AVC 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 December 31.

During the summer of 2016, Neela Dahlwahala spent considerable time putting together a sales forecast for the next budget year (January to December, 2017). Prior to her departure she e-mailed a sales forecast to the President of AVC.

Their sales forecast consisted of these few lines:

• For the year ended December 31, 2017: 475,000 units at $10.00 each*
• For the year ended December 31, 2018: 500,000 units at $10.00 each
• For the year ended December 31, 2019: 500,000 units at $10.00 each

*Expected sales for the year ended December 31, 2017 are based on actual sales to date and budgeted sales for the duration of the year.

The CFO, 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.

1. 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.

1. Because sales are seasonal, AVC 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.

1. There is only one type of raw material used in the production of toodles. Space-age acrylic (SAA) is a very compact material that is purchased in powder form. Each toodle requires 5 kilograms of SAA, at a cost of $0.45 per kilogram. The supplier of SAA tends to be somewhat erratic so AVC finds it necessary to maintain an inventory balance equal to 40% of the following month's production needs as a precaution against stock-outs. AVC pays for 20% of a month's purchases in 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.

1. Beginning accounts payable will consist of $208,406.50 arising from the following estimated direct material purchases for November and December of 2007:

Purchases in November 2017: $223,875.00

Purchases in December 2017 $162,563.50

1. AVC's 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.

1. 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.

1. The fixed manufacturing overhead costs for the entire year are as follows:

Training and development $ 43,200

Property and business taxes 39,000

Supervisor's salary 149,400

Amortization on equipment 178,800

Insurance 96,000

Other 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.

• AVC uses the straight line method of amortization.

1. 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 years' experience has provided the following information:

Lowest level of sales: 375,000 units Total Operating Expenses: $778,710

Highest level of sales: 750,000 units Total Operating Expenses: $1,022,460

These costs are paid in the month in which they occur. Not included in the above expenses is bad debt expense.

1. 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).

1. Sales in November and December 2017 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, 2017 which will be collected in January and February, 2018.

1. AVC is planning to acquire additional manufacturing equipment for $204,300 cash. 40% of this amount is to be paid in November 2018, the rest, in December 2018. The manufacturing overhead costs shown above already include the amortization on this equipment.

1. A listing of the estimated balances in the company's ledger accounts as of December 31, 2017 is given below:

Assets

Cash $ 83,365

Accounts receivable 734,000

Inventory-raw materials 9,000

Inventory-finished goods 9,125

Prepaid Insurance 64,000

Prepaid property and business taxes 19,200

Capital assets (net) 724,000

Total assets $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 monthly master budget for AVC for the year ended December 31, 2018, including the following schedules:

Sales Budget & Schedule of Cash Receipts

Production Budget & Manufacturing Overhead Budget

Direct Materials Budget & Schedule of Cash Disbursements

Direct Labour Budget

Selling and Administrative Expense Budget

Additionally, you have been provided with the Budgeted Financial Statements, Cash Budget and Ending Finished Goods Budget to guide you through completion.

1. In addition to the preparation of the budget schedules, provide Neehla with your responses to the following questions:

2. What is a sales budget, and how is it prepared?
4. What is a direct materials purchases budget, and how is it prepared?
6. What is the direct labor budget, and how is it prepared?
8. What is a manufacturing overhead budget, and how is it prepared?
10. How do companies use the budgeted income statement to improve operations?
12. Explain the purpose and benefits of the Cash Budget.
14. Outline how the use of the Master Budget can help AVC to grow and be more efficient.