BUDGETING ASSIGNMENT
Kent Manufacturing Inc (KMI) has just finished the year ended Dec 31st, 2022. After some ups and downs dealing with significant growth and new personnel, KMI ended the year on a relatively strong note, thanks mostly to the rationalization and consolidation of its operations. Specifically, management realized that they were trying to manufacture too many items and that caused significant inefficiencies in operations. This in turn led to unit costs that were too high in this competitive market. With the help of Costwise consultants, a lean operations specialist, KMI was able to determine what their key strengths were and how to capitalize on same.
This analysis led to the decision in late 2022 to concentrate production on just two productsa cherry coffee table, and a mahogany end table.
As sales grew, KMI decided to sell their old shop and rent a new facility for the time being. Their ultimate plan is to build a new state of the art facility sometime in the near future should results and growth continue their upward trend.
At present, KMI also does some custom manufacturing as it usually has some excess capacity in its rented facilities
Opening Balance Sheet
The actual balance sheet as at December 31, 2022 is included in the budget template. (Do not recalculate any of the numbers in the opening balance sheet. Take them as Given.)
Estimated Sales of Cherry Coffee Tables in Units for 2023
Mr. Cutter and Sally Shyster have provided you the following sales forecast which is based on results from previous years.
Nov (actual) 480
Dec (actual) 520
January 400 July 575 January 2022 500
February 380 August 560 February 2022 425
March 360 September 625
April 490 October 700
May 525 November 640
June 540 December 650
Estimated Sales of Mahogany End Tables for 2023
Nov (actual) 500
Dec (actual) 600
January 480 July 610 January 2022 600
February 420 August 700 February 2022 580
March 510 September 740
April 590 October 760
May 625 November 770
June 700 December 810
Estimated Custom Manufacturing in $$$ for 2023
Month Cash Received Month Work Started & Completed
December 2022 $12,000 February 2023
April 2023 $20,000 May 2023
July 2023 $25,000 September 2023
December 2023 $30,000
Sales and Collections
KMI wholesales the cherry coffee table at $215 each and the mahogany end table at $260 each. All sales are on credit with terms of 1%/eom, n30. Historically, 50% of the accounts receivable is paid within the discount period by month end. 30% are paid in the month following sale and the remainder are paid in the second month following sale. Bad debts of 2% are usually encountered and management expects no change in fiscal 2023.
In addition, as mentioned above KMI does custom manufacturing. For all custom jobs, they insist that the total amount of the job be received in full before starting the job. The customer has to supply all the raw materials, so the only prime cost that KMI incurs on these jobs is Direct Labour. The mark up on these jobs is 100% of direct labour cost (before any benefits are factored in). No sales discounts apply to these jobs and there are no bad debts applicable as the customer has paid in full before work is commenced.
Inventories, Materials Cost and Payments
Each cherry coffee table requires 20 board feet (BF) of cherry laminate, which costs $3.00 per bf and $12.50 of indirect materials. The mahogany coffee table requires 22 bf of mahogany laminate which costs $3.25 per bf as well as indirect materials of $14.00. Commencing January 2023, management wishes the ending balance in cherry inventory to equal 23% of the following months production requirements and mahogany (as it can be hard to acquire) equal to 25% of the following months production requirement. (Ignore indirect materials when calculating direct materials inventory.) Management also expects finished goods inventory for both products to equal 20% of the following months sales.
Purchases of direct materials are all made on credit and 60% are paid in the month of purchase with the remaining balance paid in the month following purchase.
Direct Labour Costs
Each cherry coffee table requires 135 minutes of direct labour and the mahogany end table requires 145 minutes. Average wage rates are $16.00 per hour plus 20% for employee benefits. The wages are all paid in the month incurred, however, the benefits are paid the month following.
Factory Overhead
The company expects to incur the following factory overhead:
Indirect materials as outlined above
Utilities $7,500 per month
Consumables $2,800 per month
Indirect labour (See Note Below) $10,000 per month
Benefits on indirect labour 20% of indirect labour
Rent $13,000 per month
Equipment depreciation (See Note Below) $3,500 per month
Repairs & maintenance $1,500 per month
Factory insurance (See Note Below) $1,100 per month.
Note re Indirect Labour:
Normal indirect labour is $10,000 per month. However, if the total number of direct labour hours equals or exceeds 3,000 hours, the company will hire an additional part-time supervisor at a cost of $3,000 per month.
Note re Factory Insurance and other overhead
The timing of the payments for factory overhead is as follows:
Indirect materials, utilities, indirect labour, rent and repairs & maintenance are paid in the month incurred.
Benefits on indirect labour are paid in the following month.
The annual factory insurance policy is paid on May 1. The existing prepaid amount represents a one year $12,000 insurance policy purchased May 1 2022.
Operating Expenses
In addition to factory overhead, the company incurs selling, general & administrative (SG&A) expenses:
Executive salaries $35,000 per month
Clerical salaries $12,000 per month
Benefits on salaries 20% of all salaries
Advertising $1,500 per month
Office rent $3,000 per month
Office supplies $1,200 per month
Utilities $1,800 per month
Vehicle $4.000 per month.
All of these expenses are paid in the month incurred except salary benefits which are paid in the following month.
Warranty
As the company is dedicated to quality, it offers a 3 month full warranty. Based on past results, the company expects that it will have warranty expenses equal to 1.5% of sales on its products.
Past experience dictates that it reimburses their customers for the warranty claims by reimbursing the customers the money paid to them. The payment pattern is as follows:
1st month after sale 30%
2nd month after sale 20%
3rd month after sale 50%.
Assume all of the opening balance in warranty payable is paid out equally in the first three months of 2023.
Dividends and Term Loan
KMI proposes to declare a cash dividend of $100,000 in January and pay it out in June. The company plans to repay $75,000 of the non-interest bearing term loan from the shareholders (Mr. and Mrs. Cutter) in September.
Equipment Purchase and Depreciation
On April 1, 2023, the company plans to purchase a $500,000 piece of manufacturing equipment. They plan on financing this by paying 10% down, and paying the balance over a 10 year period at an interest rate of 4.5% per annum.
The $3,500 per month depreciation expense represents depreciation on all equipment except the above noted acquisition. For the new equipment, it is expected to have an estimated useful life of 15 years and a salvage value of $0. The company uses straight-line depreciation.
Note: The company uses variable costing in preparing its income statement.
Operating Line Of Credit
The company borrows money by way of a $200,000 operating line of credit. Interest on the operating line is 5.25% per annum and is charged and paid based on the previous months ending balance on the line of credit.
Income Taxes:
The company must make monthly corporate income tax instalments of $2,500 based on its income in 2022. You must accrue corporate income taxes at a rate of 17.5% of net income.
KMI MANUFACTURING INC. MASTER BUDGET - PARTA YEAR ENDED DECEMBER 31, 2023 Leave Asis JAN SALES BUDGET Cherry Coffee Table FEB MAR APB MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB Sepice Total sales PRODUCTION BUDGET Cherry Coffee Table Salesis Ending water Total de Opening inventory Units to Pro SALES BUDGET Mahogang End Table Se price Totale PRODUCTION BUDGET Mahoging End Table Mesin Erding Total Opening on Urns to Proce CUSTOM Mansacturing REVENUE TOTAL SALES JAN FEB MAR APB MAY JUN AUG SEP OCI NOV DEC TOTAL JAN FEB DIRECT MATERIAL PURCHASES Cheng Laminate Cherry Coffee Tables Produced Bfgetable BF of cherry laminate needed AddDesired Ending Inventory Total Needs Less Beginning wentory Cherry Laminate purchased in BF Price per BF CherryLaminate Purchases ** Mahogany Laminate Mahogany End Tables Produced BF pendable BF of musholamente needed AddDesired Ending Inventory Tot ends Less Beginning wentary Mahogany Laminate purchased in BF Price per BF Mahagony Laminate puche Direct Labour Cheng Coffee Tables Uniprofiel Hours Tone hours Howy (lore beel) Tondages JAN FEB MAB APR MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB DIRECT LABOUR Mahogang End Tables Units produced Hours Toril houts Hourly rate Toral wages DL - Custom Manufacturing TOTAL DIRECT LABOUR Emplogee benefits Drect labout Toutes TOTAL DL & BENEFITS JAN ELD MAB APR MAY JUN JUL AUG SEP OCT NOY DEC TOTAL FACTORY OVERHEAD VARIABLE Indirect weats. Chery Collee Tables Indirect materials: Mahogang End Tables Tokslinieces FIXED is Consumables Indirect labour Benefits Rent Depreciation JAN FEB MAB APR MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB FACTORY OVERHEAD VARIABLE Indirect materials - Cherry Collee Tables ndirect materials - Mahogany End Tables Torslindret material FIXED Us Consumables Indirect labour Benefits Rent Depreciation Repaits maintenance hace Tored ovihead Total overhead SGLA Envie ses Clasalaries Benefits on sales Vapente Advertising Oificerent Olle per Telephone Vehicle Total SOLA JAN FEB MAR APB MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB 120.000 40.000 CASH COLLECTIONS Previous month's 2nd Previous m's Curreko Credits.de x collected Total before diso Sales discount Total content month collect Total collections of AIR Colections of custom miling To collected CALCULATION OF NIR Opening balance Al Credits Les collection Lerr discount Les alone Net AR 195.000 PAYMENT OF PURCHASES Previous month's Current month Purchases in pad Totalent TAA JAN FEB MAR MAY AUG SEP OCT NOY DEC TOTAL JAN FEB CALCULATION OF AIP Opening balance Purchases int Less pyments TotalAP FED MAR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL CALCULATION OF WARRANTY PAYABLE Opening balance Vatant Expense Payments Totalwaryjable JAN CASH BUDGET Opening balance Cash collection Sub Cash disements Puchares Direct labour Emplope bereits 20.000 Variable on FOM Us Consumabile Indirect labour Benes 1800 Perk Repuis maintenance Insurance JAN FEB MAR APR MAY JUN JUL AUG SEP NOY DEC TOTAL JAN FEE 1800 5.000 Fiod OH Utilities Consumables Incolabour Benefits Rent Repaits maintenance Insurance SGUA Exec salaries Coal salaries Benefits Varantyspense Advertising Ollicerent Ollice Pupplies Telephone Vehicle nt Equipment purchase Dividende Repwy term loan Repwy Note Ppable terest Line of cred Total disbursements Net oash available Add bonowing Lessons Ending balance JAN FEB MAB APB MAY JUN JUL AUG SEP OCI NOV DEC TOTAL JAN OPERATING LOAN Opening Dance Add borrowing Les repayments Ending balance JAN ELB MAB APB MAY JUN JUL AUG SEP OCI NOY. DEC TOTAL INCOME STATEMENT Sales Les sales discount Net COGS CAM Fredactory of SGA Bu debes Operating Interest pense the fresh Interestepense Nohe Payable home before comes Income tales Not income JAN ELD MAR AE MAY JUN AUG SLP OCI NOY DLC TOTAL COGS Cherry Coffee Tables . units Una cost COGS JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB COGS Majogang End Tables #unis sold Unit cost COGS COGS Custom Maling TOTAL COGS JAN FED MAR APB MAY JUN AUG SLP OCI NOY DEC BALANCE SHEET Assets Curen Cash AIR Prepaid insurance Cherry Laminate Inventory Mahogany Laminate Inventory FG-Chery Coffee Tables FG-Mahogy End Tables Total Capital Equipe Accun depin Netcapital Totalets JAN FEB MAR APB MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB Tocal assets Lisbes equity Current libres Opet ingine AIP Unedrevenue Dividends pagable Warranty pable Corporate income as able Benefits payable Total Teman Note Payable Toulabilities Shareholders Common stock PVE Total equity Totalbies & equity D#ference Retained earnings Opening balance Addretinome Less dividends Ending balance KMI Opening Balance Sheet December 31, 2022 $ 128,500 160,000 4,000 ASSETS Current: Cash Accounts receivable (net) Prepaid insurance Raw material inventory Cherry Mahogany Finished goods inventory - Cherry Coffee Tables Finished goods inventory - Mahogany End Tables Total current assets Property, Plant and Equipment Equipment Less: Accumulated amortization 570 777 42,799 47,799 384,445 220,000 40,000 180,000 $ 564,445 Total assets LIABILITIES & SHAREHOLDERS'S EQUITY Current liabilities: Bank operating line $ Accounts payable 135,000 Corporate income taxes payable Unearned revenue 12,000 Warranty payable 3,000 Employee benefits payable 30,800 Total current liabilities 180,800 Long-term debt Term loan payable 100,000 Total long-term debt 100,000 Shareholders' equity Common stock 10,000 Retained earnings 273,645 Total shareholders' equity 283,645 Total liabilities & shareholders' equity $ 564,445 KMI MANUFACTURING INC. MASTER BUDGET - PARTA YEAR ENDED DECEMBER 31, 2023 Leave Asis JAN SALES BUDGET Cherry Coffee Table FEB MAR APB MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB Sepice Total sales PRODUCTION BUDGET Cherry Coffee Table Salesis Ending water Total de Opening inventory Units to Pro SALES BUDGET Mahogang End Table Se price Totale PRODUCTION BUDGET Mahoging End Table Mesin Erding Total Opening on Urns to Proce CUSTOM Mansacturing REVENUE TOTAL SALES JAN FEB MAR APB MAY JUN AUG SEP OCI NOV DEC TOTAL JAN FEB DIRECT MATERIAL PURCHASES Cheng Laminate Cherry Coffee Tables Produced Bfgetable BF of cherry laminate needed AddDesired Ending Inventory Total Needs Less Beginning wentory Cherry Laminate purchased in BF Price per BF CherryLaminate Purchases ** Mahogany Laminate Mahogany End Tables Produced BF pendable BF of musholamente needed AddDesired Ending Inventory Tot ends Less Beginning wentary Mahogany Laminate purchased in BF Price per BF Mahagony Laminate puche Direct Labour Cheng Coffee Tables Uniprofiel Hours Tone hours Howy (lore beel) Tondages JAN FEB MAB APR MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB DIRECT LABOUR Mahogang End Tables Units produced Hours Toril houts Hourly rate Toral wages DL - Custom Manufacturing TOTAL DIRECT LABOUR Emplogee benefits Drect labout Toutes TOTAL DL & BENEFITS JAN ELD MAB APR MAY JUN JUL AUG SEP OCT NOY DEC TOTAL FACTORY OVERHEAD VARIABLE Indirect weats. Chery Collee Tables Indirect materials: Mahogang End Tables Tokslinieces FIXED is Consumables Indirect labour Benefits Rent Depreciation JAN FEB MAB APR MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB FACTORY OVERHEAD VARIABLE Indirect materials - Cherry Collee Tables ndirect materials - Mahogany End Tables Torslindret material FIXED Us Consumables Indirect labour Benefits Rent Depreciation Repaits maintenance hace Tored ovihead Total overhead SGLA Envie ses Clasalaries Benefits on sales Vapente Advertising Oificerent Olle per Telephone Vehicle Total SOLA JAN FEB MAR APB MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB 120.000 40.000 CASH COLLECTIONS Previous month's 2nd Previous m's Curreko Credits.de x collected Total before diso Sales discount Total content month collect Total collections of AIR Colections of custom miling To collected CALCULATION OF NIR Opening balance Al Credits Les collection Lerr discount Les alone Net AR 195.000 PAYMENT OF PURCHASES Previous month's Current month Purchases in pad Totalent TAA JAN FEB MAR MAY AUG SEP OCT NOY DEC TOTAL JAN FEB CALCULATION OF AIP Opening balance Purchases int Less pyments TotalAP FED MAR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL CALCULATION OF WARRANTY PAYABLE Opening balance Vatant Expense Payments Totalwaryjable JAN CASH BUDGET Opening balance Cash collection Sub Cash disements Puchares Direct labour Emplope bereits 20.000 Variable on FOM Us Consumabile Indirect labour Benes 1800 Perk Repuis maintenance Insurance JAN FEB MAR APR MAY JUN JUL AUG SEP NOY DEC TOTAL JAN FEE 1800 5.000 Fiod OH Utilities Consumables Incolabour Benefits Rent Repaits maintenance Insurance SGUA Exec salaries Coal salaries Benefits Varantyspense Advertising Ollicerent Ollice Pupplies Telephone Vehicle nt Equipment purchase Dividende Repwy term loan Repwy Note Ppable terest Line of cred Total disbursements Net oash available Add bonowing Lessons Ending balance JAN FEB MAB APB MAY JUN JUL AUG SEP OCI NOV DEC TOTAL JAN OPERATING LOAN Opening Dance Add borrowing Les repayments Ending balance JAN ELB MAB APB MAY JUN JUL AUG SEP OCI NOY. DEC TOTAL INCOME STATEMENT Sales Les sales discount Net COGS CAM Fredactory of SGA Bu debes Operating Interest pense the fresh Interestepense Nohe Payable home before comes Income tales Not income JAN ELD MAR AE MAY JUN AUG SLP OCI NOY DLC TOTAL COGS Cherry Coffee Tables . units Una cost COGS JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB COGS Majogang End Tables #unis sold Unit cost COGS COGS Custom Maling TOTAL COGS JAN FED MAR APB MAY JUN AUG SLP OCI NOY DEC BALANCE SHEET Assets Curen Cash AIR Prepaid insurance Cherry Laminate Inventory Mahogany Laminate Inventory FG-Chery Coffee Tables FG-Mahogy End Tables Total Capital Equipe Accun depin Netcapital Totalets JAN FEB MAR APB MAY JUN JUL AUG SEP OCT NOY DEC TOTAL JAN FEB Tocal assets Lisbes equity Current libres Opet ingine AIP Unedrevenue Dividends pagable Warranty pable Corporate income as able Benefits payable Total Teman Note Payable Toulabilities Shareholders Common stock PVE Total equity Totalbies & equity D#ference Retained earnings Opening balance Addretinome Less dividends Ending balance KMI Opening Balance Sheet December 31, 2022 $ 128,500 160,000 4,000 ASSETS Current: Cash Accounts receivable (net) Prepaid insurance Raw material inventory Cherry Mahogany Finished goods inventory - Cherry Coffee Tables Finished goods inventory - Mahogany End Tables Total current assets Property, Plant and Equipment Equipment Less: Accumulated amortization 570 777 42,799 47,799 384,445 220,000 40,000 180,000 $ 564,445 Total assets LIABILITIES & SHAREHOLDERS'S EQUITY Current liabilities: Bank operating line $ Accounts payable 135,000 Corporate income taxes payable Unearned revenue 12,000 Warranty payable 3,000 Employee benefits payable 30,800 Total current liabilities 180,800 Long-term debt Term loan payable 100,000 Total long-term debt 100,000 Shareholders' equity Common stock 10,000 Retained earnings 273,645 Total shareholders' equity 283,645 Total liabilities & shareholders' equity $ 564,445
