As part of the continued advancement of technology, a drone camera market has emerged in recent years. The drone camera market has been growing as more photography enthusiasts have begun adopted this high-tech approach to capturing still images and video using remotely controlled devices. Eager to capture a share of this growing market, DroneZone entered the market in early 2018. DroneZone manufactures camera drones, selling primarily to retailers.

DroneZone is pleased with its financial performance over its first few years of operations, optimistic to achieve continued financial success. For planning and control purposes the company utilizes a monthly master budget, which is usually developed at least three months in advance of the budget year. The company has a fiscal year ending December 31.

It is now Sept 15, 2019. You have been asked to prepare the Master Budget for the year ending December 31, 2020.

Based on your discussions with the various departments throughout the company, you have collected the following relevant information for preparing the budget:

Sales

1. The marketing department is forecasting the following annual sales:

For the year ended December 31, 2019: 9,000 units at $1,000 each*

For the year ended December 31, 2020: 10,000 units at $1,000 each

*Expected sales for the year ended December 31, 2019 were based on actual sales to date and budgeted sales for the duration of the year.

2. Peak months for sales generally correspond with summer weather and gift-giving holidays. History shows that January is the slowest month, with only 1% of annual sales, followed closely behind by Feb-April with 2% of annual sales for each month. Sales spike during summer months with May, June, July, and August contributing 12%, 15%, 12%, and 10% of annual sales, respectively. With the back-to-school focus in September, there is a significant dip in camera drone sales to 3% of annual sales. As Christmas shopping picks up momentum, winter sales increase to 8% in October, 13% in November, and then

peak at 20% in December. This pattern of sales is not expected to change in the next two years.

Manufacturing Costs and Inventory

3. Each camera drones spends a total of 3.5 hours in production.

4. Due to the highly technical nature of DroneZone's manufacturing process, DroneZone's direct labour rate has averaged $30.00 per hour for 2019. This rate already includes the employer's portion of employee benefits. A new collective agreement is being negotiated, with a 3% pay increase anticipated effective January 1, 2020.

5. Each DroneZone requires 1.25kg of direct materials. During 2019, the average cost of direct materials was $57/kg. The supplier of the direct materials tends to be somewhat erratic, so DroneZone finds it necessary to maintain a direct materials inventory balance equal to 40% of the following month's production needs as a precaution against stockouts.

6. 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 variable manufacturing overhead rate for 2019 is $160/unit, consisting of:

Plant and equipment maintenance $ 70

Utilities $ 40

Indirect Materials $ 30

Other$ 20

Total $ 160

7. The fixed manufacturing overhead costs for 2019 are as follows:

Supervisor's salary $ 181,800

Amortization of Plant & Equipment $ 132,000

Insurance $ 84,000

Training & Development $ 54,750

Property and Business Taxes $ 48,000

Other $ 30,000

Total $ 530,550

8. Aside from amortization, all other manufacturing costs are expected to increase by 3% in 2020 due to inflation.

9. From previous experience, management has determined that an ending finished goods inventory equal to 25% of the next month's sales is required to efficiently meet customer demands.

Collections Pattern

10. Sales are on a cash and credit basis, with 50% collected during the month of the sale, 35% the following month, and 15% the month thereafter. There are no early payment discounts for customers.

11. Based on the collection pattern described above, accounts payable as at end of business day on December 31, 2019 is projected to be $1,098,899 arising from the following estimates:

Sales (November 2019)$1,170,000

Sales (December 2019)$1,800,000

Payments Pattern

12. DroneZone pays for 20% of a month's purchases of direct materials in the month of purchase, 50% in the following month and the remaining 30% two months after the month of purchase. There are no early payment discounts offered by suppliers.

13. Based on the payment pattern described above, accounts payable as at end of business day on December 31, 2019 is projected to be $78,641 arising from the following estimates:

Direct Material Purchases (November 2019)

$95,888

Direct Material Purchases (December 2019)

$62,344

14. All payroll costs are paid in the period in which they are incurred.

Other

15. Anticipating a significant increase in customer demand and market share over the next few years, DroneZone is acquiring additional manufacturing equipment for $3,000,000 cash. Half this amount will be paid in July 2020, with the remainder to be pain in October 2020.

16. Selling and administrative expenses are known to be a mixed cost; however, there is a lot of uncertainty about the portion that is fixed. Based on prior year experience:

Lowest level of monthly sales (80 units) $87,270

Highest level of monthly sales (1600 units) $360,780

*Hint: Separate the variable cost portion of selling and administrative costs from the fixed cost portion

17. The company is forecasting the following balances as at the end of business day on December 31, 2019:

Assets

Cash $ 100,000

Accounts Receivable $ 1,098,899

Inventory: Direct Materials $ 3,591

Inventory: Finished Goods $ 11,640

Prepaid Property and Business Taxes$ 24,000

Prepaid Insurance $ 21,000

Capital Assets (net) $ 571,800

Total Assets $ 1,830,930

Liabilities and Shareholders Equity

Accounts Payable $ 78,641

Income Taxes Payable $ 19,700

Capital Stock $ 500,000

Retained Earnings$ 1,232,589

Total Liabilities and Shareholders' Equity $ 1,830,930

Required:

1. A monthly master budget for DroneZone for the year ending December 31, 2020, including the following schedules: Sales budget, expected cash collections, production budget, direct materials budget, expected cash disbursements, direct labour budget, manufacturing overhead budget, Ending finished goods budget, selling and administrative expense budget.

*If an estimate for 2021 is required, use the amount from 2020 (example: sales in Jan 2021 will be the same as January 2020)

2. Explain the importance of budgeting to business managers and decision makers