad debt expense.
"$. =ales are on a cash and credit basis, with 33< collected during the month of the
sale, !3< the following month, and 6.3< the month thereafter. F of "< of sales are
considered uncollectible )bad debt expense,.
"". =ales in @ovember and ecember #$$% are expected to be 4%$$,$$$ and
4",3$$,$$$ respectively. 8ased on the above collection pattern this will result in
>ccounts Geceivable of 4%!2,$$$ at ecember !", #$$% which will be collected in
*anuary and February, #$$+.
"#. uring the fiscal year ended ecember !", #$$+, ToyWorks will be re9uired to make
monthly income tax installment payments of 43,$$$. ?utstanding income taxes from
the year ended ecember !", #$$% must be paid in >pril #$$+. Cncome tax expense
is estimated to be #3< of net income. Cncome taxes for the year ended ecember
!", #$$+, in excess of installment payments, will be paid in >pril, #$$6.
"!. ToyWorks is planning to ac9uire additional manufacturing e9uipment for 4#$2,!$$
cash. 2$< of this amount is to be paid in @ovember #$$+, the rest, in ecember
#$$+. The manufacturing overhead costs shown above already include the
amortization on this e9uipment.
"2. >n arrangement has been made with the local bank that if ToyWorks maintains a
minimum balance of 4#$,$$$ in their bank account, they will be given a line of credit
at a preferred rate of A< per annum. >ll borrowing is considered to happen on the
first day of the month, repayments are on the last day of the month. >ll borrowings
and repayments from the bank should be in multiples of 4",$$$ and interest must be
paid at the end of each month. Cnterest is calculated on the balance at the beginning
of the month, which includes any amounts borrowed that month.
"3. ToyWorks Ltd. has a policy of paying dividends at the end of each 9uarter. The
president tells you that the board of directors is planning on continuing their policy of
declaring dividends of 43$,$$$ per 9uarter.
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Master Budget Case (vA.0) !
"A. > listing of the estimated balances in the company7s ledger accounts as of ecember
!", #$$% is given below1
>ssets
&ash 4 +!,!A3
>ccounts receivable %!2,$$$
Cnventory0raw materials 6,$$$
Cnventory0finished goods 6,"#3
'repaid Cnsurance A2,$$$
'repaid property and business taxes "6,#$$
&apital assets )net, %#2,$$$
Total assets 4",A2#,A6$
Liabilities and =hareholders7 /9uity
>ccounts payable 4 #$+,2$%
Cncome taxes payable #",3$$
&apital stock ",$$$,$$$
Getained /arnings 2"#,%+!
Total liabilities and shareholders7 e9uity 4",A2#,A6$
Ge9uired1
". 'repare a monthly master budget for ToyWorks for the year ended ecember !",
#$$+, including the following schedules1
=ales 8udget H =chedule of &ash Geceipts
'roduction 8udget
irect (aterials 8udget H =chedule of &ash isbursements
irect Labour 8udget
(anufacturing ?verhead 8udget
/nding Finished Ioods Cnventory 8udget
=elling and >dministrative /xpense 8udget
&ash 8udget
#. 'repare a budgeted income statement and a budgeted statement of retained
earnings for the year ended ecember !", #$$+, using absorption costing.
!. 'repare a budgeted balance sheet at ecember !", #$$+.
2. )?ptional, 'repare a budgeted income statement for the year ended ecember !",
#$$+, using variable costing. >ssume the per unit variable cost for #$$% was
4A.$3#$.